Construct!Construction Litigation Committee

www.abanet.org/litigation/committee/construction/home.html

Winter 2006 Vol. 15 No. 2

Judge Chrisopher F. Droney decided,over objection, that a plaintiff was “enti-tled to an attorney’s fee award that isgreater than the one provided for by thecontingency fee agreement.”3 In thatcase, Charts v. Nationwide MutualInsurance Co., the plaintiff and hislawyer entered into a contingency feeagreement that provided that the attor-ney fee “will be one quarter (25%) ofany recovery obtained in the case, afterdeduction of expenses, either by way ofsettlement, trial or appeal.” At the con-

particularly when those fees aresought pursuant to a statute, like anunfair or deceptive trade practicesact, worker’s compensation act, or amechanic’s lien law, and where thesuccessful client sought vindication ofboth private and public wrongs,2

those reasonable attorney fees mightbe recovered without regard to thelimitations on the total recovery otherwise imposed by a contingencyfee agreement.

In a recent ruling the U.S. DistrictCourt for the District of Connecticut,

The contingency feeagreement, the

proverbial key to the courthouse,1

and, by its terms, is a limit to theamount a lawyer can recover from theclient. Such an agreement, however,should not necessarily limit the attor-ney fees that prevailing counsel canrecover from the unsuccessful oppos-ing litigant. In construction law, prac-titioners sometimes prosecute claimson behalf of clients that seek, as partof the claim for relief, reasonableattorney fees. In certain situations,

American Bar Association Section of Litigation

Force Majeure: Risk Allocation forUnforeseeable Events

By Timothy S. Taylor and Allison O. Kahn

When a hurricane brings a constructionproject to a stop, who pays for the delay? When access to asecurity-sensitive construction site is severely restrictedbecause of newly promulgated, post-9/11 terrorism securi-ty measures, who pays for the contractor’s loss of produc-tivity? When worldwide natural disasters cause the price

of building materials to skyrocket, whoshould bear the extra costs? The answers to these questionsshould be found in the force majeure provisions of the parties’ contracts.

Force majeure, or the Latin expression vis major,describes the particular circumstances that may excuse per-

Timothy S. Taylor

Continued on page 7

Continued on page 10

Nicole LiguoriMicklich

Providing Keys to the CourthouseWithout Giving Up Full Recovery

By Nicole Liguori Micklich

Allison O. Kahn

Damages Issue

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Winter 2006 ABA Section of Litigation 7

between the events causing disrup-tion and delay and the resultantcosts generally provides valuableinformation from which the ownercan evaluate liability and quantumaspects of the claim.

A more detailed discussion of this topic will beincluded in the Construction Claims chapter ofthe upcoming Litigation Services Handbookpublished by Wiley Press.

Stephen Lechner is a principal ofPricewaterhouseCoopers L.L.P. in San Francisco,

CA, where he leads the Construction AdvisoryServices practice in the United States. He canbe reached at (415) 498-6596 or stephen.p.lech-ner@us.pwc.com.

INEXCUSABLE

TOTAL DELAY (IN WORKDAYS)

EXCUSABLE CONCURRENT COMPENSABLE

EXTENSION OF TIME

OWNER’S DAMAGES

LIQUIDATEDDAMAGE/DAY

INEXCUSABLE TIME-RELATEDCOSTS/DAY

COMPENSABLE

CONTRACTOR’S DAMAGES

+ + +

X X

Exhibit 5: Delay and Related Damages Calculations

formance under a contract when an actof God or some other superveningevent occurs beyond the control ofeither of the parties.1 In determiningwhether a force majeure event hasoccurred, the test is “whether under theparticular circumstances there was suchan insuperable interference occurringwithout the party’s intervention ascould not have been prevented by theexercise of prudence, diligence andcare.”2 In other words, the force majeureevent has to be (1) not reasonably fore-seeable in the ordinary course of theindustry and (2) beyond the reasonablecontrol of the party.3

Drafting the Force Majeure ClauseForce majeure clauses can shift the riskallocation from the promisor, who is pro-viding the labor, materials, or service, tothe promisee, who has agreed to pay forand accept the labor, materials, or serv-ice.4 For example, a contractor maydemand that a force majeure clause beinserted into the general contract to allo-

cate to the owner the risk of loss in theevent that unforeseeable delays occur forreasons beyond the control of the con-tractor. Similarly, a subcontractor or sup-plier may place a force majeure clause inits subcontract or supply contract to shiftthe risk to the contractor for unforesee-able delays that are beyond their control.In the absence of a force majeure clause,the performance risk is presumed to restwith the promisor.5

