General Publications July 9, 2020

“COVID-19 Will Have Lasting Impact on Construction Contracts,” Law360, July 9, 2020.

Extracted from Law360

Before the COVID-19 pandemic, the U.S. construction industry was running at near-peak capacity with more than $800 billion in major projects underway.

What began as interruptions of the supply chain for materials and equipment has expanded to include restrictive working conditions and indefinite shutdowns of entire projects. Project delay, lost productivity and potentially more work stoppages may continue for months, and the process of allocating the cost of these events could be long and contentious.

What is more, a cascade of new developments will make long-term planning even more critical, requiring all stakeholders in the construction industry to focus on minimizing similar impacts on future projects through contract drafting strategies.

At the outset of the COVID-19 pandemic in the U.S., stakeholders in the construction industry had a renewed focus on the principle of force majeure. Generally speaking, force majeure excuses contractual performance when an event beyond the control of the parties prevents performance, for the duration of the event, but it does not excuse performance or cancel the contract.

In construction, force majeure is typically defined by contract, and in large part force majeure provisions did little more than collect dust until the COVID-19 pandemic arose. Construction contracts usually define whether a force majeure event has occurred and how the parties are to handle it, including whether a contractor is entitled to a schedule extension or additional money for the resulting impacts.

While there are exceptions, the consensus is that the COVID-19 pandemic qualifies as a force majeure event when governments deemed particular construction projects nonessential or otherwise mandated project shutdowns and reduced workforce. The relevant question that all stakeholders then quickly ask is, what next?

The answer is that while the cause of claims are extraordinary, the claims themselves will look like claims stakeholders have typically seen. That is, contentions will revolve around what the contract says, and depending on the agreed-upon remedies for force majeure, whether it can be established that project delay and loss of money are genuinely the result of the COVID-19 pandemic.

More than ever, it will be incumbent upon owners, developers and contractors to clearly and transparently document COVID-19-related impacts and be capable of tying those impacts to the COVID-19 pandemic itself, rather than another cause that was within a party's control, such as poor performance, excessive rework or otherwise deficient performance.

It will be essential that stakeholders have accurate schedules before and after the impacts of the COVID-19 pandemic to isolate the real impact. If a contract allows for monetary relief due to a force majeure event, contractors must clearly document and isolate additional cost caused by the COVID-19 pandemic; otherwise, owners will resist absorbing costs if the contractor may have incurred those costs because of a competing cause.

Peering into the crystal ball, it will be those stakeholders that effectively use project controls and tracking tools to effectively establish project status and impacts, including scheduling and cost accounting, that will be able to avoid protracted disputes and either avoid claims or resolve them in a way that ensures successful project closeout.

Likewise, nimble stakeholders capable of deploying all the strategies available in the project playbook — including strategic use of suspension, deceleration/acceleration, supplemental forces and the like — will ensure project success in a construction industry set during the COVID-19 pandemic.

For example, in the case of a complete government-mandated project shutdown and eventual restart, parties will likely be able to agree on the number of days of schedule relief either by application of the contract's force majeure provision or by the owner's contractual right to suspend a project for a certain period of time.

However, if the contract provides that a contractor is entitled to additional money for costs incurred because of the shutdown or project suspension, restart and overall delay, the parties may very well dispute causation. That is, whether the COVID-19 pandemic shutdown or suspension actually caused the additional project costs versus whether costs could have been avoided or would have been incurred anyway.

Likewise, if government authorities order a reduction of work force on a major construction project, it is even more likely the parties will hotly debate the question of causation, including how many days of delay the COVID-19 pandemic actually caused to project completion or whether a party is attempting to use the slowdown as an excuse for a project already behind schedule.

Equally as important as monitoring current impacts of the COVID-19 pandemic is planning for future projects. Parties need to think about and account for the realities of construction in this environment. Some of these considerations include:

  • Whether it is important to specify where equipment and materials come from when some manufacturing locations may be shut down while others are not;
  • Examining partnership, joint venture, participation and loan documents that address project ownership, risk-sharing and financing;
  • Reviewing ever-more-critical provisions of design, construction and supply contracts for the services, equipment and materials needed to build and manage the project in a dynamic setting;
  • Focusing on contracts with end-users or off-takers of the project; and
  • Studying insurance policies, bonds, guarantees or security agreements that could allow risks of a large-scale construction project in the COVID-19 pandemic environment to be offloaded to a third-party surety or insurance carrier.

Also, of course, force majeure provisions will be of paramount importance. The key to addressing the COVID-19 pandemic going forward, like any other deal point, is to address the issue clearly and thoroughly so that the parties can avoid, or effectively allocate, risk so that they have some control over the outcome of a dispute.

