What ‘Hell or High Water’ Clauses Mean for Construction Contracts

While parties must comply with their contractual obligations when a project is shut down, they must also be forward looking; this includes reviewing their agreements to learn lessons from the effect of previous pandemics like COVID-19 and other unforeseen circumstances.

Although not widely used in building contracts currently, the economic consequences of this pandemic and possible future “waves” could cause parties to seek to shift the risk of delay to their counterparty in the future by including a “hell or high water” (HOHW) clause. Such clauses describe an independent and absolute contractual obligation of a party to perform under an agreement without any contractual defense, including force majeure.

The term is derived from the expression “come hell or high water”, which means the action or obligation must be performed regardless of any difficulties. Historically, these clauses are often found in non-construction related contracts, like equipment leases and project finance and mergers and acquisition agreements.

While still unusual in the UK, there are several cases in the U.S. that have upheld HOHW clauses in other areas under freedom of contract drafting principles. In building contracts, the HOHW clause would mandate the contractor’s obligation to perform regardless of the difficulties, thereby shifting the loss from interruption to the contractor. Contractors should consider whether HOHW clauses are already relevant to their business to the extent that they have leased equipment on site.

In new negotiations, contractors may seek to modify such clauses to excuse performance on the occurrence of certain events, i.e., epidemics/pandemics, or where government actions render performance difficult or impossible.

Contractors should consider hedging against the risk potentially posed by HOHW clauses through business interruption insurance, although the exclusions in such policies must be scrutinized carefully as many policies either exclude coverage for pandemics/viral infections following the 2003 SARS outbreak or hedge recovery related to exclusions. Fully evaluating these issues will enable contractors to reduce lost income and protect themselves from claims by subcontractors and suppliers.

In the wake of this pandemic, its unprecedented monetary losses and the likely absence of insurance cover, rather than relying on the traditional clauses such as force majeure and change in circumstances clauses to allocate risk, parties to building contracts (including the entire supply chain) may find their counterparts seeking to negotiate new provisions to allocate risks.

While the strength of their bargaining position will certainly play a role, even parties with lesser bargaining power should consider options they have to mitigate the risks associated with pandemics and other extraordinary situations that result in undue economic hardships.

Deborah Ruff, partner at Pillsbury, wrote this article with counsels Julia Belcher, Christopher Stretch and Charles Golsong.

The original article first appeared in ‘Building’ on Monday, April 20, 2020.