Force Majeure: Are you ready?

A “force majeure” clause is included in contracts to relieve the parties of their obligations in the event of significant unforeseen circumstances that are typically outside of their control. Essentially, it is a contract provision that relieves the parties from performing their contractual obligations when circumstances beyond their control arise, making performance illegal, impossible and/or impractical. A “force majeure” clause often covers fires, floods, wars, etc., but the language can be  expanded to cover a wide variety of events.

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The inclusion of a “force majeure” clause in a contract is generally to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict parties from being able to fulfill their contractual obligations.

A typical force majeure clause defines specific (e.g. flood) or general (e.g., act of God) events that can trigger relief from all or some obligations set out under the contract. The outcome may be termination of the contract, or negotiation of temporary or permanent changes to the scope of work and the amount of compensation needed to continue operating after the force majeure event.  By comparison, most contract issues, changes and exceptions are dealt with by the parties under “Change Management” or “Contingency Planning” clauses in the contract.  Force majeure is reserved for only those serious unforeseeable events that rarely arise.

Flooded streets can trigger a force majeure.

How Does It Work

All force majeure clauses are not written the same and need to be reviewed on a case by case basis but generally they read something like this:

In the event that the performance of the contract is made impossible by force majeure, then either party shall forthwith notify the other in writing and the Municipality shall either; terminate the contract in writing; or authorize the Contractor to continue the performance of the contract with such adjustments and/or amendments as required.

So, a few things jump out right away. Firstly, a decision is required to accept that there actually has been a triggering event. Let’s say you get a “notice in writing” that the contractors’ facility has been shut down due to a fire and they are seeking to cancel their contract under the force majeure clause. This would be the time to dust off that official contingency plan you required all your contractors to submit and determine whether there is a provision for diverting materials to another facility in the event of a prolonged shutdown. If there is such planning in place, then you do not have a force majeure triggering event. Instead, you have a planned contingency event and the contractor should implement the alternative arrangements previously agreed upon.

If you do decide that there has been a valid trigger event, you must then decide if you will:

  1. Terminate the contract, in writing, as soon as reasonably practicable and in accordance with the notification timelines set out in the contract;
  2. Authorize the contractor, in writing in accordance with the notification timelines set out in the contract, to continue operating with such adjustments; and/or amendments as needed.

This decision requires you to quickly analyse the feasibility of replacing your contractor and the financial/political cost of disrupting your program while you get that done. You will need to consider such things as:

  1. How much time is left on the contract term;
  2. Whether other contractors are available to quickly step in and how much of a premium they’ll want;
  3. Whether residents would accept service level changes; and
  4. Associated legal, procurement, communication and contract management costs.

If the costs noted above are not reasonable, you may prefer to negotiate (i.e., using your contract change management provisions) and authorize the contractor to continue under an amended scope of work. This option frequently results in additional costs and/or reduced service levels. In this case the contract should be reviewed carefully to determine whether the contractor can be held responsible for any of these additional incurred costs.

Is A Labour Shortage A Force Majeure Event?

The short answer is maybe. COVID-19 might cause a contractor to shut down due to loss of staff and claim the virus is an “act of God”. If the shutdown lasts for a period that can be handled with labour disruption contingency planning provisions, then no force majeure trigger is justified. If the labour disruption lasts long enough that the contractor goes out of business or must permanently hire, train or increase wages for significant numbers of new employees then there may be a justifiable force majeure trigger. Clearly an evidence-based analysis must support such a decision. In addition, consideration needs to be given to the triggering event. In other words COVID-19 is the triggering event potentially falling under the force majeure clause and not the labour disruption.

By comparison, municipalities have been split on whether to consider a labour disruption caused by a strike as a force majeure event. It can be reasonably argued that strikes are not foreseeable in the ordinary course of business and should therefore be included as part of a force majeure. Likewise it can be argued that labour disruptions are a potentially foreseeable event that is entirely within the contractor’s ability to resolve and/or avoid.  Contingency plans can also be developed in advance to ensure that some level of service is delivered during strike periods and/or other labour disruptions. Similarly, if the labour shortage is a direct result of a contractor under-bidding the number of staff or wage levels needed to operate the contract to the required standard, it’s clear that the consequences of those bad business practices are foreseeable and therefore, cannot be submitted as force majeure events. Low profits caused by winning a contract with a lowball bid are not a valid “unforeseeable” force majeure event. However, the language of the force majeure clause needs to be carefully drafted and reviewed to determine what, if any, labour disruptions are or are not considered to be a force majeure. The clearest drafting will specifically exclude labour disruptions, such as strikes and lock-outs, from the definition of what constitutes a force majeure event.

Source: Ralph F. Stitt, Rivoli Theatre / Public domain

An ounce of prevention is worth a pound of bandages and adhesive tape.

– Groucho Marx

Is Transition To IPR a Force Majeure Event?

Again, it’s a possibility and the contractual language needs to be carefully reviewed. Whether program transition falls within a definition of force majeure depends on how significantly the transition affects your specific contract and whether the circumstances were considered to be foreseeable. The transition is typically mitigated by inclusion of a Change of Law clause in the contract, which is intended to relieve the municipality of compensating the contractor should the contract need to be broken due to the transition to IPR. The Change of Law clause can be relied upon to require the parties to engage in a negotiated settlement or other dispute resolution mechanism such as the Change Management clause.

Bottom Line

An up to date force majeure clause that clearly defines a force majeure event and a separate change management clause are valuable tools that you will likely need in the near future as we move towards transitioning the Blue Box Program. We encourage you to dig out your contracts and review your force majeure clause and contingency plans before you receive that notice of event letter.

Contact CIF Staff

CIF staff are always ready to help. Feel free to contact any member of the team to discuss your issues and questions.