Coronavirus and Force Majeure Provisions In Construction Contracts: May I Be Excused?

By Martha Perkins posted 04-20-2020 12:08 PM

  

By Allyson True Cook and Cassandra L. Welch of Stites & Harbison PLLC
Published March 24, 2020

The World Health Organization (WHO) officially declared COVID-19 a pandemic on Wednesday, March 11, 2020. While we have all experienced the effects the spread of the novel coronavirus has had on our daily lives, the total impact the virus will have is still unclear. As the virus continues to run its course, contractors and owners must begin to address concerns with project delays, liquidated damages clauses, and cost overruns on projects—to name a few.

Already, the coronavirus pandemic has paralyzed our nation in that many companies have severely limited, or have halted altogether, the production and shipment of products and supplies. Government-mandated quarantines and shutdowns are impacting the availability of the workforce in many ways. The government shutdowns and shortages of supplies/materials are impacting every industry, including the construction industry.The number of state and local governments issuing “stay at home” or “shelter in place” orders potentially impacting construction projects grows each day. Further, state and local governments continue to revise previously issued orders and the activities covered thereunder. For example, on March 16, 2020, Boston’s mayor ordered that all construction projects across the city be shut down for at least two weeks due to the coronavirus outbreak.1 However, on March 23, 2020, Massachusetts’s governor, Charlie Baker, issued an order declaring construction operations, inspections, and maintenance of construction sites as essential operations, which expressly preempted the order issued by Boston’s mayor.2 Thus, in less than a week Boston construction projects were shut down and then allowed to resume. Other government entities have specified what types of construction can continue. For example, San Francisco’s shelter-in-place order has caused all strictly commercial construction projects to shut down.3 States, municipalities, and other governmental bodies will undoubtedly issue additional orders potentially impacting construction projects in the coming weeks.

The unknown ramifications of the coronavirus are overwhelming. In these uncertain times, it is important that you examine your contracts to determine whether the impact of the coronavirus excuses or suspends performance under those contracts.

Force majeure clauses, common in commercial and construction contracts, are one avenue by which the parties may be entitled to suspend or delay performance under a contract, and in some instances, even terminate a contract. Force majeure clauses generally excuse performance obligations or extend the time for performance of a contract when a project is delayed as a result of a defined event or some event that is generally beyond a party’s control. The traditional remedy under most force majeure clauses is an extension of time. Even if your contract does not include a force majeure clause that expressly addresses the events we are facing in the world today, it is possible that performance may still be excused under common law principles such as “impossibility” or “impracticability.”

Whether a force majeure clause excuses or suspends performance depends on the language of the specific clause. When examining a contract’s force majeure clause, three basic questions should be addressed: (1) does the event you are facing constitute force majeure under the contract; (2) does the event actually impact your ability to perform under the contract; and (3) what are the contract’s procedural requirements for invoking the force majeure clause.

Whether an event qualifies as a force majeure event depends upon the terms of the individual contract and the prevailing law of the jurisdiction that governs the contract. While some jurisdictions may interpret the language in a given force majeure clause broadly, other jurisdictions may take a narrow approach to enforcement of force majeure provisions and will grant relief only if the cause of delay or nonperformance is expressly addressed in the clause.

The WHO’s classification of the coronavirus as a pandemic—by itself—will provide some clarity in reviewing force majeure provisions. If a contract specifically identifies “pandemics” as a force majeure event, the coronavirus will undoubtedly qualify. Additionally, language in force majeure provisions that relates to the public health—such as flu, disease, epidemics, outbreaks, or plagues—will likely cover the coronavirus pandemic. Even if the clause does not specifically address pandemics and public health events, clauses explicitly including “acts of government” or similar language as a force majeure event could provide avenues of relief for government-mandated shut downs or travel restrictions due to coronavirus. Depending upon the jurisdiction interpreting the contract, force majeure clauses that include language such as: “acts of God,” “unforeseen events,” or “events beyond the parties’ control” may also cover the coronavirus.

The AIA contract documents are commonly used in the construction industry and contain various provisions that may apply under the circumstances. While the AIA documents do not specifically use the term “force majeure,” Section 8.3.1 of the AIA A201-2017 General Conditions address a contractor’s right to request time extensions due to delays:

8.3 Delays and Extensions of Time

8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.

Unless Section 8.3.1 has been modified by the parties to expressly address public health issues, a party will have to rely on the general references to “unusual delay in deliveries,” “other causes beyond the Contractor’s control,” or “other causes that the Contractor asserts, and the Architect determines, justify delay” to seek an extension of time due to effects of the coronavirus.

