May The Force Majeure Be With You In Construction Contracts
Written by: Alan Nochumson
Most construction contracts allow contractors to escape legal responsibility if completion of the construction project is delayed by a force majeure event, i.e., acts of God, unusual weather conditions, war or riots.
Force majeure clauses are premised on the idea that since the contractor cannot predict or plan for such an event, it would be unfair to force the contractor to perform during its continued existence.
In Morgantown Crossing L.P. v. Manufacturers and Traders Trust Company, the U. S. District Court for the Eastern District of Pennsylvania recently found that a governmental delay in processing permit applications for construction of a branch office for a bank in a shopping center did not constitute a force majeure event as defined by the terms of a ground lease.
APPLYING THE CLAUSE
In 2002, Wolfson-Verrichia Real Estate Investments Inc. and AllFirst Bank entered into the ground lease. Under the lease, WV, the landlord, was to arrange for construction of site preparation and improvements. AllFirst Bank, the tenant, was to then construct the branch office. The lease contained a condition precedent clause requiring WV to obtain by May 1, 2003 all necessary governmental permits, approvals and authorizations for construction. If this condition was not fully satisfied by that date, either party could terminate the lease.
The lease also contained a force majeure clause providing that neither party would be in default of its obligations under the lease if their performance were delayed or prevented due to strikes, lockouts, inability to obtain labor and materials on the open market, war, riots, unusual weather conditions, acts of God, or other similar causes beyond their control. The clause further stated that in the event of occurrence of a force majeure event, the deadlines would be extended by the length of the delay caused by the event so long as the party unable to perform notified the other party of the delay within fifteen days of its commencement.
After AllFirst Bank merged into Manufacturers and Traders Trust Company, it initiated negotiations with WV to buy out the lease, preferring not to build the branch office. Although these negotiations hit an impasse, Manufacturers realized that it could terminate pursuant to the condition precedent clause.
Soon after executing the lease, WV submitted applications to the township for signal permits. Five months later, WV requested telephone status of the applications, but the township’s representative stated that he could not recall the applications. WV thus had to resubmit the applications and start the application process anew. After reviewing the permit applications, the township advised WV that the applications would not be approved unless WV agreed to pay for improvements to the traffic infrastructure surrounding the shopping center.
Realizing that the applications would not be processed before the May 1, 2003 deadline, WV, on April 30, 2003, sent a letter to Manufacturers extending the deadline until Dec. 31, 2003, pursuant to the force majeure clause.
In the letter, WV cited the township’s refusal to sign the permit applications as a force majeure event. The very next day, WV assigned its rights under the lease to Morgantown Crossing L.P. On May 2, 2003, Manufacturers, while acknowledging receipt of the April 30 letter, terminated the lease based upon the condition precedent clause.
Undeterred, Morgantown continued negotiations with the township. Almost two weeks later, the township approved the signal permit applications after Morgantown agreed to contribute $115,000 to the township for traffic improvements.
Morgantown then initiated an action for declaratory relief and damages for breach of contract in state court. After the case was removed to federal court, Manufacturers sought summary judgment on grounds that since the landlord at the time did not fulfill its contractual obligations by the May 1, 2003 deadline, it had the right under the condition precedent clause to terminate the lease. The district court agreed and entered summary judgment in favor of Manufacturers.
The district court stated that the condition precedent clause clearly gave both the landlord and tenant under the lease the ability to terminate the lease in the event the requisite governmental permits and approvals were not obtained by May 1, 2003. Citing the time of the essence clause contained in the lease, the district court held that Manufacturers had the right to terminate the lease when WV failed to obtain the necessary permits by the bargained-for deadline.
The district court was not persuaded by Morgantown’s insistence that WV’s delay in obtaining the necessary permits was excusable as a force majeure event under the lease. The district court pointed out that [w]hen the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.
The district court also reiterated that the event that actually prevents a party’s performance will only be excused if the force majeure clause specifically includes the event and the event effecting contract performance was not within party’s control.
The district court first examined the language of the force majeure clause. Since a governmental delay in obtaining the required permits was not specifically included in the list of force majeure events, i.e., strikes, lockouts, an inability to obtain labor or materials in the open market, war, riots, unusual weather conditions and acts of God, the district court concluded that WV’s failure to obtain all governmental permits by May 1, 2003 could not be excused.
The district court then determined that the cause of delay did not fall into the ambit of the catchall segment of the force majeure clause, i.e., other similar causes beyond the control of the parties. The district court emphasized that [a] catchall provision in a force majeure clause is limited to the things of the same kind and nature as the particular events mentioned. In other words, the catchall provision must be construed within the context established by the preceding listed causes.
The district court did not believe that the cause of delay was of the same kind or nature as the ones enumerated in the force majeure clause. Unlike those unforeseeable events, the district court noted that governmental delay in the permit application process in commercial real estate development is foreseeable. The district court pointed out that WV, a sophisticated business entity with experience in developing several shopping enters, agreed to bear the risk if the township delayed the permit application process.
The district court also rejected Morgantown’s contention that WV had no control over the decision-making process of the governmental entities, their review of the plans or issuance of the required permits.
The district court did not believe that WV made active and diligent efforts to secure the necessary permits by the May 1, 2003 deadline. Although WV knew that the process to apply for a signal permit takes four to eight weeks, it waited over five months to make a telephone call regarding the status of the application. Because the township representative could not remember completing the applications, WV was forced to start the process anew and resubmit the applications.
The district court also stated that WV delayed issuance of the permits through its poor handling of the negotiations with the township. The district court did not believe that the township made extortionate and illegal demands on WV. In fact, the district court noted, [w]ith a multimillion dollar construction project such as this, it is not uncommon for the local government to request the developer to contribute to the support and maintenance of the town’s infrastructure. [Morgantown] cannot characterize this practice as extortion and attempt to use it as justification for ceasing negotiations with the [t]ownship for several months.
Although a force majeure clause has the potential to serve as a shield for a contractor if the construction project is delayed, the district court’s holding in Morgantown Crossing reinforces the mantra that drafting a contract is a fine art. The next time you represent a contractor in contract negotiations, you should ponder all the ways that project can be delayed and attempt to insert those causes into the clause.
On the flip side, attorneys representing owners should require that the force majeure clause contain a notice requirement in order to prevent contractors from making ad hoc excuses at the conclusion of a delayed project. Regardless, as a matter of practice, contractors should immediately notify the owner of the occurrence of the force majeure event, even if they are not contractually obligated to do so.
In Morgantown Crossing, the landlord was required to notify the tenant of the force majeure event within 15 days of its occurrence. Even if the district court in Morgantown Crossing had found that governmental delay constituted a force majeure event under the lease, the landlord would likely have been denied the benefit of the clause given WV’s failure to notify Morgantown of its occurrence within the time period prescribed under the lease.
Reprinted with permission from the December 27, 2004 edition of The Legal Intelligencer © 2004 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, email@example.com or visit www.almreprints.com.