By John P. Martin of McCarter & English, LLP
Published April 9, 2020
As state and local governments shut down construction projects in response to the COVID-19 pandemic, project owners and contractors should review closely the general contracts for their projects to determine what consequences shutdown orders will have on those projects. While every contract is unique, the terms negotiated for important contract provisions such as the force majeure, suspension, and termination provisions can be critical to assessing next steps and potential responses.
Using the American Institute of Architects (AIA) standard form A201—2017 General Conditions of the Contract for Construction (Form A201) as an illustrative baseline, we discuss best practices for negotiating the language of such terms and outline potential solutions if the parties did not follow those practices in negotiations. It should be noted that executing a general contract with an unedited Form A201 included in the contract documents is not a best practice.
Termination by the owner for convenience provision
Form A201’s unedited “termination by the owner for convenience” provision entitles a contractor to, among other things, “costs attributable to termination of Subcontracts.” This broad and open-ended language is often revised in negotiations. For example, owners may push at a minimum for additional language added to the clause, such as “provided that such costs shall not include overhead and profit on Work not executed or termination fees required by such Subcontracts.”
Force majeure provision
While Form A201 does not contain the term “force majeure,” its Section 8.3.1 provides that a contractor is entitled to a time extension when any one of five types of delay events occurs. These delays include force majeure-like events such as labor disputes, fire, unavoidable casualties, abnormal weather conditions (properly documented), and the catch-all “causes beyond the Contractor’s control.” This catch-all phrase would likely encompass epidemics and pandemics, which are often specifically included in force majeure provisions. While Section 8.3.1 is designed to shield the contractor from a delay claim by the owner when an event beyond a contractor’s control occurs, it does not provide protection for the owner. This provision may not raise eyebrows in negotiations because force majeure provisions are common and generally not controversial.
Suspension by the owner for convenience provision
Form A201 includes a “suspension by the owner for convenience” provision that allows an owner to “suspend, delay or interrupt the Work, in whole or in part for such period of time as the Owner may determine.” While this provision gives the owner significant discretion in suspending a project, it also obligates the owner to adjust the contract time and price for any increases in time and cost incurred by the contractor as a result of the suspension. In addition, the contractor is entitled to its profit on those increased costs. Consequently, this is a provision that the parties may revise in negotiations because an owner may not want to take on such expenses.
Termination by the contractor provision
Form A201 has a “termination by the contractor” provision which provides that if work is stopped as a result of a government order for 30 days, the contractor can terminate the contract on seven days’ notice. For context, as part of the COVID-19 pandemic response, the City of Boston shut down all construction projects as of March 23, 2020, until further notice. If maintained, the work stoppage will hit 30 days on April 21, 2020. If on April 21, 2020, a contractor decided to invoke the termination provision, the unedited Form A201 version would allow the contractor to recover payment for the work it performed but also would entitle the contractor to “reasonable overhead and profit on Work not executed” (emphasis added). This “work not executed” language could lead to unintended results. Contractors may decide that it makes financial sense during a pandemic to terminate projects for the purpose of collecting its remaining overhead and profit while avoiding further outlay of work on the project, particularly as a project’s future becomes stalled or uncertain. Owners frequently push hard in negotiations to delete this provision from the Form A201 model.
If, however, the “work not executed” language was not deleted from the final executed contract, the owner may have little recourse beyond a preemptive termination of the contract for convenience—a move that could be problematic depending, as discussed earlier, on the language of the provision and the business objectives of the owner. One possible solution is for the owner and contractor to negotiate an amendment to the contract documents providing for the owner to forgo its right to terminate for convenience for the duration of a government shutdown order in return for the contractor forgoing its right to suspend. The precise details of such an amendment would be subject to negotiation. What is imperative is that owners and contractors review their contract documents, determine their rights and potential exposure, and plan a response.
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John P. Martin is Special Counsel in the Boston office of McCarter & English, LLP. He helps clients with their construction transactional and litigation needs. He focuses on representing owners in the drafting and negotiation of general contracts; subcontracts; design-build agreements; engineering, procurement and construction agreements; engineering agreements; architectural agreements; and master agreements for continuing design and construction services. He can be reached at email@example.com or 617.449.6504.