How Schwabe attorneys help Pacific Northwest clients navigate act of God clauses that reflect current realities
Force majeure clauses are routinely written into contracts to limit both parties’ liabilities in the case of unforeseen events, such as hurricanes or terrorist attacks.
These "act of God" clauses were generally boilerplate language to which no one really paid much attention.
Then the Covid-19 pandemic exploded across the globe, with government mandated shutdowns of businesses and construction projects, followed by supply chain disruptions and labor shortages, not to mention a possible recession and the specter of new Covid strains.
“Before, it wasn’t as top of mind to be as detailed and intentional,” said Stephanie Holmberg, who leads Schwabe Williamson & Wyatt’s Real Estate and Construction Industry group. “The majority of force majeure clauses would include some reference to a global pandemic, but now it’s one of the most important clauses we review in a contract because we’ve seen what can happen if you don’t have a properly drafted clause.”
Holmberg and her colleagues in the Portland firm said they are advising clients on how to adequately protect themselves in the face of recent events that dealt broad-based blows not only to public health but also the economy.
This is where force majeure language, which protects parties from circumstances that are totally outside their control, can be both a sword and a shield. It excuses a party from delivering on an obligation but can also relieve a party from paying for the missed delivery of materials or supplies.
“You want to try to provide an offramp,” Holmberg said. “Now more than ever, we believe businesses should be very careful in terms of evaluating the risks associated with these uncertainties.”
The more specific the language, the better, Holmberg said.
Holmberg’s real estate and construction group at Schwabe has fielded calls from project owners, developers, contractors, subcontractors, materials suppliers and basically everyone involved in the supply chain.
“It all comes down to what’s in your contract,” Holmberg said. “It’s a matter of figuring out what was impeding the work and advising them on how to go forward.”
The construction industry is not the only one where these clauses have become particularly relevant.
Kent Roberts is a Schwabe shareholder who represents maritime clients, including marine terminals, shipyards, ports and other entities. Many such clients have service contracts with strict timelines for performance and penalty clauses for late delivery.
Oftentimes over the past two years, delays have been due to sub-suppliers with manufacturing facilities that were shut down due to the pandemic or labor shortages.
“So we’re looking at our client’s force majeure clause and asking, ‘Is that covered by the terms?’” Roberts said.
Another important consideration is whether to craft contract language that covers the recurrence of an event, such as a new Covid subvariant. The key is to be proactive, Roberts said.
“In manufacturing and performance, oftentimes the contract specifications require the company or manufacturer to source certain materials from particular suppliers who meet certain standards,” he said. “What happens if the supplier can’t perform, and the contract doesn’t permit you to go to an alternative source? We’ve counseled clients to anticipate where things might go wrong in a sole source supply contract.”
Holmberg agreed that clients are more proactive.
“There is definitely a heightened level of consideration by both parties to market factors, whether it’s defined as force majeure or not, and we’re seeing them thinking about these issues and including them in the contractual language to protect themselves,” she said.
So far, there hasn’t been a torrent of litigation related to contemporary force majeure events in the maritime industry, Roberts said.
“It’s such a small industry, the suppliers and manufacturing base have to get along,” he said. “People do their best not to burn bridges.”
The same is true in construction, Holmberg said.
“Because of the pressure they’re under, we did see businesses come together and say in a typical world, we’d litigate over this, but we just want to move on or scrap it or get the project built,” she said.
Read the full article in the Portland Business Journal
This article was republished with permission from the Portland Business Journal.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.