Preserving Construction Claims in the Face of COVID-19
By Procopio Partner Mary A. Salamone
With each passing day, it seems that there is no end in sight to the far-reaching impacts of the COVID-19 virus (commonly known as the novel coronavirus). Along with the heartbreaking human impacts, businesses in numerous industries are also being hard hit. The U.S. construction industry will certainly not be spared.
This pandemic will deliver an unprecedented blow to the construction industry, unleashing a barrage of claims for delay and cost overruns on both public and private projects. Claims will likely stem from a suspension of work as a result of mandatory quarantines and curfews, and/or inevitable material shortages due to the disruption of worldwide manufacturing, distribution and supply chains. Therefore, it is vital to have a thorough understanding of your legal rights and remedies to guide your decision-making process in the ensuing weeks.
One of the ways contractors can seek to protect themselves from unforeseen events is by including a “force majeure” (fr. “superior force”) clause in their contracts. To be classified as a force majeure event, it must be beyond the control of the contracting parties; it cannot be anticipated, foreseeable or expected; and the event must be unavoidable.
The presence of a force majeure generally excuses contractual performance when such nonperformance is caused by unforeseen events beyond the control of both parties that either make performance impracticable or frustrate the purpose of such performance. These events are also commonly referred to as “Acts of God,” and they excuse nonperformance for events such as natural disasters, usually including floods, tornadoes, earthquakes and hurricanes. They can also encompass acts of people, such as terrorism, riots, labor strikes and wars, as well as “acts of any governmental authority.” Other provisions may specifically include provisions such as epidemics or natural disasters.
Article 16.1 of the AGC Long Form Prime Contract Between Owner and Contractor, Section 8.3.1 of the AIA Document A201-2017 General Conditions, and Section 6.3.1 of the ConsensusDocs Form 200 are standard clauses addressing force majeure events in the leading form contracts used by construction industry professionals.
By way of example, Section 8.3.1 of the referenced AIA contract provides in pertinent part as follows: “If the Contractor is delayed at any time in the commencement or progress of the Work… (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions…or other causes beyond the Contractor’s control… then the Contract Time shall be extended for such reasonable time as the Architect may determine.”
For projects that utilize the Caltrans Standard Specifications, the 2010, 2015 and 2018 versions all contain a reference in Section 1 titled “Definitions” under the definition of the word “day” an exception to working days for unanticipated events such as epidemics, Governor-declared state of emergency and quarantine restriction.
What actions should you implement now to protect your company’s interests? You can start by reviewing the language of your contracts for guidance, paying close attention to time-related clauses. While courts will often interpret a force majeure clause based on what is specifically listed in the contract, nonperformance may still be excused even if epidemics are not identified. Typically, catch-all phrases such as “or other causes beyond the Contractor’s control” found at the end of an itemization of specific force majeure events can arguably be deemed to encompass the effects of the COVID-19 outbreak thereby entitling a contractor to an equitable time adjustment.
As COVID-19 continues to spread, some may suggest its impact will no longer be “unforeseeable” or “beyond the reasonable expectation” of the parties. That is especially true if a contract was made in recent months after concerns over the virus were made public.
You should also review your contract for any price escalation clause that may afford relief from material price increases due to limited market availability. Depending on the explicit language in your contract, you may wish to begin having discussions with your counter-parties about invoking force majeure provisions.
Contractors should also be vigilant to not overlook any contractual requirements for providing timely, written notice to project owners and proposals to mitigate some of the damages that may ensue. Additionally, contractors should adhere to any requirements to request time extensions such as submission of a change order request coupled with time impact analysis or schedule fragnet. If a contractor demonstrates that it has encountered excusable delays and complied with the terms of the time extension clause, it should not be assessed liquidated damages or actual owner damages for such delays. It also stands to reason that the contract should not be terminated for default because of the delays. Whether the contractor may recover its delay costs for the excusable delays depends upon whether the excusable delay is also a compensable delay and whether it is concurrent with other delay.
You should also investigate whether there is available insurance coverage for an interruption to your business and projects due to COVID-19. Potential coverage may come from more than one source. Business interruption coverage is a common endorsement to a commercial property policy. This may offer coverage, depending on the terms of the policy and whether the impact of the virus on your business constitutes an “occurrence.” There are other conceivable opportunities for coverage. For instance, consider looking to your builders risk coverage in the event a shutdown causes physical loss to covered property.
Now is the time to seek assistance from an experienced insurance counsel to discuss policies and coverage that might be available. We also suggest that you have a construction attorney review your current contracts and assist in drafting future contract provisions to shield against the delays and cost impacts that will inevitably flow from COVID-19.
Mary A. Salamone is a Partner in Procopio’s Orange County office and a member of its Construction Law team. She brings in-depth knowledge and experience to her clients in all aspects of both public and private construction projects and disputes.