By James Diwik of Troutman Sanders LLP and Robert A. Gallagher and Jamey B. Collidge of Pepper Hamilton LLP
Published on April 9, 2020
Much has been written about whether and how COVID-19 qualifies as a force majeure event, and some additional information can be found here. But typical force majeure provisions entitle contractors to only schedule relief. While force majeure clauses may limit exposure to liquidated or consequential damages for delays, contractors who incur increased costs resulting from COVID-19 delays should carefully evaluate the entirety of their contractual rights to not only an extension of time, but also recover prolongation costs. To assist in this endeavor, this article looks beyond force majeure to other potentially relevant contractual provisions. Potential remedies under the various contractual clauses discussed herein will depend upon the specific contractual language and project-specific facts.
A change-in-law provision is a common contractual provision that may allow for additional time, money, or both if there is a change to a federal or state law, executive order, or other governmental action during contract performance. COVID-19 has produced multiple government orders and directives that have impacted construction throughout the country. A 50-state account of these orders and directives can be found here. Change-in-law provisions may appear in broader force majeure provisions, or as standalone clauses. Ultimately, the type of relief available under these provisions will depend on the specific contractual language.
Some contracts include provisions for relief in the case of emergency. For example, the AIA provides a standard emergency clause:
“In an emergency affecting safety of persons or property, the Contractor shall act, at the Contractor’s discretion, to prevent threatened damage, injury, or loss. Additional compensation or extension of time claimed by the Contractor on account of an emergency shall be determined as provided in Article 15 and Article 7.”
See AIA Document A201-2017 § 10.4. Emergency provisions may provide contractors the right to suspend work and seek consequent compensation and time extensions. Furthermore, emergency provisions may provide an avenue for recovery of additional compensation and time related to isolated events such as shutting down a project for a short period to disinfect a work area after an infected employee leaves the work site, or leasing a larger space to hold project meetings to comply with social distancing requirements.
Escalation/Unit Price Provisions
Escalation or unit price provisions entitle the contractor to an equitable adjustment in the contract or material price if the character or quantity of an item is now so different as to create a substantial inequity. COVID-19 has, and will likely continue to dramatically affect global supply chains, leading to increased lead times and costs for project-specific equipment and materials outside the contemplation of the contracting parties. However, escalation or unit price provisions typically require that any change, here the COVID-19 pandemic, creates a substantial inequity mandating relief, a fact specific analysis.
Change Order Provisions
Change order provisions may allow contractors to recover additional compensation and time as the result of COVID-19 disruptions. In certain instances, contractors may receive informal or written directives from an owner or, in the instance of a subcontractor, a general contractor related to COVID-19 that unilaterally mandate changes to an existing contract’s scope or work. In such cases, contractors should request written orders for any directed changes prior to commencement of work, if practicable, and in any event document the time and costs associated with any directed change.
Stop Work Notices and Provisions
Under certain circumstances, typically due to certain acts, omissions, or directives by the owner, a contractor may be permitted or required to stop work. In that event, the contractor may be entitled to an extension of time and reasonable costs related to the shutdown, including delays, demobilization and mobilization costs. Stop work provisions typically apply under very specific situations and require strict compliance with notice requirements.
Suspension and Termination Provisions
Suspension of work clauses may provide an avenue of relief for contractors. For example, some suspension provisions include the right to suspend project work during the presence of “hazardous conditions” As the project worksite. The actual or potential presence of the COVID-19 virus at a project work site may arguably constitute a hazardous condition allowing the contractor to suspend work and obtain time extensions and recovery of costs related to the suspension period.
Contractual termination provisions typically require stoppage of work on a project for a defined period of time as a result of a court order or government act. If applicable, termination provisions may entitle contractors to compensation for work performed, reasonable overhead and profit for work not executed, and costs incurred due to termination. Since termination of a contract is an extreme remedy, contractors should give careful and due consideration of the effects of invoking a termination provision before invoking.
