V. Frederick Lyon

An increasingly popular and sensitive topic in the power plant construction arena is force majeure, a well-known concept which has increased relevance in the wake of September 11.

September 11 has resulted in a fundamental re-examination of risk parameters in the energy construction industry. But even before the tragic events of that day, power plant constructors were frequently invoking force majeure clauses in an overheated and labor short market to justify delays in bringing plants on line. Terror and labor shortages, in an unpredictable and dynamic market - each guarantees that force majeure will assume increasing importance in defining the risk profiles of successful power plant construction projects.

Force majeure is widely misunderstood - by owners, lenders, and contractors alike. It is often improperly used as a catch-all phase to excuse contractual non-performance, no matter the cause. The parties are of course free to define force majeure differently; in every instance, however, the language of the contract must be consulted to determine the rights of the parties.

Immediately after September 11, major American equipment vendors sent written notices to their customers that the events of that day constituted potential force majeure incidents, especially as they impacted transportation and the short-term disruption of the aviation industry. Contrast this situation, however, with those force majeure claims arising from labor shortages. In an overheated construction environment with insufficient numbers of craft labor and experienced power plant designers, certain EPC contractors have recently sought to use this unavailability of labor as the reason for their inability to timely perform, justifying a force majeure time extension. This issue is the basis for litigation on delayed power plants.

Within the power industry, owners fairly argue that the exigencies of the labor market were reasonably foreseeable, within the control of the contractor, and were consequently within the risk profile assumed by the contractor.

In energy construction, the shortage of skilled labor and the demands that the inevitable construction boom would place upon that shrunken pool should have been anticipated by a prudent EPC contractor. Consider combining September 11 and labor shortages. In New York City, skilled craft such as operating engineers flocked to work at Ground Zero, for understandable reasons of patriotism and pay. Faced with a diminution of their work force as a result of this force majeure event, contractors elsewhere in the City consequently may have not been able to maintain progress. In this unique circumstance, a labor shortage resulting from an underlying force majeure event may justify a time extension. Absent the underlying, unforeseeable event, however, the lack of labor is classically a risk assumed by an experienced contractor. Only if the parties have expressly addressed this issue by contractually defining a craft shortage as a force majeure event will this analysis be altered.

September 11 fundamentally impacted the risk analysis of American commerce. As lenders become even more risk averse and the insurance industry retrenches and limits hedges to unforeseen risk, force majeure will become even more important in establishing the risk profile of a project.