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Force majeure clauses in construction contracts - Lexology
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As with many websites, JD Supra's website located at www. These technologies automatically identify your browser whenever you interact with our Website and Services. It reasoned that as a general proposition, a supplier is not only required to mitigate the force majeure event itself, but also the effect on the other party of the force majeure event.
The Court further held relying on English authority that these obligations to mitigate are not infinite but are limited by "commercial reasonableness":. A supplier need not show that the event [of alleged force majeure] made it impossible to carry out the contract, but it must show that the event created, in commercial terms, a real and substantial problem, one that makes performance commercially unfeasible. In sum, and in the absence of clear words to the contrary, the supplier was not excused from nonperformance by a force majeure event if the sole consequence of that event is to drive him to buy from another supplier and make a smaller profit.
The supplier would be excused, however, if that solution, in all the circumstances, is not reasonable. A new trial was ordered and Atcor and Continental settled prior to trial. Accordingly, it is difficult to predict just what the reference to "commercially unfeasible" would have meant when applied to the facts of that case.
One case on point, and which was referred to in Atcor , is the English case referred to as the Wildhandel ,32 a case involving sale of Chinese frozen rabbits. The supplier claiming force majeure was unable to meet the heavy burden imposed on it to establish that it was unable to acquire an alternate supply, regardless of price, in order to gain the benefit of force majeure.
This result seems harsh and may also ignore the concept of commercial reasonability. However, it might still be considered consistent with the heavy burden on the party seeking to demonstrate the lack of commercially reasonable mitigation measures when force majeure is declared. Based on the Atcor decision, parties negotiating force majeure clauses must be aware of an additional implied duty to mitigate, on commercially reasonable terms, the adverse effects on the other party which may arise from force majeure events.
Any ousting of this implied duty will, as stated in Atcor , require clear and unequivocal language. In order to avoid disputes and unforeseen liabilities, the extent to which a party declaring force majeure must mitigate the event and its consequences should be specified in the contract. The extent of Atcor's influence on Alberta force majeure jurisprudence is, however, an open question. Aquilo Energy Inc. In the interim, Aquilo was forced to look elsewhere for a rig to get the job done.
The force majeure clause contemplated a specific duty to mitigate:. The performance of any suspended obligation shall be resumed as soon as reasonably possible after such [force majeure] cause ceases to exist. The reasoning is very brief, and seems to be based on the view that such an obligation to mitigate the effect of the force majeure would need to be expressed clearly in the written contract. The doctrine of commercial reasonableness was not addressed in this context, nor was the Atcor case cited.
It is submitted that if by raising the concept of "commercial reasonability" the Alberta Court of Appeal intended to move away from the strict interpretation historically accorded to such clauses as demonstrated by the Supreme Court of Canada in the Atlantic Paper case, the result is arguably to introduce additional uncertainty into a concept that has historically proven itself to be troublesome of interpretation for common law courts.
That said, it may be that the concept of "commercial reasonableness" is simply a recognition of events closer to what is generally perceived to be impossibility of performance as referred to in Atlantic Paper and consistent with the use of the term "impracticability" in the U. Certainly, other Canadian courts have proceeded by way of strict interpretation in interpreting such clauses. In Fishery Products International Ltd. Midland Transport Ltd.
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While en route, the trucks were obstructed by independent truckers conducting a political protest which caused two of the three trucks to be delayed sufficiently to cause the fish to fail inspection. The Bill of Lading under which the contract was being carried out provided in part as follows:. An appeal to the Newfoundland Court of Appeal arose after the trial Judge found that the force majeure clause had been properly invoked by Midland and that it relieved it of its obligations.
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The Court of Appeal overturned that decision finding that "strikes" referred to actions by employees of the company invoking the force majeure clause and that it did not extend to the truckers' blockade. Further, the court held that the "Queen's or public enemies" did not include citizens of the state who simply break the law. At the heart of the common law of contract is the notion that where a party agrees to a contractual obligation, that party is liable for damages when the obligation is not met.
It is presumed that parties intend to be bound to perform their bargain. Consistent with this notion, Courts are wary of those terms that attempt to remove or limit liability for non-performance. Exclusion clauses, restrictive covenants and limitations are examples of this type of clause. Such "exculpatory" provisions tend to be interpreted narrowly or "strictly" because they tend to relieve parties from contractual obligations. Insofar as force majeure provisions are considered to be exculpatory, which undoubtedly they are, they will be strictly and narrowly construed.
When interpreting contracts, Courts strive to give effect to the intention of the parties to a contract. The intention of parties is generally to be derived exclusively from the words of the contract itself, as evidence of subjective intent is inadmissible. To assist in determining contractual intention, numerous interpretive rules have developed. Some of these rules have particular relevance for parties drafting and considering force majeure clauses: i the concept of "strict construction" including the ejusdem generis rule; iii the concept of "commercial reasonableness"; and ii the contra proferentem rule.
One interpretive principle often utilized to arrive at a narrow construction is ejusdem generis. The principle is as follows:. Where there are general words following particular and specific words, the general words must be confined to things of the same kind as those specified. Ejusdem generis is of particular relevance to force majeure clauses that include a detailed list of triggering events. A good example is the use of this principle to construe a force majeure clause in Atlantic Paper. In determining whether the market situation faced by the manufacturer fell within this concluding phrase of the definition, the Court applied the ejusdem generis principle to hold that the phrase relied upon must be interpreted so as to limit its application to events like those previously described, "over which the [party claiming suspension of the contract] exercises no control,"42 and which" makes performance impossible".
