Anyone watching what has happened recently in Houston and Florida will immediately think about the safety and wellbeing of those affected by Hurricanes Harvey and Irma. Once the rain stops, the water recedes and the aftermath of destruction is assessed, both areas and their residents will be looking at a long road to recovery, much in the same way as New Orleans in 2005 (Hurricane Katrina) and New York and New Jersey in 2012 (Hurricane Sandy). Among the many challenges that lie ahead, owners and contractors of existing projects – whether in Houston, Florida or other parts of the country – as well as those involved in new projects to rebuild, must take steps to assess the effects and identify their contractual rights and obligations. For those in Houston and Florida, this will no doubt mean working closely with their insurance carriers to recover project-related losses. For those in other parts of the country, contracting parties need to assess the impact, if any, on projects and ascertain their available remedies.
Potential impact of hurricanes
Hurricanes can cause issues with the supply and demand of raw materials, supplies and equipment, especially at critical junctures such as ports and warehouses due to their location on or near the coast. Natural disasters often affect the construction industry in the form of price increases and material scarcity. For example, oil shortages during a hurricane can greatly affect commercial contractors that rely on diesel-powered machinery. Similarly, natural gas shortages cause prices to spike, which increases the cost of producing asphalt, paints and tyres for heavy machinery.
Hurricanes can also affect the timely flow of materials, supplies and equipment. In 2005 Hurricane Katrina created a shortage of resins produced from oil that manufacturers needed to create polyvinylchloride and other vinyl products. Damage caused by Hurricane Katrina in the Gulf of Mexico disrupted supplies of ethylene and natural gas during the second half of 2005. In the aftermath of Hurricane Katrina, repair efforts along the Gulf Coast quickly consumed many building materials, creating short-term shortages and further price hikes. If equipment, materials and supplies are coming from the affected areas, projects run the risk of delay. Moreover, supplies, equipment, materials and labour may be diverted to Houston and Florida, which could further affect a project.
Remedies for contractors
The general rule under most construction contracts is that the contractor must perform and complete the work, or run the risk of default, termination or damages. However, external events beyond anyone's control or anticipation often disrupt this contractual equilibrium. With that in mind, it is critical for owners and contractors to understand the affects that flow from such events, as the fallout from these unforeseeable acts can greatly influence a contractor's ability to perform under its contract.
To accommodate for the unknown, most contracts provide a force majeure clause to limit and allocate risk. 'Force majeure' (French for greater force) refers to events that are beyond the control of the contractor and generally wreak havoc on jobsites in the form of physical damage, in addition to cost and time affects. Force majeure events typically include most natural disasters (eg, fires, floods, earthquakes, hurricanes and droughts), which are characterised by their complete inability to be foreseen at the time of contract drafting. Notably, many construction contracts do not use the term 'force majeure', but rather employ broad language addressing a variety of causes beyond the control of the party seeking to invoke the provision.(1)
In most standard contracts, both the owner and contractor will generally share the risk of loss for force majeure events, where contractors are entitled to a time extension but not compensation. Thus, a contractor can rely on the force majeure clause to seek a time extension and avoid an assessment of liquidated damages by the owner. While a contractor will likely be entitled to additional time, contractors (unless the contract expressly provides otherwise) will not be allowed to recover delay damages as a result of an unforeseen event. Thus, contractors must assess whether their projects will be affected by Harvey and Irma, and determine what remedies their contracts provide.
As far as recovery for price escalation, most contracts place the risk of price escalation on the contractor. For example, the American Institute of Architects documents do not include an escalation clause. If a contract contains an escalation clause, the clause will typically provide a time period after which the escalation applies.
Finally, the House of Representatives recently passed a $7.9 billion aid package for Hurricane Harvey victims, and the Senate has approved an overall package value that adds $7.4 billion, for a total of $15.3 billion. Undoubtedly, money will be made available in Florida as well. Both bills have $7.4 billion going to the Federal Emergency Management Agency (FEMA) disaster relief fund.
Because federal money is involved, those contractors coming to the aid of a disaster-struck area must be aware of issues arising out of federal contracts issued through FEMA. Contractors working primarily in the commercial world may not be aware of the multitude of regulations that they are subject to under the Federal Acquisition Regulations and should take steps to familiarise themselves with the rules. While most of the contracts will likely be firm fixed-price contracts, contractors working under a cost reimbursement contract may not be familiar with the regulations surrounding time-keeping and accounting practices. Mistakes in this area could open up contractors to issues involving false claims. Contractors working with federal money would also be subject to Davis-Bacon Act requirements, which establish the requirement for paying local prevailing wages for labourers and mechanics during public works projects. Prudent contractors should familiarise themselves with any red tape before pursuing or accepting contracts involving federal funds.
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