From force-majeure provisions to price-gouging considerations, make sure your legal strategy prepares your construction company to weather any storm.
While legal considerations are often the last thing on the minds of project owners and contractors during an emergency, construction industry stakeholders should bear in mind the impact of natural disasters on their legal rights, remedies and potential exposure to claims.
For all stakeholders, two of the most pressing considerations are: (1) what provisions in their contracts are impacted by a natural disaster and (2) do they have any potential exposure to price-gouging claims?
STORM-PROOFING CONTRACTS
Four provisions generally found in construction contracts worth reviewing and discussing before, during and after a natural disaster are:
FORCE MAJEURE
If properly executed, a force-majeure provision excuses an impacted party's performance upon the occurrence of a force-majeure event, which are events that are unforeseeable and unavoidable by a contracting party. Common examples include natural disasters, war and embargoes.
For example, a fast-moving tornado could be considered unforeseeable because it is sudden and unpreventable. However, economic events, such as a change in the market, are considered foreseeable by law and cannot be included in standard catch-all language.
Stakeholders should also be mindful of any notice requirements when reviewing a force-majeure provision and ensure they properly follow the notice procedures. Although giving notice is likely the last thing on their mind amid the chaos and clean-up of a force-majeure event, it is important to ensure the deadline does not go unnoticed.
LIQUIDATED AND CONSEQUENTIAL DAMAGES
Liquidated damages typically assess a daily charge each day the project goes on longer than it is supposed to. General contractors often agree to liquidated damages in their contracts with the owner, but commonly try to pass those costs down through subcontracts. If a subcontractor has a subcontract that incorporates the general contractor's prime contract, they should review the contract or at least ask if the general contractor agreed to liquidated damages. If they did, then the subcontractor may also be on the hook. Subcontractors should limit their exposure by only agreeing to liquidated damages to the extent caused by their fault. They should also try capping the amount of liquidated damages.
The same is true for consequential damages. Subcontractors and suppliers should try to negotiate for a broad waiver of consequential damages (e.g., lost profits, business interruption, etc.) and punitive damages to protect against unforeseeable and uncontrollable damage.
INSURANCE
Builder's risk insurance, and the risk of casualty loss to work in progress, may be addressed in construction contracts. While unlikely, some parties are either unaware or underestimate the need for it. If there is no language in the contract to the contrary, a contractor generally bears the risk of a casualty loss since it has control over the jobsite. However, this may not be much comfort to a project owner if the contractor is not ultimately in a financial position to repair and restore the damaged work. By obtaining a builder's risk policy, the owner and contractor shift the risk of loss to the insurance company up to the policy limit—which is typically the replacement cost value of the work—for covered losses. A builder's risk policy, however, is not a silver bullet, and attention must be paid to the policy to ensure the coverage matches the possible risks during construction.
INDEMNITY
Subcontracts, or master service agreements, almost always require subcontractors and suppliers to indemnify the contractor from damages arising from various claims. Such indemnities frequently shift a substantial amount of the risk to subcontractors and suppliers. Indemnities are very complicated; thus, there is not a one size fits all approach. Generally, look for mutuality (subcontractor indemnifies general contractor for “x” and general contractor indemnifies subcontractor for “y”). Like force-majeure provisions, indemnities typically require notices.
PRICE-GOUGING CONSIDERATIONS
It is also predictable that during a natural disaster, there is a surge in demand on local retailers and/or materials suppliers. Naturally, vendors may reflexively increase prices to account for the new market dynamics of scarcity and urgency.
But when does a necessary price increase become price gouging?
While the federal government generally regulated price gouging during COVID-19 pandemic using the Defense Production Act, there is no comprehensive federal law prohibiting or regulating price gouging. With presidential candidates calling for a federal price-gouging ban, the regulatory landscape could change.
For now, enforcement of price-gouging laws is left to the states. At least 35 states have enacted laws designed to protect consumers from price gouging after a disaster. For example, Texas enacted the Texas Deceptive Trade Practices-Consumer Protection Act which defines price gouging as “a false, misleading or deceptive act or practice to take advantage of a disaster declared by the governor or the president by selling or leasing fuel, food, medicine, lodging, building materials, construction tools or another necessity at an exorbitant or excessive price.”
Unfortunately, the DTPA does not define what constitutes an “exorbitant or excessive” price. It is a question of fact determined on a case-by-case basis.
If price gouging is evident, the DTPA imposes stiff penalties, and violators may be required to reimburse consumers. They also may be liable for a civil penalty of up to $10,000 per violation and an additional penalty of up to $250,000 if the consumers were elderly.
Price-gouging laws vary state to state, so be sure to contact legal counsel to discuss further details as they pertain to your company.
WEATHERING THE STORM
Natural disasters pose significant challenges for the construction industry, impacting both legal obligations and business practices. By proactively reviewing and understanding key contract provisions—such as force majeure, damages clauses, insurance requirements and indemnity obligations—stakeholders can better protect their interests when disaster strikes. Additionally, awareness of relevant state price-gouging laws is crucial to avoid potential legal pitfalls during times of scarcity and high demand. Given the complexity of these issues, it's essential for stakeholders to work closely with legal counsel experienced in construction law.
Originally published by Construction Executive.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
