War-fueled Construction Cost Increases May Warrant Look at Force Majeure

Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on May 19, 2022.

The Russian invasion of Ukraine and economic sanctions imposed by countries around the world in response have disrupted supplies of fuel, steel, and other materials necessary for construction. This has resulted in price escalation that threatens construction project budgets. Owners and contractors across the country are running to their contracts (and their lawyers) to determine who bears the risk of these cost increases. While contracts vary quite a bit with respect to the assignment of risk for material price escalation, there are a few common provisions to keep an eye out for.

Some contracts include express material price escalation clauses or allowances for materials that allocate shared risk between the contractor and the owner. Some contracts also have broadly applicable change provisions that grant the contractor the ability to seek a contract price adjustment. But in the absence of these sorts of provisions, the key contractual term often is a “force majeure” clause, which addresses the assignment of risk of unforeseeable events outside of the parties’ control.

An example of typical force majeure language is:

“The Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the Contractor’s reasonable control, including, but not limited to, acts of God or of the public enemy; labor strikes or disturbances; riots or civil disorder; acts of war; epidemic or pandemic disease; the acts of governmental authorities; or unusually severe weather.”

Unfortunately, this sort of language can raise more questions than it answers. Where a military conflict directly affects contract performance, the conflict generally will qualify as a force majeure event. But it is rare that a contract specifies what qualifies as a “war.” Is a foreign war far from the project site an “act of war” affecting performance? What about material price increases caused by the economic ripple effects of a war?

Courts have addressed similar issues before, though infrequently. The baseline rule stated in various cases is that the contractor generally bears the risk of price increases due to labor or material shortages resulting from a war, but that those shortages may excuse delayed performance. Definitional issues have been litigated in the context of insurance policies. For example, “war” need not necessarily refer only to a formal, declared war.

In the 1993 case TRT/FTC Communications, Inc. v. Insurance Company of State of Pennsylvania, a federal appeals court even determined that a robbery occurring during the 1989 Operation Just Cause conflict in Panama was caused by war to the extent it was “enabled by the military hostilities.” But cases like these provide only rough guidance: every contract is different and should be evaluated according to its particular terms.

Some construction contracts—notably including the American Institute of Architects’ form contracts—do not include force majeure clauses addressing cost increases. In such cases, the risk of price escalation usually falls on the contractor unless it can show that the increase fundamentally changed the project in ways not contemplated by the parties or rendered performance truly impossible. These positions usually are difficult to support and tend to produce costly and time-consuming dispute resolution proceedings.

If a contract includes a force majeure clause that seems to cover the indirect price impacts of a foreign war, it is imperative that the contractor strictly comply with any and all notice and claim procedures specified in the contract. A contractor can waive its rights to seek a price or time adjustment by failing to follow the procedures. The procedures often require notice of the event within a stated number of days. But this presents another difficult issue: is the relevant “event” the outbreak of war or the downstream increase in prices? This ambiguity again can lead to disputes, so a contractor should provide notice as early as it possibly can.

For those entering contracts, how should the parties address this sort of conflict-driven price escalation? Contractors should consider the potential for far-flung military conflicts to impact material prices and availability and account for that risk when preparing bids or estimates. Owners may have an incentive to agree to materials allowances or price escalation clauses, assuming some of the risk, rather than pay contingency pricing. For negotiated contracts, it is advisable to negotiate specific, well-defined force majeure provisions and specify price thresholds or percentage increases over defined time periods for key materials beyond which price increases are a compensable change. This can provide some degree of certainty to the parties and reduce the potential for disputes based on competing interpretations.

Whether we like it or not, in the wake of the Ukraine war and escalating international tensions, it is more difficult to say that war and resulting price increases truly are unforeseeable events. While force majeure clauses are often boilerplate and easily overlooked, it is important for owners and contractors to pay close attention to the allocation of risk in their contracts for these sorts of increases.