A lack of clarity or specificity on how to handle impacts of the COVID-19 pandemic will result in a court or other factfinder applying statutory and common law in ways that, perhaps, neither of the contracting parties intended. Of course, there are times when one stakeholder or another may believe that statutory or common law is in their favor, so a strategic decision is made to be silent on a particular issue. This is a risk, however, since the existing case law on pandemics and epidemics is limited.

Further, stakeholders must determine whether to address the COVID-19 pandemic as part of a standard force majeure provision or insert a new, free-standing provision focused on the COVID-19 pandemic.

Whether crafting an existing force majeure provision or drafting something new, stakeholders should consider if foreseeability should be a factor. While most form documents and provisions do not specifically address whether an event needs to be unforeseeable to constitute a force majeure event, it could help give a better understanding of risk allocation in the future.

Section 8.3 of the American Institute of Architects A201 and Section 6.3.1 of ConsensusDocs 200, which act as force majeure provisions though are not expressly referred to in that manner, provide for extensions of time for certain events including epidemics and causes beyond a contractor's control, but these provisions do not address foreseeability.

Traditionally, under the common law, parties were not entitled to relief from a contractual obligation unless the force majeure event was unforeseeable. So, if foreseeability is not expressly addressed, courts could read an unforeseeability requirement into the provision, per common law, which could be problematic for contractors going forward because the COVID-19 pandemic and many of its effects could be considered foreseeable.

One way to address foreseeability is to state that foreseeable events do not qualify as force majeure events excusing contractual performance. The parties would then simply define what "foreseeability" means in the context of the COVID-19 pandemic.

For example, current governmental orders and extensions thereof, safety guidelines (Centers for Disease Control and Prevention, Occupational Safety and Health Administration, etc.), and known supply chain issues as of the date of the contract could all be defined as foreseeable, which would mean that even if an event were related to the COVID-19 pandemic, a party would not be relieved of its obligations under the contract.

Stakeholders may also want to incorporate some other common law concepts into force majeure provisions to clarify that a contractor must demonstrate more than the mere existence of an epidemic before it can be excused from its performance.

For instance, under California common law, courts require a promisor invoking force majeure to show "that, in spite of skill, diligence and good faith on his part, performance became impossible or unreasonably expensive."[1]

Contractors must also prove the force majeure event was beyond its reasonable control. And finally, in order to constitute a force majeure, an event must be the proximate cause of nonperformance of the contract.[2] These common law concepts are utilized in many jurisdictions, and it is entirely appropriate to incorporate them into contracts to ensure clear risk allocation.

There are numerous ways to incorporate some or all of the above concepts into your contracts, but one way is to include all the desired qualifications into the force majeure provision, providing that the claiming party may only be excused from performance if all the required conditions are met.[3]

Every project has a different risk profile, and no one provision will be universally appropriate, particularly as circumstances continue to change. As the effects and impacts of the COVID-19 pandemic are revealed, claims are made and court decisions are published, these provisions will undoubtedly continue to evolve.

[1] See Jin Rui Grp., Inc. v. Societe Kamel Bekdache & Fils S.A.L. , 621 Fed. Appx. 511 (9th Cir. 2015) (citing Oosten v. Hay Haulers Dairy Emps. & Helpers Union , 45 Cal. 2d. 784, 789-90 (Cal. 1955) (quoting Corbin on Contracts § 1342)).

[2] Hong Kong Islands Line Am. S.A. v. Distribution Serv., Ltd. , 795 F. Supp. 983 (C.D.C.A. 1991); Wheeling Valley Coal Corp. v. Mead, 186 F.2d 219, 223 (4th Cir. 1950); Oosten v. Hay Haulers, Dairy Emps. & Helpers Union , 45 Cal. 2d. 784 (Cal. 1955).

[3] Below is an example of one way to modify the standard AIA Section 8.3.1. This is one of probably dozens of options, and only a starting point.

§ 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, or other causes beyond the Contractor's control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; (5) by other causes that the Contractor asserts, and the Architect determines, justify delay; or (6) by an epidemic or pandemic, then the Contract Time shall be extended for such reasonable time as the Architect may determine, provided that (i) the Contractor demonstrates, through a CPM delay analysis, that such act or event caused a delay to Work on the critical path of the Project Schedule and cannot be avoided by resequencing the Work, (ii) such act or event was not reasonably foreseeable, and (iii) such act or event was beyond the Contractor's control and not due to its fault or negligence. With respect to delay events arising out of the COVID-19 pandemic, "reasonably foreseeable" shall mean governmental orders currently in place and the extension of these orders beyond the current expiration dates, safety guidelines that have already been issued in response to the COVID-19 pandemic, and any currently discoverable supply chain issues. The Contractor shall not be entitled to an extension of time to the extent the performance of the Work was delayed by any other cause for which the Contractor is not entitled to an extension in the Contract Time under the Contract Documents.

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