As American Contractors come to grip with the full scope of the coronavirus pandemic, the construction industry is realizing that many ongoing projects could be delayed and disrupted for months, if not suspended altogether. Many projects are already being shutdown or slowed down to a crawl due to social distancing guidelines, which is really throwing a wrecking ball at projected timelines.
Day by day, as the impact from the virus grows, the resultant financial damages will increase exponentially. Even though it isn’t a hard question to answer, the question of who bears the cost impacts will likely remain a point of contention between owners, contractors and subcontractors for years.
In the worst cases, those disputes could spiral into potential long drawn out legal battles. Owners and developers will potentially be able to recover some of their losses through their business interruption insurance. Contractors and subcontractors, however, have fewer avenues to recovery. That of course is going to come down to the exact wording of the contract and whether it generally refers to “causes beyond the contractor’s control” or does it specifically mention epidemics. This is where my suggestion would go to contractors and subcontractors to check their contract clauses regarding claims, notice, schedules, delays, Force Majeure and safety.
Force Majeure is a contractual concept that derives from a French legal term of art that roughly translates to “superior force,” and it generally refers to an event or effect that cannot be anticipated or controlled. This clause is typically negotiated to determine when a party will be excused of their performance, whether deadlines will be extended, and how the parties will allocate increased costs resulting from Force Majeure events. This clause is fairly common in commercial development and construction contracts, including joint venture and financing documents and should be cascaded down to you, the 2nd & 3rd party contractors.
Typically, it is defined in contracts by listing out specific events or examples like epidemics, pandemics or infectious diseases. The list of specific examples in the definition of Force Majeure is sometimes followed by a general or catch-all phrase such as “other events beyond the reasonable control of the parties.” which is very important to you. The actual definition of Force Majeure in a contract is important because the relief available to a party under a Force Majeure provision depends in large part upon the precise wording of the provision. Definitions also commonly exclude certain events, for example, it is common for definitions to exclude general economic conditions or general market fluctuations. It is generally more difficult for a party to claim Force Majeure by invoking a “catch-all phrase” in a contract and some courts require a special showing to win those claims, for example, a party seeking to invoke the general “catch-all phrase” might also have to prove that the event was unforeseeable.
As a general matter, the party seeking excuse from performance under a contract has the burden to prove that the Force Majeure clause should be invoked. This means that if you are the party invoking Force Majeure, you will need to prove that your inability to perform is actually caused by the COVID-19 outbreak or some related event. Without adequate details and supporting documentation, this could be difficult to establish. This is why it is critical to timely document any possible Force Majeure event and related impacts to your construction project.
Even in the most standard construction agreements, numerous provisions could present legal and financial challenges and hold contractors liable for delays and damages. Contractors should pay particularly close attention to respective notice provisions. If you fail to properly notify another party within the stipulated time period, their right to an extension of time and resultant damages might be waived. You should reserve rights to both additional time and money and not limit your potential remedies. Even if a contract includes a force majeure clause, more often than not, you are only entitled to an extension of the contract time, not to any additional compensation. Owners and developers may also attempt to enforce “no damage for delay” clauses, which exempt them from having to pay any damages to contractors for delays caused by any reason. While these can be overcome under certain circumstances, the burden of proof falls on you, the contractor. My advice for contractors, owners and subcontracts alike, is to properly document the status of the project at the outset of the impact, implement a risk management plan, and keep an accurate and detailed account of events and costs incurred during the impact period.
Another important aspect of this conversation is that you may also be required to show that costs were reasonably incurred and efforts were made to mitigate costs during the impacted time period. Costs that could have been reasonably avoided or mitigated, such as replacement of damaged materials due to improper storage, may be excluded. You should pay close attention to the direct consequences of the virus impact, say, a project shutdown, and segregate any ongoing impacts which persist after resumption of work such as continued loss of productivity, lack of available skilled labor and lack of materials. In addition, costs should be tracked for any acceleration efforts that are implemented after work is resumed.
Ultimately, to avoid long drawn out legal battles you need to to identify a problem at the earliest stage possible so it can be dealt with efficiently and cost-effectively for all parties. This means document, document, document. It will be incumbent upon you to prove that you were not behind prior to the virus and that the virus placed you even further behind or you can be liable. And when this is all over, if you had to lay off your workforce, it is imperative that you let your contract holder know the impacts of that on their projects sooner rather than later.