By Elizabeth J. Dye of Pillsbury Winthrop Shaw Pittman LLP
Published March 30, 2020
The global effect of the Coronavirus disease (COVID-19) is still unknown, and the progress of many large-scale construction projects has been affected by “Shelter in Place” orders, although some states and localities have classified construction projects as “essential.” Just last Friday, New York shut down all construction, with few exceptions.
Several states have enacted gathering bans of all sizes (including Michigan, Oregon, New Mexico, Washington, New York, New Jersey, Wisconsin, Illinois, Indiana, Ohio, West Virginia, California) and more people are likely to be quarantined as widespread testing becomes available. These decisions will undoubtedly affect the supply of materials and labor necessary for construction projects.
Officials have turned to increasingly disruptive and measures to control the spread of the virus in addition to event prohibitions and school closures, including restricting people to their homes, and closing businesses that are not “essential.” While many companies have adopted mandatory telecommuting, this is an impossibility on the construction sites. Eventually, supply and labor shortages due to governmental restrictions or quarantines will affect the critical path of construction projects.
The construction business may continue as usual in many states for now, but contractors should look ahead and consider how their projects will be affected. Restrictions intended to stop the spread of COVID-19 change daily, and their applicability to construction workers has been unclear in some states. In the face of uncertainty, it is critical to carefully examine contracts for claims and defenses, and examine the scope and applicability of force majeure provisions.
Here are a few thoughts on how contractors can navigate labor shortages:
Force Majeure Clause
If a delay or total shutdown seems inevitable, contractors should examine their force majeure clauses carefully. A force majeure clause excuses a contractor’s performance under its contract for certain enumerated events, including, for example, “natural disaster,” “war,” “governmental actions,” “labor strikes,” and “acts of God.” Some recent provisions actually list “epidemics,” but these are more common in contracts related to the healthcare sector. The key events contractors should look for include “governmental actions” or “labor disruptions,” and, of course, “epidemics” or “pandemics.”
In addition to enumerated events, force majeure clauses typically include catch-all provisions that excuse non-performance for “other causes beyond the Contractors’ control.” These tend to be interpreted narrowly. As discussed in further detail below, it is preferable to link a labor shortage to an enumerated event, instead of relying on a catch-all clause.
Even if a contractor operates in states or localities that currently classify construction projects as “essential,” that could change any day. It is important to routinely communicate concerns to the project owner regarding potential delays or shutdowns, and include details such as the anticipated number of delay days, increased costs, and critical path delay. Early and frequent communication can stave off notice arguments and highlight mitigation efforts.
Connect Any Labor Shortage to an Enumerated Force Majeure Event
Many factors will affect the availability of labor during this time, including illness, quarantine, government bans, financial hardship, and workers’ fear of contagion. Because force majeure clauses are narrowly construed, contractors should connect labor shortages to enumerated events listed in the force majeure provisions. For example, if a contractor claims force majeure because of a “labor shortage” when that is not an enumerated event, many courts will be unconvinced. But if the contractor is able to connect the labor shortage to a government order shutting down schools, which forces its workers to stay home with their children because of lack of childcare, then it has a more persuasive argument.
It is also important to couch labor shortages under force majeure events when possible because many jurisdictions interpret “catch-all” clauses narrowly. For example, under the laws of Texas and New York, a catch-all clause is interpreted under the principle of ejusdem generis, which means that when “general words follow an enumeration of two or more things, they apply only to . . . things of the same general kind or class specifically mentioned.” Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 199 (2012). This means if “labor disruption” or the like is not an enumerated event, it is important to consider how a labor shortage can fit under another enumerated event.
An additional wrinkle to all this is whether the contract or applicable law requires that the enumerated force majeure event be unforeseeable. While labor shortages are generally foreseeable, labor shortages resulting from “Shelter in Place” orders or mandatory quarantines are not. Some jurisdictions hold that a contractor need not prove that enumerated events were unforeseeable. Foreseeability will also come into play when a contractor relies on a catch-all provision.
Contractors will still face challenges even when it is clear that a labor shortage or disruption is a force majeure event. Undoubtedly, they will face arguments that labor disruptions and shortages are not caused by an enumerated event, such as governmental orders, but rather voluntary decisions, such as a general contractor closing down its construction site due to financial difficulties or health concerns. The key to navigating the unpredictability caused by COVID-19 is to understand the contract and applicable law, provide early notice, and seek legal guidance when needed.
One final consideration is that contractors have many tools in addition to force majeure clauses to handle potential delays. For more information on force majeure read our recent client alert “Supply Chain Coronavirus Impacts: Force Majeure and Beyond” written by Robert A. James, James Campbell and April Lord for a discussion of force majeure clauses in supply contracts.
Elizabeth J. Dye is an Associate in the Houston office of Pillsbury. She assists clients with complex construction and litigation matters. She represents clients in a broad range of complex litigation matters, including energy, construction defects litigation, insurance recovery work, personal injury, and property damage claims. She can be reached at email@example.com or 713.276.7627.