Force Majeure Trends in Construction Litigation

Matt Addison, Managing Partner of our Reno office and Co-Chair of our statewide Construction Law & Litigation Practice, was interviewed by Law360 for a feature Q&A published in Real Estate Authority. Matt shares his expertise and insights on the increasing frequency of force majeure arising in construction litigation, particularly in construction delay claims. Matt describes the force majeure situation in terms of how COVID related supply chain difficulties upended planning, estimating, and ordering throughout the construction industry. Instead of implementing helpful lessons learned, in today’s post-pandemic environment there is a frequent unscrupulous abuse of force majeure in an attempt to cover tracks of negligent parties who fail to anticipate, order in a timely manner, investigate delivery time frames, etc. “In other words, force majeure is used to cry wolf now,” said Matt. Matt’s Q&A is available here and provided below. Matt answers the six questions listed below.

1. What are some of the key trends you’re seeing in construction litigation right now?
2. Walk me through where we are now with the supply chain issue versus where we were two to three years ago. Supply chain was big in the news with the onset of COVID-19, and I’m wondering how you’ve seen the issue evolve.
3. In disputes that you’re seeing now, how much are you seeing force majeure come into play?
4. I’m wondering about force majeure in new contracts that are inked now. How are parties approaching force majeure for new contracts given what we’ve learned in four years?
5. We’ve talked a lot about litigation, [but] I also know that you do development work as well. I want to get your thoughts on what the landscape for development in Nevada is right now in terms of construction.
6. What are the trends you’re watching in the real estate or construction spaces over the coming months?

“McDonald Carano Leader Sees Parties Abusing Force Majeure,” Law360 Real Estate Authority, 4/10/2024

Force majeure provisions in construction contracts, which have been given increased attention since the onset of COVID-19, are now being abused by parties as a way to try to shirk responsibility, a construction leader at McDonald Carano LLP told Law360. Force majeure contract provisions allow parties to get out of contract obligations in the event of extreme or unforeseen circumstances. In the early weeks and months of the COVID-19 pandemic, parties scrambled to see what force majeure language existed in their contracts. Nowadays, according to Matt Addison, co-chair of the construction law and litigation group at McDonald Carano, parties that failed to order materials in a timely manner or failed to anticipate events are trying to claim force majeure, but such claims may not hold up when the ordering history is examined.

What are some of the key trends you’re seeing in construction litigation right now?

The first issue is delayed claims, as a result of supply chain difficulties. I’m seeing most of my cases having to do with contractors being delayed by the ordering and/or supply of specific parts. And by parts, I mean equipment, raw materials, everything. It seems to be a different world these days, in terms of being able to rely on the availability of these things according to standard or traditional delivery times. And so if [contractors] are inexperienced or unaware … then it multiplies the problem. In other words, if an inexperienced person assumes he can get a certain amount of steel in four weeks, and therefore waits to order that steel until five weeks before he needs it, he may get it 13 weeks later, and now there’s a big tension between the contractor and the owner. When the contractors delay, the contractor says, “Well, my assumption was reasonable in terms of when I could order it.” And the owner says, “Hey look, we hired you for your professional experience. You should have known and anticipated there would be supply chain issues. You should be watching the materials and their availability, and therefore, it’s your fault that you didn’t anticipate this when you agreed to the schedule in the first place.”

Walk me through where we are now with the supply chain issue versus where we were two to three years ago. Supply chain was big in the news with the onset of COVID-19, and I’m wondering how you’ve seen the issue evolve.

There’s absolutely no question that it’s better. In other words, of course, during COVID, everybody went crazy and everybody froze. And so it was an absolute shot in the dark in terms of getting anything, and that resulted in just pure chaos in the construction industry. And no one could really blame anyone else for it. But while it’s gotten better, it’s still unpredictable. I just settled a case in a mediation where some very sophisticated equipment made by four manufacturers that could be used interchangeably wasn’t available for a period of more than three to six months. And that’s a combination of the actual supply chain raw materials issue versus the constructability of that specific equipment. In other words, that was delayed as well. And I imagine that had to do with all sorts of things, including technology, availability of supply of materials, maybe some constriction in terms of the supplier, making sure that it had enough customers to justify the construction of this particular equipment, that sort of thing. But what’s really going on these days is that in light of this unpredictability, more sophisticated people have to be involved from the contractor or subcontractor side of things, who appreciate the estimation and planning of the jobs based upon the availability of what they’ll need and who are staying up to date on the availability of what they’ll need, so that they can, [number] one, bid on jobs and take jobs based upon a time frame that is actually feasible. And number two, be really proactive in their ordering of this stuff, and therefore be very aware of its availability perhaps well in advance of where they otherwise would traditionally.

Now, I just saw this come back to bite somebody, though, in another case, and that is that basically a capital venture had big plans on a construction project and ordered some very sophisticated equipment from my client that kept, essentially, rooms dry, so that certain sophisticated manufacturing could take place in those rooms. So my client jumped on it, ordered it well in advance, had it custom manufactured to the tune of about a million dollars, and then this venture capital company said, ‘Sorry, I lost my funding. I want to delay this project. And in fact, I want to move it to another location.’ There’s my client holding the bag with a $100,000 deposit on a million-dollar piece of equipment. And the venture capital folks saying, ‘Sorry, I can’t pay you for the equipment.’ So a double-edged sword created by all of these issues that is really a tough one to work out from the contractor’s perspective because this particular client did it exactly correctly. Served the customer very well. Ordered it in advance. Only asked for 10% down. All very reasonable terms, and now it could be stuck with a custom piece of equipment that it can’t pay for and probably can’t use on another project.

In disputes that you’re seeing now, how much are you seeing force majeure come into play?

