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Procurement Perspectives: Force majeure clauses may permit contract overhaul

STEPHEN BAULD
Procurement Perspectives: Force majeure clauses may permit contract overhaul

The language of a contract should make clear that the term is not so broad as to encompass every minor inconvenience or cost overrun.

A contractor who has quoted a fixed price to a municipality should be expected to deliver the materials or service promised at that fixed price, since the very purpose of a fixed price contract is to guarantee the price to the municipality. If the price of the contractor’s inputs go up, then that is the very risk that the contractor has agreed to assume.

It is only when the cost increase is so great that it goes beyond anything the parties could possibly have contemplated that questions of force majeure should arise.

Generally, force majeure clauses excuse the parties from performance only while the event that brought them into operation subsist. Such an approach is rarely in the customer’s interest, should the force majeure continue for a lengthy period.

In such a case, the municipality should be allowed to find some other source of supply. Consequently, the force majeure clauses in a contract should always allow for the possible termination of the contract where the incident that amounts to a force majeure continues for an unduly long period of time.

Many complex contracts now divide what have hitherto been dealt with as force majeure events into a series of different classes of supervening events, each class carrying a different consequence. The main clauses of such events are the following:

Adverse change in law: The coming into effect or repeal, without re-enactment or consolidation, in Ontario of any application law, or any amendment or variation of any applicable law, including any judgment of a relevant court of law which changes binding precedent in Ontario in each case after the date of the agreement.

The effect of events of this kind will vary. Where the change is the result of the legislation or policy action of the government with whom the private sector party has contracted, the action may be seen to amount to a constructive breach of contract, entitling the private sector party to be made whole (i.e. paid full compensation for its loss).

Where the adverse change of law is the result of an action or some other level of government, the event is usually classed as a compensation event.

Relief events: Events of this class allow a party an extended time to perform but do not give rise to a right to compensation.

The class covers fire, explosion, lightning, storm, tempest, flood, earthquake, hurricane, tornado, riot and civil commotion (to the extent it does not constitute a force majeure event); a blockade or embargo falling short of a force majeure event; an official or unofficial strike, lockout, go-slow or other labour dispute, generally affecting the construction, building maintenance or facilities management industry; and any civil disobedience or protest action, including any action taken by any person or persons protesting or demonstrating against the carrying out of any part of the project operations or against the construction or operation of the facility located on site.

The definition will exclude anything resulting from the act or omission of a party seeking relief. The lack of any entitlement to compensation constitutes, in effect, an assignment of risk to the contractor.

Compensation events: Events for which compensation is payable in relation to any uninsured increase in cost, over and above any allowance in the form of additional time to perform. The obligation to pay amounts, in effect, to an assignment of risk to the government.

Force majeure events: A narrow residual bag of extreme events, such as war, civil war, armed conflict or terrorism, acts of foreign enemies or similar hostilities or a natural disaster of corresponding magnitude.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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