Generally, reliance upon a force majeure clause requires that one or more of the following conditions be fulfilled:. When drafting force majeure clauses it is necessary to ensure that four key components are addressed:. The Anglo-American legal tradition is to expressly define the event or events that will enable a declaration of force majeure rather than merely relying on the general concept of force majeure.
Commonly included "acts of God" flood, fire, war, civil disturbance, governmental or judicial orders or actions, sabotage, explosion, landslides, lightning, earthquakes, fires, storms, floods and washouts are commonly included as events that trigger force majeure. As noted, in common-law jurisdictions it is also common to customize a force majeure to the type of project or industry to which it is being applied. The duration of the force majeure condition must be defined within the contract.
Usually, it is expressed to correspond to the period during which the situation giving rise to it cannot be overcome. Any well drafted force majeure clause will carry within it an express duty to mitigate. In most contracts, the party declaring force majeure must, so far as possible, remedy the situation with due diligence or "with all reasonable dispatch". While the obligation described clearly includes a duty to mitigate the force majeure event itself, what is less clear is whether the duty to mitigate also includes a duty to mitigate the affects of the force majeure event.
As a matter of concept, the distinction may appear subtle but it can be of great importance as illustrated by several cases decided in Alberta and Texas in relation to gas supply contracts. In Tejas Power Corp. Amerada Hess Corp. Amerada curtailed its supply of natural gas to some but not all of its customers and instead selectively chose those to whom it would make deliveries. Tejas made two arguments seeking to hold Amerada responsible for failing to mitigate, not the force majeure event, but the effect on Tejas of the force majeure event.
In that regard, it argued firstly that Amerada ought to have apportioned its limited supply of gas among all affected customers. This argument was rejected on the basis that the court held that Amerada could allocate as it pleased so long as such allocation was "fair and reasonable". The only expert testimony presented at trial indicated that Amerada's allocation was indeed fair and reasonable. Second, Tejas argued that the availability of gas on the spot market would have allowed Amerada with "due diligence" to "overcome" the affects of the force majeure event as required by the contract.
The Texas Court of Appeal rejected this argument noting that to accept the argument would be to "rewrite a contract or interpret it in a manner the parties never intended". Producers Marketing Ltd. As the Learned Trial Judge observed:. Section If the seller is unable to supply gas due to an event of force majeure, any reduction in supply is to be apportioned among the various purchasers who share similar contracts as the buyer on a pro rata basis.
In the result, the court ordered Producers Marketing to "do all things necessary to assure the supply of 11, gigajoules per day of natural gas" to Androscoggin. On the other hand, a different result arose from the decision in Apache Corp. Virginia Power Energy Marketing In c. As a result of the hurricanes, Apache's ability to produce and deliver gas was disrupted and Apache declared force majeure and curtailed deliveries to Virginia Power. The contract between the parties provided in part as follows:.
Virginia Power contended that Apache should have delivered gas to alternate delivery points are found on the open market other gas for delivery at the alternative delivery points. The court rejected these arguments and noted that Apache's obligations expressly required all reasonable efforts at resumption of performance but they did not expressly require alternate performance in case of a force majeure event.
At trial, it was held that there was no obligation to supply gas at alternate delivery points and further noted that in any event, an implied obligation to purchase alternate supplies on the open market would be an unlimited obligation, and would render the force majeure provisions all but meaningless. Based on the recent U. Until other cases arise, it is unclear whether the standard of "commercial reasonableness" will cause the Alberta court, and those of other provinces, a more expansive view of that requirement.
When drafting, it may be important to expressly disclaim certain aspects of the duty to mitigate. For example, in relation to labour disputes, the parties will wish to ensure that they are not subject both to the demands of its work force during the dispute and the possibility of having to pay contractual damages for failing to settle labour disputes. Accordingly, many force majeure clauses recognize this reality by including clauses such as the following:. The obligations of the party giving notice of force majeure so far as they are affected by such force majeure, shall be suspended during the continuance of any inability so caused, but for no longer period, such a cause, shall, so far as possible, be remedied with all reasonable dispatch; provided however, that this provision shall not require the settlement of strikes or other concerted acts of workers by exceeding to the demands of the opposing parties when such course, in its sole discretion, is considered unreasonable.
Louis The force majeure was declared on January 29, following a weld failure and pipe rupture on the segment. Although 50 homes within a 3-mile radius had to be evacuated for six hours, there were no reports of injuries or fire associated with this incident. Segment has a capacity of 1. With repairs underway, the force majeure remains in effect, and the pipeline expects that service will be restored on or about Sunday, February 8. Following the rupture, natural gas continued to flow on REX, west of Segment , but at a much reduced pressure and volume. Eastbound flows on REX from the Rockies, which had averaged 1.
The REX westbound flows also have continued past Shelbyville, averaging 0. According to the U. PHMSA tracks and reports data on pipeline incidents, which include both issues on pipelines directly, as well as supporting infrastructure, such as compressor stations. On average, over the past five years , there were incidents annually on natural gas transmission pipelines. These incidents include, among other things, pipeline breaks caused by digging equipment, metal corrosion, and equipment failure.
The United States has close to 2.
Most of this mileage, 2. Henry Hub falls to lowest level since June Natural gas spot prices declined at most locations outside the Northeast. Larger declines occurred farther west, in California and the Rockies. Northeast prices rise with cold and stormy weather.
Prices in New England started the report week higher than other trading points. Marcellus-area prices rise through the week.
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