Planning for a Catastrophe

Please find below a recently published article from our Construction Team members, Stephen T. Miller and Tiffany C. Raush. The article “When Force Majeure Is For Sure: The Business of Constructing in Disaster-Prone Areas” was first published in the ConsensusDocs Construction Law Newsletter Volume 4, Issue 3. 

One could have predicted in early 2017 that at least some portion of the Gulf Coast would be struck by a hurricane that year.  The reality is that constructing in Texas, Louisiana, Mississippi, Alabama, or Florida in July, August, or September carries with it the very real risk that your construction site will be struck by a hurricane or tropical storm.  The 2017 Atlantic hurricane season saw 17 named storms with more than $200 billion in damages.  Three of those named storms—Harvey, Irma, and Maria—made the 2017 Atlantic hurricane season the costliest ever on record.

Of course, thankfully, not every year will be such a record-setter.  But constructing along the Gulf Coast, or any area similarly “disaster-prone,” carries with it unique considerations.  Construction contracts almost universally include “force majeure” provisions that apply in the event of a hurricane.  But force majeure provisions typically only buy the contractor some time.  Moreover, such provisions are breeding grounds for disputes.  For example, most force majeure clauses include hurricanes as qualifying events, but recall that “Hurricane Harvey” did most of its damage as a tropical storm.  “Tropical storm” may not be included in the force majeure definition in your contract.  Second, most contracts will require timely “notice” of the qualifying event, which can be difficult to do when you are in the midst of disaster recovery.  Third, contracts and case law will often require a demonstration that the contractor acted to mitigate the effect of the force majeure event.  See also In re S. Scrap Material Co., L.L.C., 713 F. Supp. 2d 568 (E.D. La. 2010) (noting that Hurricane Katrina was an “Act of God” but “[o]ne invoking Act of God as a defense must prove not only that the weather was heavy but also that it ‘took reasonable precautions under the circumstances as known or reasonably to be anticipated.’”).  That sounds reasonable.  But mitigation efforts at the height of a disaster are often easily criticized after-the-fact when time and circumstance allow for more analysis and reflection.  Finally, the contractor must be able to show that the force majeure event caused the delay at issue.  But often the contractor is moving so quickly—as are the sub-contractors, suppliers, laborers, insurance companies, etc.—to deal with the disaster at hand, that detailed meeting minutes, confirming emails, and contemporaneous reports are simply not possible to document all the ways the force majeure event is affecting the time line of the construction project.

Contractors along the Gulf Coast cannot simply hope for the best when constructing during hurricane season.  Nor can they expect to rely on insurance and a force majeure provision should the worst happen.  Instead, contractors should be fully prepared with a disaster action and recovery plan before signing a contract.  Indeed, owners in the Gulf Coast region—particularly in populated, industrial, burgeoning cities like Houston, and particularly following Harvey—are coming to expect their contractors on major projects to have detailed and thorough disaster contingency plans in place.

What’s In Your Disaster Action Plan?

Your disaster preparedness and recovery action plan depends on the disaster and the construction project.  It should cover pre-construction disaster planning such as identifying roles and responsibilities in the event of a disaster, identifying potential off-site quarters in the event of a local evacuation order, creating an emergency call list, among other items.  This stage—i.e., before a storm is barreling down on your project—is a good time to consider potential labor and supply shortages that typically result after hurricanes.  For example, demand for construction supplies and services sky-rocketed after Hurricane Harvey.  Thomasnet.com, an online sourcing and supplier selection platform, analyzed searches for particular products and supplies before and after Harvey.  The below tables summarize some of the results, including 1,200% increase in searches for doors, 1,700% increase in searches for steel buildings, and 4,600% increase in searches for trucking services.  See https://blog.thomasnet.com/thomasnet-trends-hurricane-harvey.

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Identifying potential suppliers, labor sources, and transportation that may be available to you ahead of time could make a huge difference in your recovery and your bottom line.  Remember that most force majeure clauses will not allow you to recover increased costs if the cost of materials suddenly surges after the storm.  See, e.g., S&B/Bibb Hines Pb3 Joint Venture v. Progress Energy Fla., Inc., 365 Fed. Appx. 202 (11th Cir. 2010) (denying contractor’s $40 million claim after four hurricanes struck the Gulf Coast resulting in a shortage of materials and a corresponding increase in the costs of construction for the contractor).  If you are a large contractor, consider whether you have projects in other locations that could spare materials at cost until prices come down.  Alternatively, consider mitigating the risk through agreements with construction companies in other locations that may be willing to “come to your aid” should you be impacted (knowing that, as part of the risk-sharing arrangement, you would be willing to reciprocate).

Your disaster action plan should also cover what to do when a storm has been predicted, when it is occurring, and after it has passed.  There is plenty of hurricane-preparedness advice out there, but one we like as a starting point is Allianz’s The Calm Before the Storm: Construction Site Hurricane Protection.  The 33-page booklet available online includes useful information, suggestions, checklists, and forms for contractors working in hurricane-prone areas.

The point is this: as the heart of hurricane season approaches in the Gulf Coast, do not be lulled into a false sense of security that (1) a storm probably won’t happen or (2) that a force majeure or similar contract provision will provide adequate protection.  In the Gulf Coast, hurricanes and tropical storms are a factor and force majeure provisions are better left as a last resort.

With hurricane season upon us, employers are justifiably concerned about the potential impact of a natural disaster on their business. A hurricane, natural disaster, or any other crisis in the workplace can bring a business to a screeching halt and devastate the lives of a business’s most valuable asset, its employees.

To minimize the impact of a natural disaster, employers should have plans in place before disaster strikes, including, for example, a crisis management plan, a communication plan, and a disaster response and recovery plan. These plans must take into account the effect a catastrophe may have on workers and include ways to help impacted employees return to work as soon as practical to ensure continued productivity at the workplace following a natural disaster. Any enacted plan should consider the application of relevant federal and state laws to ensure compliance and avoid any employment-related lawsuits or any agency enforcement action following a natural disaster. Continue Reading Planning for a Catastrophe