Enforceability of a force majeureclause is determined by the intent of theparties, which is evidenced by the lan-guage in the contract.6 The terms of thecontract will be enforced with commonlaw rules merely filling in gaps left bythe document.7 “In other words, whenthe parties have themselves defined thecontours of force majeure in their agree-ment, those contours dictate the appli-cation, effect, and scope of forcemajeure.”8 Consequently, parties to aconstruction contract should draft theforce majeure provision with care,mindful of the risks that they mayencounter, especially in light of lessonslearned from recent disasters.

For example, a force majeure clausemay provide that:

Neither party will be liable for anybreach or failure to perform underthis Agreement or any other docu-ments incorporated by referenceherein if such breach or failure toperform is due to acts beyond thereasonable control of such party,which include by way of illustration,acts of God or public enemy, acts ofFederal, state or local government,either in its sovereign or contractualcapacity, fire, floods, civil disobedi-ence, strikes, lock-outs, freightembargoes, inclement weather, orany other cause or conditionsbeyond such party’s reasonable con-trol; provided, however, that theparty which has been so affected will(i) promptly give written notice tothe other of the fact that it is unableto so perform and the cause(s) there-fore; and (ii) resume its performanceunder this Agreement immediatelyupon the cessation of such cause(s).9

As illustrated in this example, forcemajeure clauses often contain catchallphrases such as “or any other cause orconditions beyond such party’s reason-able control.” Such a catchall phrasemust be construed within the context

Force MajeureContinued from page 1

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8 Construct! Winter 2006

established by the list of force majeureevents that precedes it.10 Although sucha broad term would suggest an expan-sive interpretation, the term will be lim-ited to events similar to those specifical-ly enumerated. In addition, the partyseeking relief under the force majeureclause must show it exercised reason-able diligence to avoid the event.11

Parties also should contract for theremedies available upon occurrence offorce majeure events. Often, construc-tion contracts and supply contracts willgrant time extensions but no monetaryrelief. For example, a force majeureclause may permit an extension of thecompletion date but prohibit a contrac-tor from claiming damages resultingfrom delay.12 However, parties are freeto contract otherwise. The negotiationof a force majeure clause should accu-rately reflect the ability of the parties toaccept and allocate risk. Therefore, acontractor in a project located in a statewhere extreme weather conditions arepossible may want to build a contin-gency risk into the price of the contractor negotiate terms for monetary reliefin the event of delays resulting fromsuch events.

Hurricanes and Natural DisastersParties to a construction contractshould also consider whether to makeprovision for the impact of forcemajeure events on the cost of con-struction supplies.

Until recently, the inflation in build-ing materials has been driven in largepart by the rapid industrialization ofnations like China and India, as well asby the enormous reconstruction effortsin Iraq and Afghanistan.13 However, thedevastation of hurricanes and other nat-ural disasters in the 2004 and 2005 hur-ricane seasons has caused fuel prices toskyrocket, and costs for lumber, ply-wood, cement, and steel are also expect-ed to rise. Past natural disasters, such asHurricane Andrew in 1992, inflated theprice of building materials. HurricaneAndrew destroyed more than 28,000housing units and was largely responsi-ble for pushing the cost of plywood up44.6 percent and the price of Southernpine framing lumber up 16.7 percent,according to the National Association ofHome Builders. Compare those statis-tics with the roughly 200,000 homes

destroyed in the City of New Orleansby Hurricane Katrina and the picturestarts to become clear. We can expectincreases in the costs of most construc-tion materials, including concrete, lum-ber, steel, and drywall. Furthermore, therising fuel prices will no doubt increasethe production and distribution costs ofthese materials.14

There can be no mistake that hurri-canes and similar natural disasters willtrigger a force majeure clause in a con-tract. However, a contract that onlyallows for time extensions is of no helpto contractors, subcontractors, and sup-pliers facing potentially record-breakingincreases in material costs and fuel

expenses. Similarly, a contract thatallows a contractor an extension of timeor damages for delay usually will notcover the costs of construction materialsthat increase drastically as a result of theforce majeure event. Consequently, to beprotected, the party responsible for sup-plying such materials needs to includeseparate escalation clauses in its con-tract to absorb increases to material orlabor costs. These clauses usually refer-ence a general inflation index or a spe-cific materials/industry index to beadjusted at specific intervals, that is,monthly, annually, and so on.15

Therefore, in the event that a projectsuffers massive increases in materialscosts, such a provision allows the con-tractor to seek an increase in the agreed-upon price for these materials.

