Force Majeure Clauses and Construction Contracts

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FORCE MAJEURE CLAUSES IN CONSTRUCTION CONTRACTS

Prepared by Lowell A. Westersund, Q.C. Partner Fraser Milner Casgrain LLP

March, 2008

Montréal Ottawa Toronto Edmonton Calgary Vancouver New York www.fmc-law.com

The primary purposes of construction contracts are to clarify responsibilities (including performance and payment obligations) and to allocate risk. It is in regard to the latter purpose that the concept of force majeure plays an important role. Such clauses serve to deal with the risk of events which fall short of frustration. Such clauses can be successfully employed to recognize industry or project specific risks. By way of example, a number of years ago the writer dealt with a pipeline claim that arose from the delayed completion of a series of compressor stations and a connecting pipeline through the southern interior of British Columbia. Perhaps the biggest risk on that, and perhaps on any pipeline project, was the inability to reasonably manoeuvre and work on the pipeline right away. As matters transpired, the work was done during an extremely rainy summer. Although very unusual, the amount of rain did not approach one in one hundred year or other bunch numbers that would have clearly have resulted in a force majeure event having been triggered. Nevertheless, the work became very slow and very expensive to complete. Only after extensive negotiation and litigation preparation were the potential claims arising from the cost and time of performance resolved. Had the force majeure clause in the contract been drafted with the specific project and type of work risk in mind, the dispute could have readily been avoided. At the time of writing, there are serious shortages of both labour and certain materials in Canada, though the shortages are more acute in some areas of the country than others. Oilsands project construction in Alberta, pre-Olympic construction in British Columbia and general economic expansion in Saskatchewan have all lead to shortages in Western Canada. On other hand, the competition for steel, specialty metals and specialty pressure vessels throughout North America, arguably caused in part by competition from the rapidly expanding economies of both China and India, has focused the need for the careful examination and drafting of both force majeure and other risk allocation clauses within construction contracts.

___________________________ Lowell A. Westersund, Q. C., Partner, Fraser Milner Casgrain LLP, Calgary, Alberta The author wishes to acknowledge the contributions, insights, and research assistance of lawyers and students at Fraser Milner Casgrain LLP who contributed to the preparation of this article, Tom O'Leary, Cory Ghitter, and Chris Knight, Student-At-Law.

-2The issue is highlighted in Alberta where there is a fear that labour shortage could be advanced as a force majeure event. These circumstances have sparked some owners of large projects to specifically exclude labour shortage as an event of force majeure. This, apparently, despite such shortage neither falling within the idea of the "…unexpected, something beyond reasonable foresight or skill" 1 and despite the fact that many cases in all three of Canada, England and the United States have held the changes in market conditions are not sufficient to fall within a standard force majeure clause 2 . In other areas, rather than face arguments that a force majeure event has occurred due to the material shortage, risk allocation clauses have been formulated to specifically address shortages of such materials as steel. For example, a provision written on behalf of the American Institute of Steel Construction provides as follows: The subcontract price is based upon the agreed prices and surcharges for the steel types and shapes necessary for the project and posted and made publicly available by [steel mill] on [date]. Notwithstanding anything herein to the contrary, any increases or decreases in the price of the steel...
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