“Force” and Foremost: COVID-19 and Force Majeure in Construction Contracts

44

Since our last article, fear of the coronavirus (COVID-19) continues to spread as rapidly as the disease itself. Within the last few days, President Trump declared a national emergency and announced the steps the Executive Office is taking to respond to the outbreak. The virus and the efforts taken to prevent its proliferation are likely to continue affecting the global economy. Those in the construction industry are preparing for the worst and are increasingly evaluating their contractual rights. First and foremost on this list is likely the “force majeure” provision. As owners, contractors, subcontractors, and material suppliers weigh their options under such a clause, they may wish to consider the following:

Does the contract include epidemics as a force majeure event?

Contractors would always be wise to consult their contracts before taking any action. A force majeure provision often excuses a contractor from performing if an event identified in the clause occurs and sufficiently disrupts performance of the contractor’s obligation. These provisions may not be labeled as “force majeure” but generally will grant excusable, non-compensable delay or suspension of performance for certain, enumerated events beyond the contractor’s control. These types of provisions may or may not list “epidemics” as triggering events. For example, both the Federal Acquisition Regulations (FAR) and the ConsensusDocs forms include epidemics as an event permitting excusable delay. If the contract lists epidemics as a force majeure event, a contractor may have grounds to argue that the current situation with COVID-19 qualifies, particularly given the World Health Organization’s recent characterization of the virus as a global pandemic. Nonetheless, a contractor attempting to excuse performance will need to prove that the coronavirus outbreak materially impacted the contractor, and that any delays or inability to perform were directly connected to the consequences of COVID-19.

What if the contract is silent on epidemics?

Some contracts, including the standard AIA documents, do not enumerate “epidemic” as a force majeure event or grounds for excusing delay. The A201-2017 form’s most relevant equivalent may be the broad and somewhat ambiguous examples listed in § 8.3, Delays and Extensions of Time: “unusual delay in deliveries” or “other causes beyond the Contractor’s control.”

Courts and Boards of Contract Appeals may take a restrictive view of the types of non-enumerated events that warrant excusable delay. For example, a reduction in workforce due to coronavirus may be insufficient to excuse delay if the contractor assumed the responsibility of employing and utilizing a competent workforce. Similarly, if only a limited number of employees were infected by the coronavirus, a contractor may be unable to show that there was a sufficiently adverse effect to excuse its delay successfully. On the other hand, if the contract requires the use of specific materials from affected areas, the resultant shortages may warrant an excusable delay of performance. Suppliers are already navigating this situation with materials from China. In sum, if the contract does not mention epidemics as a force majeure event or grounds to excuse delay, parties might consider how COVID-19 is applicable to other listed grounds and structure their claims and defenses accordingly.

How can contractors claim force majeure or excusable delay?

Assuming the contract contains force majeure or similar excusable delay provisions, a practical first step in seeking relief is to comply with any relevant contractual notice provisions. Failure to provide required notice may waive the contractor’s entitlement to a time extension, which could result in liquidated damages or default. The contractor should also be prepared to show that performance delays were proximately caused by COVID-19 and were beyond the contractor’s control.

On the other hand, most contracts contain a duty to mitigate. Accordingly, when sending a force majeure notice, a contractor may consider documenting the mitigation efforts it is undertaking to overcome the delay, including, for example, accelerating performance or resequencing the schedule. Otherwise, the notice could be used against the contractor as evidence that it was aware of delays and potential delays but failed to mitigate properly. A contractor would be wise to balance both its obligations to provide notice and its duty to mitigate.

Contractors should also consider evaluating other provisions in their contracts that may be relevant to or affected by invoking the force majeure provision. These provisions may include governing law, liquidated damages, price escalation, changes, and termination clauses. Furthermore, the analysis of the effect of multiple delays can become more complicated when there is a mix of compensable delays with a force majeure event and requires a careful study of the specific contract clause(s) that may be applicable. A thorough analysis of the relevant contract provisions and state or federal governing law is key in helping a contractor successfully navigate the multifaceted challenges of the coronavirus.

 

Reprinted with permission. Originally published by Bradley Arant Boult Cummings LLP. Copyright 2019.