Terrorism and Government PolicySince the unfortunate events ofSeptember 11, 2001, terrorism hasbecome a well-known force majeureevent. Terrorism can impact a construc-tion project directly, as was the case inNew York City, or indirectly, by affect-ing market conditions and increasinggovernment security and regulation.

The issue of whether increased gov-ernmental antiterrorism security mea-sures constitute a force majeure excusefor contractor delay was at issue in therecent decision of Broward County v.Brooks Builders, Inc.16 Brooks Builders,the contractor, filed suit againstBroward County seeking compensationfor delay damages on a project for con-struction of a fire station adjacent to theFort Lauderdale airport. Although theproject was not inherently complex, itslocation—adjacent to an active airportrunway—presented significant chal-lenges and numerous delays. Some ofthe delays were caused by a consider-able increase in security measures onthe active airport runway after theSeptember 11, 2001, terrorist attacks.These delays occurred daily as the con-struction workers spent a substantialamount of time gaining access to theworksite through the security gates. Thecontract expressly required the contrac-tor to comply with all airport securitymeasures, but the contractor argued itcould not have anticipated the extrameasures put in place after 9/11.

The court found that although theparties may not have foreseen theextraordinary delays due to theSeptember 11 terrorist attacks, their con-tract nonetheless had multiple provi-sions suggesting that the risk of loss forunexpected delays was to be borne bythe contractor. Nevertheless, the con-tractor claimed relief under the follow-ing force majeure provision:

In the event that the Contractor isordered by the Engineer, in writing,to suspend work for some unfore-seen cause not otherwise providedfor in the contract and over whichthe Contractor has no control, the

Courtstraditionallyhave found thatgovernmentpolicies thatindirectly affectthe economicconditions andprofitability of a contract are not forcemajeure events.

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acts of God, acts of the public enemy,acts of Government, labor disputes,fires, insurrections or floods.

Seaboard sought to invoke the forcemajeure clause for “acts of Govern-ment” that made its timber contractcostly and unprofitable. Specifically,Seaboard argued that there were a num-ber of government acts that occurredduring the early 1980s that affected itscontract—for example, new monetarycontrol procedures and the deregulationof savings institutions—which led to anincrease in interest rates and a slump inthe timber market.

The court found that the forcemajeure clause listing “acts ofGovernment” as an excuse for per-formance was not to be interpreted sobroadly as to include government fis-cal or monetary policy. Governmentacts or policies that were complainedof had no more than an attenuatedeffect on the contract at issue and atmost made performance of the con-tract unprofitable. Government poli-cies that affect the profitability of acontract but do not preclude perform-ance should not be considered “actsof Government” in the context offorce majeure. Finally, the court reas-sured, “A force majeure clause is notintended to buffer a party against thenormal risks of a contract. The normalrisk of a fixed-price contract is thatthe market price will change.”18

Force Majeure InsuranceAlmost by definition, the damagesresulting from a force majeure event canbe disastrous. However, perhaps thebest solution for allocating risk is for theowner to assume the risk and theninsure against it. Force majeure insur-ance may include coverage for projectcompletion, performance coverage, anddelayed completion.19 Although a proj-ect is usually protected by “all-risk”insurance provided by the contractor,all-risk insurance usually does nothingmore than cover the expense of repair-ing the work in place. However, it doesnot provide coverage for damagesincurred by the owner for the delaysincurred in completing the project,which often can be substantial.Therefore, force majeure insurance maybe the best way to protect owners whoare concerned about their investment

from unforeseen delay damages result-ing from force majeure events.

Timothy S. Taylor is a member of the Con-struction Litigation Practice Group in theMiami office of Carlton Fields, P.A. He can bereached at ttaylor@carltonfields.com or (305) 530-0050.

