Come hell or high water, or Covid-19: Managing contractual risks

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Conflict Avoidance Pledge, RICS

The disputes team at international law firm Pillsbury explores the hell or high water clauses in construction contracts amid Covid-19 and offers advice on how to manage these risks

The disputes team at Pillsbury have been following the ongoing coverage of force majeure issues in construction and noticed a real gap when it comes to discussions of hell or high-water clauses.

As the spectre of Covid-19 continues to spread worldwide, endangering the public’s health and bringing unprecedented business interruption, construction professionals should review their existing contracts to evaluate their obligations and actively consider the impact that the Covid-19 pandemic may have on existing and future negotiations of construction contracts, including the use of “hell or high water” clauses.

What are hell or high water clauses?

So-called “hell or high water” (“HOHW”) clauses—aptly named after the common expression used to assure that something will be done despite seemingly insurmountable difficulties—i.e., it must be done “come hell or high water”—typically provide that the party’s obligation to perform under the contract is absolute and unconditional and that the costs of any interruption must be borne by the party obligated to perform.

HOHW provisions are most often used in equipment leases or charters (such as aircraft leases and marine vessel charters), as well as construction project finance and merger and acquisition agreements. For instance, the clause may require a lessee of an aircraft to pay for the rentals “come hell or high water”.  (And yes, some HOHW clauses actually use that phrase.)

Enforcing HOHW

Across the pond, at least one US Federal court has enforced a HOHW clause in connection with a lease agreement for construction equipment, preventing the plaintiff, who leased a paving machine, from rescinding the lease agreement for the machine and excusing ongoing payments, even after the defendants inexplicably failed to deliver the machine.

Outside of lease agreements, HOHW clauses have not been widely used in construction contracts in either the UK or the US. The Covid-19 pandemic may change that: parties may seek to add such a clause to protect themselves from a contractor seeking to excuse performance due to a force majeure event and to ensure that the contractor must bear the costs caused by any interruption in work.

Those seeking to include a HOHW clause in their construction-related contract should take heed of the clause’s limitations.  First, your clause should be well drafted and “watertight”, as one US court cautioned.

Second, HOHW clauses may have less force in compelling performance of construction activities.  For example, the most common applications of HOHW clauses (e.g., equipment leases) require continued payments specified in the applicable agreement, not performance of a service specified in such agreement.  That, of course, is a critical distinction.  A party seeking to enforce a HOHW clause to compel performance of construction activities will be hard-pressed to find any English or American case law to support their argument.

Third, government orders restricting physical activity, such as the “shelter-in-place” orders that are currently in effect in many countries, states, and localities, could cause further complication, as courts in both the UK and the US may decline to enforce HOHW provisions that are against public policy, such as those that would require one to violate the law or that interfere with public welfare or safety.  Indeed, courts would likely be reluctant to compel construction activities where they would violate a “lockdown” order or other similar government directive.

Fourth, courts in the UK and the US may also decline to enforce a HOHW clause where agreement to the provision was based on fraudulent inducement or fraudulent misrepresentation. Courts also recognise unconscionability as a defence, although for most parties to construction contracts, this defence likely would not apply in jurisdictions where there is a presumption that unconscionability does not apply to contracts between sophisticated business entities.

To be sure, any well-advised party will likely resist the inclusion of HOHW clauses or at least seek to water them down so as to excuse performance—for example, on the occurrence of certain force majeure events (including epidemics or pandemics) or where government policy or laws render performance difficult or impossible (such as when a lockdown is imposed).

Parties seeking to negotiate or enforce HOHW clauses should proceed with caution and carefully consider their anticipated context. Although the current uncertain climate is less than ideal for negotiating a contract, some parties will inevitably start to look back at the drafting table and hope to get terms drawn up, ready to hit the ground running when measures are lifted. Construction professionals should be ready—come hell or high water—for how negotiations have changed in response to this pandemic.

 

 

Deborah Ruff, Julia Kalinina Belcher, Charles H. Golsong, Nan McGarry, Jose L. Lua-Valencia, Colin T. Kemp and Laura C. Hurtado

Pillsbury Winthrop Shaw Pittman LLP

Twitter: @pillsburylaw

LinkedIn: Pillsbury Winthrop Shaw Pittman

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