Article 14 of the AIA A201-2017 governs termination of the contract by a contractor. Under Section 14.1.1, the contractor may terminate the contract if work is stopped for 30 consecutive days due to “issuance of an order of the court or other public authority having jurisdiction that requires all Work to be stopped,” or “an act of government, such as a declaration of national emergency, that requires all work to be stopped.” Accordingly, if a project is effectively shut down by a governmental order issued as a result of the coronavirus, that shutdown—by itself—will not be sufficient to terminate the contract. The shutdown must last for 30 consecutive days before it is considered an event entitling a contractor to terminate the contract under Section 14.1.1. Under Section 14.1.3, if a contractor provides proper notice of termination under Section 14.1.1, it is entitled to recover payment for the work already executed, reasonable overhead and profit on work not executed, and “costs incurred by reason of such termination.”

Sections 14.3 and 14.4 govern an owner’s rights under the AIA documents to suspend and terminate contracts, respectively. In either scenario, the owner may do so “for convenience” and “without cause.” If an owner elects to order work suspended under Section 14.3, the contractor will be compensated for increases in costs and time caused by the suspension (unless the contractor’s “performance is, was, or would have been, so suspended . . . by another cause for which the contractor is responsible.”). If the owner chooses to terminate the contract then the contractor will be entitled to payment for work executed and costs incurred because of the termination—including costs incurred due to the contractor’s terminating subcontracts. The contractor may also be entitled to a termination fee if the parties have so agreed.

The ConsensusDocs, another commonly used set of standard contract forms, contain similar provisions that may apply under the circumstances. Section 6.3.1 (Delays and Extensions of Time) of the ConsensusDocs 200, Standard Agreement and General Conditions Between Owner and Constructor, identifies 13 events that warrant an extension of time, including “epidemics,” “transportation delays not reasonably foreseeable,” and “adverse governmental actions.” If a contractor is impacted by any of those specific events, the contractor is entitled to an equitable extension of the contract time.

Regardless of the contract form utilized by parties, a thorough review of the contract provisions and of the law in the jurisdiction where the contract provisions will be enforced is necessary to guide parties in these turbulent times. If a party does invoke a force majeure clause, performance will only be excused to the extent that there is a causal link between the force majeure event and the nonperformance. In other words, if a party was already performing unsatisfactorily, or had already demonstrated an inability to perform due to financial hardships, it will be unable to rely on a force majeure event to avoid damages and claims that existed prior to a government-mandated shutdown.

Finally, parties seeking to invoke a force majeure clause must comply with any procedural requirements necessary to invoke the clause, such as providing written notice within a certain time frame. Assuming that your contract does contain notice provisions, those provisions must be carefully examined in order to ascertain what triggers the notice requirement and how the notice must be provided. For instance, a contract may state that a party seeking to invoke force majeure must give notice when impact of the force majeure event becomes foreseeable. Or, it may state that notice is required only when impact of the force majeure event is felt.

It is important to consult with your attorney to review your contracts and assess the applicable laws of the jurisdiction that may operate to delay or excuse performance of the contract. Your attorney will be able to advise you of other potential laws that may excuse performance under the contract. Likewise, if you are currently in the process of negotiating a contract, you should consult with an attorney as to the best language to include in order to protect yourself against future impacts of the pandemic.

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1Boston 1st Major US City to Order Halt on All Construction.; Jenn Goodman; ConstructionDive; Published March 17, 2020.

2https://www.mass.gov/doc/march-23-2020-essential-services-and-revised-gatherings-order/download; https://www.mass.gov/doc/covid-19-essential-services/download

3What the coronavirus shutdown means for the Bay Area’s housing crisis; J.K. Dineen; San Francisco Chronical (March 17, 2020)

 

 

Allyson True CookAllyson True Cook is Counsel in Stites & Harbison's Covington, Kentucky office. Her practice focuses on construction, real estate, commercial finance, employment, healthcare, general business services, and litigation. She routinely counsels clients in the acquisition, sale, development, leasing, construction, and financing of industrial, commercial, and residential properties. She can be reached at acook@stites.com or 859.652.7612.

 







Cassandra L. WelchCassandra L. Welch is an attorney in Stites & Harbison's Covington, Kentucky office and is a member of the Construction Services Group. Casey’s practice focuses primarily on litigation. She can be reached at cwelch@stites.com or 859.652.7614.








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