Allison Oasis Kahn is a member of the Labor andEmployment and Appellate Practice and TrialSupport groups in the West Palm Beach office ofCarlton Fields. She can be reached atakahn@carltonfields.com

Endnotes

1. See R&B Falcon Corp. v. Am.Exploration Co., 154 F. Supp. 2d 969, 973(S.D. Tex. 2001).

2. See Mathes v. City of Long Beach, 263P.2d 472, 477 (Cal. Ct. App. 1953).

3. See Stroud v. Forest Gate Dev. Corp.,2004 WL 1087373 (Del. Ch. 2004).

4. See In re Westinghouse Elec. Corp.Uranium Contracts Litig., 517 F. Supp. 440,459 (E.D. Va. 1981) (“the risk of a contin-gency that affects performance is presumedto rest on the promisor. However, the partiesmay agree to shift a particular risk to thepromisee, or to allocate the various risksbetween them as they see fit.”).

5. Id.6. See R&B Falcon Corp., 154 F. Supp. 2d

at 973.7. Id.8. Id. citing Sun Operating Ltd. v. Holt,

984 S.W.2d 277, 283 (Tex. App. 1998).9. 12 WEST’S PENNSYLVANIA FORMS,

COMMERCIAL TRANSACTIONS § 2301, form 12.5.10. See Stroud, 2004 WL 1087373 at 5; see

also Matador Drilling Co. v. Post, 662 F.2d1190, 1198 (5th Cir. 1981) (requiring partyclaiming force majeure to demonstrate thatevent of same general character as thosespecifically listed in clause occurred).

11. See Stroud, 2004 WL 1087373 at 5.12. Wm. Cary Wright, Force Majeure

Clauses and the Insurability of Force MajeureRisks, CONSTR. LAW., Fall 2003, at 17.

13. James Temple, Cost of BuildingExpected to Rise, CONTRA COSTA TIMES (S.F.),Sept. 9, 2005, at 2.

14. The Katrina Premium: Facing HigherConstruction Costs, Governments Need toScrutinize Needs More Closely, FORT WAYNENEWS SENTINEL, Sept. 13, 2005, at A6.

15. Laurence P. Lubka, What Can I DoAbout Those Steel Prices?, CLAIMS RESOURCE,Fall 2004.

16. 908 So. 2d 536 (Fla. 4th Dist. Ct. App.2005).

17. 308 F.3d 1283 (Fed. Cir. 2002).18. Id. citing N. Ind. Pub. Serv. Co. v.

Barbon County Coal Co., 799 F.2d 265, 275(7th Cir. 1986).

19. PHIL BRUNER & PATRICK O’CONNOR,BRUNER AND O’CONNOR ON CONSTRUCTIONLAW, § 11.126 (2002); Wright, supra note 13.

Contractor may be reimbursed foractual money expended on the workduring that period for shutdown.. . . No provision of this article shallbe construed as entitling theContractor to compensation fordelays due to inclement weather, forsuspensions made at the request ofthe Contractor, or for any other delayprovided for in the contract, plans, or specifications.The court disagreed with the con-

tractor’s interpretation of this provision,because the gate access delays resultedfrom the increased security measuresimplemented by the government, notfrom any order by the engineer.However, the court’s ruling suggeststhat had the contract contained a forcemajeure clause allocating risk of govern-mental interference to the county, thenthe contractor could have recovereddamages resulting from delay.

Courts traditionally have found thatgovernment policies that indirectlyaffect the economic conditions and prof-itability of a contract are not forcemajeure events. For example, inSeaboard Lumber Co. v. United States,17

Seaboard entered into a timber contractwith the U.S. government to harvesttimber on government lands. At thetime the contracts were executed inSeptember 1980, there was a housingboom, and the price of timber was high.However, between 1981 and 1983, thegovernment allowed interest rates torise in order to combat inflation, whichled to a softening of the housing andlumber markets. This arguably causedmany contractors to run into financialdifficulties. Seaboard sought relief fromthe courts in order to invoke a forcemajeure clause in its contract for “acts ofGovernment,” which granted relief tothe contractor where

[the contractor] experiences delay instarting scheduled operations orinterruption in active operationseither of which stops removal ofIncluded Timber from Sale Areathrough curtailment in felling andbuckling, yarding, skidding andloading, hauling or road construc-tion, as scheduled under B6.31, for 10or more consecutive calendar daysduring a Normal Operating Seasondue to causes beyond Purchaser’scontrol, including but not limited to

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