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Energy Law Exchange

October 9, 2017

Force Majeure during Construction – Are you Ready? (From the Owner’s Perspective)

Hurricanes Harvey, Irma and Maria have come and gone. Looking back, were you ready? What should you be doing to prepare for the next hurricane? Lawyers spend considerable amounts of time defining the scope of force majeure events and the associated relief mechanisms in their construction agreements. After the contract is signed, however, lawyers often move on to the next deal and lose sight of the current project. We firmly believe lawyers should maintain the same attention to detail when preparing for, and responding to, issues which arise during project execution, including a force majeure event. This article highlights a few pre- and post-force majeure activities which may help lawyers counsel their owner clients before, during and after a force majeure event.

Stay In Touch. Outside the construction context, transactional lawyers often disengage following execution of the underlying contract. If you are buying assets through an M&A transaction, once the transaction closes, the parties have largely concluded their obligations and thus it is only natural to focus on more pressing needs. However, construction operates quite differently than these traditional transactions. Construction can last anywhere from six months (for small construction projects) to longer than five years (for major infrastructure projects). When two entities are actively engaged for such long periods of time, execution of the construction contract marks the beginning of the parties’ obligations. In the event a force majeure event occurs, questions will arise between the parties regarding the causation, the length and impact of the delay, mitigation opportunities, and similar issues. Every lawyer knows that the answers to these questions always depends on the facts surrounding the situation. If the fact gathering starts from scratch, the process is already broken and the ability to promptly respond with any accuracy is lost. Stay in front of the issue by staying in touch. Here are a few recommendations. When your contractor’s monthly project report comes in, read it at the same time your project team is reading it. If you do not understand certain aspects of the report, ask questions to your project team contemporaneously with the report. For most construction contracts, detailed schedules are provided. You do not have to be a project controls expert to read a level 3 schedule; stay up-to-date on recent versions and make sure your project team is properly tracking progress as well as meeting the owner’s obligations. Finally, and most importantly, establish an on-going relationship with your project team. If they see their lawyers as problem solvers, then they will be more inclined to engage and keep lawyers in the loop. Too often, lawyers are only called when a problem has escalated to a level beyond the project team’s control. By establishing this open communication, lawyers can stay in touch, help the project team navigate the known and unknown problems and ultimately be capable of answering the tough questions during the unexpected, force majeure times.

Know Your Contracts. If you have a large suite of contracts, have you taken the time to understand the differences between the force majeure provisions? One of the most important items to undertake prior to any force majeure event is to familiarize yourself with the force majeure provisions in the variety of project-related agreements, including engineering, procurement and construction agreements as well as the associated commercial agreements. We recommend focusing on gaps to determine any uncovered risk and liabilities. More specifically, you should study: 1) the breadth of each force majeure definition; 2) the types of relief provided in the event of force majeure; and 3) the party’s obligations to notify its counterparty of such an event and the associated impacts. This should all be done with a base knowledge of the project execution plan, including how one contract will impact the others. Depending on the size of the project, owners may consider compiling such information into a single database for easier comparisons across multiple documents. Such organization will also help bring order to the disruption surrounding significant force majeure events. We strongly recommend your contract analysis extend beyond the construction-related contracts and include any contract which is related to the overall project. If coordinated properly, all project agreements (including construction and commercial sales agreements) will contain virtually identical expressions of force majeure. For a variety of legitimate reasons, it may not be feasible to have complete alignment though. Most importantly, we recommend focusing on those commercial contracts where your client requires completion of construction to fulfill its obligations under such commercial contract. Ideally, the commercial contract’s force majeure relief will be at least as broad as any relief provided by a construction-related contract. If that is not the case, risk mitigating activities should be actively pursued to reduce these commercial liabilities prior to the actual force majeure, including identifying other ways to meet any at-risk commercial requirements. Unfortunately, if your client waits until the event occurs, it may be too late to do anything about the exposure. Before the disruption caused by a significant force majeure event occurs, prepare yourself and map out a plan for any extra-contractual activities that can be invoked to mitigate such risk.

