Force Majeure and Entire Agreement
Clauses: Avoiding Ambiguity in
Construction Agreements
Fall 2010
In business, we enter into written contracts with
our clients, suppliers, and customers for one main
reason: certainty. Written contracts clarify the
mutual obligations between parties. For example,
what actions must occur before performance under
a contract is required? What events would frustrate
an agreement and result in its cancellation? What
exactly is included in the purchase price?
Bryce Mclean
Katherine kowalchuk
Marc Song
In the context of new home construction, it is
extremely important that all contractual terms and
conditions be clear and concise in order to minimize
any misunderstandings between the builder and the
home buyer. Does the agreement set out how much
deposit the purchaser must pay before the builder
has to start construction? Are there clauses in the
contract that state what instances will allow a builder
to delay completion or even cancel the agreement?
Is the agreement clear as to whether the construction
of a garage is included in the total purchase price?
Force Majeure and Entire Agreement Clauses
are two important clauses that typically appear in
construction contracts that warrant some attention.
Force Majeure simply means “superior or irresistible
force.” The purpose of such clauses are to describe
the events that would excuse one party from the
obligation to perform the contract. Typical Force
Majeure clauses only discharge parties from their
obligation to complete (or complete by a certain
time) due to acts of god or nature beyond the parties’
control. For example, strikes, floods, wars, embargos,
and government actions are all superior or irresistible
forces that may delay or prevent completion. More
recently, public health emergencies or pandemic
events such as communicable disease outbreaks
have also been considered as events beyond the
control of a contracting party.
The main issue concerning a Force Majeure
clause in the context of construction agreements
is the determination of what other circumstances a
builder may reasonably rely upon in order to take
the position that it cannot complete construction on
time or at all. What about the inability of a builder to
obtain goods or labour? What about rising material
and labour costs that may drive the original construct
cost estimates beyond what was originally budgeted
by a builder? Are these examples of causes beyond
a builder’s control that would allow it to escape its
contractual obligation to perform?
In Canada, the leading case on the interpretation of
Force Majeure clauses is Atlantic Paper Stock Ltd.
et al v. St. Anne Nackawic Pulp & Paper Co. ltd.
(1975), 56 D.L.R.(3d) (“Atlantic Paper”). This case
set out that an event that may frustrate a contract is
something that is: “unexpected or something beyond
reasonable human foresight and skill.”1 An important
Alberta case on this issue is Atcor Ltd. v. Continental
Energy Marketing Ltd., [1996] A.J. No. 131 (A.B.C.A.)
(“Atcor”). The appeal Justice in Atcor stated that:
“a supplier need not show that the event made it
impossible to carry out the contract, but it must show
that the event created, in commercial terms, a real
and substantial problem.”2 Taken together, Atlantic
Paper and Atcor suggest that in order for a party to
delay or cancel an agreement, it must show that an
event made “performance commercially unfeasible.”
Put another way, a Force Majeure clause protects
parties from “events outside normal business risk.”3
By inference, this means that an inability to obtain
building materials from any supplier (due to say a
global shortage of steel) may qualify as a reasonable
basis to delay performance.
However, poor
business decisions or a builder’s rising costs would
not necessarily frustrate its obligation to perform. As
stated in Atcor: “the supplier should not be able to
cancel a contract merely because an expected profit
will not occur as a result of new events.” 4
Notwithstanding the foregoing, the determination
of what circumstances will allow for the
cancellation of a contract will also depend on
the specifics facts of each case. Force Majeure
clauses can be written in a number of different
ways. It follows that a court’s interpretation of
Force Majeure clauses will also be contingent on
the exact language used as well as an analysis
of the intentions of the parties concerning the
application of the clause.
A second important clause in construction agreements
is the Entire Agreement Clause. These clauses
clarify what discussions, promises, statements
or documents are included in the contract. Entire
Agreement Clauses typically read as follows:
1
Atlantic Paper Stock Ltd. et al v. St. Anne Nackawic Pulp &
Paper Co. ltd. (1975), 56 D.L.R.(3d), at para 7.
2
Atcor Ltd. v. Continental Energy Marketing Ltd., [1996] A.J. No.
131 (A.B.C.A.), at para 17.
3
Atcor Ltd. v. Continental Energy Marketing Ltd., [1996] A.J. No.
131 (A.B.C.A.), at para 11.
4
Atcor Ltd. v. Continental Energy Marketing Ltd., [1996] A.J. No.
131 (A.B.C.A.), at para 35.
1
Force Majeure and
Entire Agreement
Clauses
“The parties confirm that this Agreement and the annexed
Schedules constitute the entire agreement and that
there are no further or other conditions, representations,
warranties, undertakings, guarantees, promises or
agreements either expressed or implied either by law or
custom save those mentioned in this Agreement and the
annexed Schedules.”
An Entire Agreement Clause is especially important when the parties
have protracted or complex negotiations. Construction projects by
nature create long business relationships between builders and
their clients. Parties should always be clear on what items are
included in the purchase price and aware of all the changes they
may mutually agree on during the course of the relationship. This
means clearly describing construction specifications in schedules
attached to a main contract. This also means getting all changes
in writing and acknowledged by both parties.
Force Majeure and Entire Agreement clauses both determine the
obligations between parties and a clear understanding of them can
help avoid future conflicts.
TIPS:
A) Contracting parties should be clear on what events will terminate
or suspend performance.
B) Insert a clause in a construction agreement which states that no
oral or written agreements or promises other that those in writing
and signed by both parties are binding and vary the terms of the
agreement.
C) Have both parties initial and or sign all the schedules that form
part of the agreement.
Disclaimer
This article should not be interpreted as providing legal advice. Consult
your legal adviser before acting on any of the information contained in
it. Questions, comments, suggestions and address updates are most
appreciated and should be directed to:
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Calgary 403-260-8500
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