Additional Considerations for Contractual Remedies
Providing proper notice is typically a condition precedent to the exercise of the above contractual remedies. Accordingly, contractors are advised to closely examine and strictly follow contractual and, in the event of public works, administrative notice requirements to help reserve rights and avoid potential claims of wavier. While COVID-19 regulations and orders may impact your ability to strictly comply with certain notice requirements—e.g., in-person service requirements—substantial compliance under the circumstances may excuse failure to achieve literal compliance with contractual notice requirements. In that event, contractors are well-advised to document all efforts to provide notice. Furthermore, exercise of the above-discussed contractual provisions may additionally invoke contractual dispute resolution provisions. For example, the AIA Standard General Conditions requires that most claims first be submitted to the Initial Decision Maker, and then be subject to mediation as a condition precedent to binding dispute resolution. Ignoring dispute resolution provisions may impact your ability to submit a claim or recover additional compensation. In the event of claims arising from COVID-19, contractors should consider providing compliance notices to subcontractors regarding their potential impact claims, emphasizing the importance of timely claim submissions, failure of which may impact the contractor’s ability to pass-through subcontractor claims to the owner.
The potential applicability of contract provisions to COVID-19 impacts on your project is a time-sensitive and deliberate process for contractors suffering from delays and cost increases. If you have further questions or seek advice based on your specific fact situation and contractual provisions, please reach out to any of the Pepper Hamilton and Troutman Sanders construction group. In addition, Pepper Hamilton and Troutman Sanders maintain a COVID-19 Dedicated Resource Center to help guide clients through the challenges presented by COVID-19.
James Diwik is a partner in the Litigation and Construction practices at Troutman Sanders LLP. His practice includes the counseling and representation of owners, general contractors, subcontractors, architects and engineers in all aspects of the construction process including project planning and design, contracting, contract and delivery issues, affirmative claim analysis and prosecution, and resolving disputes through negotiation, arbitration, and litigation. For the last five years, James has been ranked and recognized as a leading attorney in the construction industry in Chambers USA. In addition, James has prepared and presented numerous programs involving issues pertinent to the construction industry. Similarly, he has authored and co-authored various publications involving issues of construction law and is a member of Troutman Sander’s Construction Group Covid-19 Response Team. He can be reached at firstname.lastname@example.org or 415.477.5735.
Robert A. Gallagher is a partner in the Construction Practice Group of Pepper Hamilton LLP. Bob represented construction clients on projects ranging in size up to $4.5 billion and in dispute proceedings ranging in magnitude up to $400 million in 31 states, the District of Columbia, Canada, South America, the Middle East, Europe, and Australia. He has significant experience with process plants, including water and wastewater treatment, heavy industrial process facilities, and power plants. He has acted as counsel on a wide array of construction projects, including coal, solar, gas-fired, and hydroelectric power plants, water and wastewater treatment plants, tunneling projects, locks and dams, highways, pipelines, transmission lines, and heavy industrial and commercial construction projects. He represents owners, EPC contractors, equipment manufacturers, construction managers, general contractors, subcontractors, design professionals, and pipeline suppliers and installers. Bob is the editor of Constructlaw.com, a blog focusing on recent trends in construction law and construction litigation and is a member of Pepper Hamilton’s Construction Group Covid-19 Response Team. He can be reached at email@example.com or 412.454.5018.
Jamey B. Collidge is an associate in the Construction Practice Group of Pepper Hamilton LLP. Jamey counsels and represents owners, construction managers, general contractors, and subcontractors in all phases of the construction process and on a wide range of projects including water treatment facilities, mass transit systems, and other commercial and government construction projects. He represents clients both in state and federal court litigation, and alternative dispute resolution proceedings. He also provides counsel on project management issues. He is a contributor to Pepper’s construction blog, constructlaw.com, and is a member of Pepper Hamilton’s Construction Group Covid-19 Response Team. He can be reached at firstname.lastname@example.org or 215.981.4484.