Enforce Your Contract. When the underlying commercial assumptions prove wrong, the financial models typically have some margin for variance from such assumptions. If the contractor promised to deliver the completed facility by a certain date, hopefully the associated commercial contract has sufficient flexibility to allow for such delay. Where the assumed total installed cost is guaranteed by a contractor, hopefully the margins between profit and loss can nevertheless handle some cost overruns. However, when such variances exceed the assumed margins, executives will necessarily need to mitigate such circumstances, which can cause significant pain for the contractor. If your client has previously been lax in its enforcement of the agreement, human nature makes it very difficult to modify such habits (not to mention the fact that you may be causing legal issues through such course of conduct). In our experience, if expectations are set early that both parties should fully comply with the obligations set forth in the agreement, then the parties’ long-term relationship is greatly strengthened. While it may seem like a simple piece of advice, it is an essential piece of advice that goes against most people’s aversion to conflict. In the force majeure context, here are a few things to think about when a contractor submits a claim for force majeure: 1) did the contractor submit the claim in accordance with the contract (both timing and substance of notice); 2) is it actually a force majeure event pursuant to the terms of the underlying agreement; and 3) if it is a force majeure, have they proven their rights to the relief requested? If they haven’t followed the obligations set forth in the agreement, tell the contractor about such failure and tell them that you expect such compliance. Equally, if a contractor has met the requirements and is entitled to relief, owner should be quick to provide such relief. Acting quickly can amplify the benefits of such relief for the contractor, and such quick actions show the proper give and take during such stressful times. Ultimately, you may be able to turn the disappointment of a force majeure event into an opportunity to build goodwill between the parties.

Gather Your Own Facts. As noted above, it is important to stay in touch throughout the project. This is the first and most important step in fact gathering. By doing so, you remain informed on what the facts looked like on the ground directly before the force majeure. When the force majeure event occurs, it is important to continue your fact gathering immediately following it. Too often, an owner will rely upon its contractor to prepare the claim and substantiate such claim, based on its view of the world. Due to the contractor’s inherent conflict, such a view may simply be skewed without any malice. The owner should be independently analyzing and assessing available information after such event and should come to its own conclusion as to whether causation exists for any particular claim as well as an independent evaluation of the damages. The owner can use this information, as well as other project-related data that should have been collected by the owner throughout the project (such as pre-event progress reports, critical path schedules, installation logs, and manhour curves) to independently confirm the contractor’s claim for relief. Since the above required claim analysis may require expertise outside the owner’s core skillset, owners may need to hire a third party consultant to help assess these claims. If you have recently lived through Hurricanes Harvey, Irma or Maria, you already know that locating, vetting and mobilizing such expertise after the hurricane can be difficult. Instead, we recommend investing in relationships well before the event. Then, in the event of significant force majeure events, you will know who to call and they’ll likely answer your call before an unknown entity’s. If you decide to hire a third party consultant, you should also consider what steps, if any, should be taken to keep such consultant and any consultant-generated work product protected from any future litigation. Absent proper steps, you may risk converting your consulting expert into an expert witness, and thus making their past communications and work product discoverable. Each jurisdiction contains different rules on such protections, and you should be fully versed on such rules prior to retention of such consultants.

Mitigate the Event. Many construction contracts require the contractor to mitigate delay from a force majeure event. For example, in a hurricane situation, work stoppage may be required in order to ensure safety of on-site personnel. Continued rain for a period of time after such event however may not require the same stringent safety requirements. In the event that the contractor should have re-commenced work (or started clean-up) at the site more quickly, the contractor may be responsible such failure. Other provisions related to labor or material shortages, environmental risks, and acceleration requirements may also play a role in project recovery as the damages are further assessed. When considering the options for mitigation, all such provisions should be explored and properly invoked.

Manage Your Insurance Company. Last, it is important to remember that insurance was procured to further mitigate the owner’s exposure to a variety of risks, including risks borne out of force majeure events. Prior to the force majeure event, you should retain and maintain all insurance policies in a safe location. Redundancy is key. Also, you should have the contact information for such insurance companies, and not just the number for the insurance agent but also the claims group. Each insurance policy contains different requirements for notifications and preservation of damaged property. Lawyers should work with their risk managers to ensure plans are in place at the project level to meet such requirements, and that such plans are used during force majeure events. After the force majeure event, notifications should be promptly provided to the insurance company and lawyers should consult with its internal risk management group to ensure all red-tape is properly addressed.

Starting early and staying informed throughout the project and any force majeure event allows you to better protect the owner’s interests and confirm all parties’ adherence to contract terms. Driving the process from the start is the best way to efficiently and effectively ensure a quick resolution of any potential issues and re-focus efforts on moving your construction project towards final completion. During construction, new people rotate on the projects, those who started the project naturally rotate off and the passage of time can lead to unclear memories. Then, when you add the inherent risks of construction, a well-drafted construction contract should serve as the playbook for each side moving forward. Transaction lawyers spend considering time trying to achieve such well-draft contracts. After completing the contract, lawyers should stay involved, and prepare for the unexpected. It’s really no different than what your project team is probably already doing. Get plugged in to such on-going preparations, and stay plugged in to make sure the next force majeure event causes the least disruption possible.