Pretty much all the time, and I think it’s actually being abused. In other words, people now immediately throw up their hands, and by people I mean unscrupulous contractors, and claim force majeure to cover their own tracks, when they failed to anticipate things and order timely, and investigate at the front end of the job what the time frames for the delivery of the materials they’ll need are. And then they turn around say, “Well, force majeure.” Well, no. As a lawyer for the owner, you’ve got to go back and look through the actual ordering communications that they made and the responses they got from the manufacturers, and then their timeliness in disclosing to the owner where any issues might exist, in order to resolve the merits of whether it was actually a force majeure or just negligence on the part of the contractor. In other words, it’s used to cry wolf now.

I’m wondering about force majeure in new contracts that are inked now. How are parties approaching force majeure for new contracts given what we’ve learned in four years?

They’re adding to the typical force majeure provisions very open-ended and general terms like anything beyond the contractor’s control, to try to cover those unforeseen occurrences that do have a delay. But what they don’t differentiate between, again, is whether they were on the ball of controlling that or not. In other words, the contractor will claim, “Oh look, this 13-week delay was beyond my control. I mean, here’s a letter from them saying we’re backed up. We can’t supply it for 13 weeks.” Well, OK, but I’ve seen it too many times from the owner now where I go back and say, “All right, well, what did you do at the front end of this job to investigate the time frames and availability of this stuff? And if you did, why did you agree to this period of construction, or why doesn’t your schedule include performing other work in the interim while you’re waiting for these products to be delivered?” Things like that, because, again, I’ve seen a very unscrupulous contractor recently blame everything on force majeure only to get to the mediation and have it come out very clearly that its own subcontractor’s inexperience with the ordering and acquisition of certain materials was the absolute 100% cause of the delays. In other words, the delays, although not traditional, were known at the time that the orders should have been made. In fact, at the time of the submission of the bid on contract. So it’s not like it’s hidden. If you don’t take a look, you can’t later say it wasn’t your fault.

We’ve talked a lot about litigation, [but] I also know that you do development work as well. I want to get your thoughts on what the landscape for development in Nevada is right now in terms of construction.

The market’s still very good because, again, plenty of space, low taxes, friendly business environment, relatively low regulatory activity, and actually a lot of good contractors. There are a lot of folks in Reno who are scrupulous and who have long histories of experience and that sort of thing. It’s ironic because more and more, I’m seeing people from out of state come in and try to get the best deal they can from a contractor, not realizing that there could be mistakes, deficiencies, inexperience involved in a relatively new player, only to turn out to cost them more in the end. Whereas if they’d gone with the experience and the long-term knowledge of some of the more experienced contractors, they may have had a higher price bid to them at the front end. But in terms of the product they receive and the problems that they have, it’s so much more worth it down the road. So that’s huge. But the manufacturing is still going really strong. I talked to a gentleman [recently] from Los Angeles who makes parts for airplanes. Big, complicated, various metal parts for both military and civilian aircraft, and they saw an opportunity in northern Nevada they couldn’t refuse. They saw a significantly sized manufacturing facility that had been dormant, and the price they could get it for — he told me they just couldn’t turn it down. They needed a little more manufacturing space. They have some ungodly amount down in Southern California but of course it’s highly taxed. Crunched in terms of space, and all of that, and they’re just ecstatic to come to northern Nevada and take over this plant and refurbish it, and they think they’re going to make a ton of money out here.

I’m heavily involved in EDAWN, the Economic Development Authority of Western Nevada. And its job solely is to bring in businesses, primarily from California but from around the United States. In fact, our new executive director is from Mississippi originally, and he said, “I keep saying to all of us, … you know guys, it’s not that we should just look to California. People are wanting to move to Nevada from all over the United States.” EDAWN’s done a good job of bringing in the distribution centers and the manufacturing, but also very concerned about the housing market, so there’ll be plenty of homes for these people to move into.

What are the trends you’re watching in the real estate or construction spaces over the coming months?

Well, the first one, it’s over the rest of my life but also the rest of the coming months, and that is water. We represent TMWA in our firm. I have an appeal for them before the Nevada Supreme Court right now. They’re the Truckee Meadows Water Authority. They do an amazing job in that they’ve invested heavily in water storage infrastructure of the Truckee River between Tahoe and here. At least three different major reservoirs, increased their capacity and so forth, which has — I don’t want to say drought-proofed us — but even two years ago when we had significant drought, we had sufficient water to do whatever we need. But, we’re 10,000 to 15,000 homes short in the Truckee Meadows now. And while residential use is not the primary, of course it’s commercial use of water that’s more consuming, but we have to watch our water. I mean, we don’t want to end up like Las Vegas and Los Angeles, Phoenix, with the Colorado River and what’s happening there. That’s very scary. So we’re in a better infrastructure place than I think southern Nevada is, but still it’s a finite resource, and we’ve got to do a much better job here with getting rid of our lawns. And in the hotels and casinos and commercial spaces with limited flow toilets, things like that. I mean, there are so many things that we can do.

About McDonald Carano

In 2024, McDonald Carano celebrated its 75ᵗʰ Anniversary of serving Nevada’s legal, business, government, and civic communities. More than 60 lawyers and government affairs professionals serve Nevada, national, and international clients from our offices in Reno, Las Vegas, and Carson City. McDonald Carano provides transactional, litigation, regulatory, and government affairs services to startups, corporations, private companies, trade associations, nonprofits, public entities, high-net-worth individuals, and family offices throughout Nevada. We are deeply committed to supporting local communities by volunteering our time, resources, and services, including pro bono legal services, to nonprofit organizations, charitable foundations, and public service entities. We are proud to be your Nevada law firm since 1949.

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