The Coronavirus and Your Construction Contract: Is Performance Excused due to COVID-19?
March 17, 2020
The Coronavirus has brought uncertainty to all aspects of life. Business has no doubt been affected, and the construction industry is no exception. If you are a contractor with a major construction project underway (or about to begin), you are naturally asking yourself how the outbreak affects your project. What happens if performance is delayed by shortfalls in labor or materials caused by the spread of the virus or protective measures in response to it?
While the answer depends on many factors, the most important is probably the contract you signed. Most contracts include a “force majeure” or similar clause excusing performance when certain unforeseen circumstances arise. This clause is the first place to look. Specifically, you will want to determine the following:
- What is defined as a force majeure event (or excusable delay) excusing performance?
- What is required to take advantage of the clause (e.g., prompt notice, documentation, etc.)?
- To what extent is performance excused?
- Is delay compensable?
What is defined as a force majeure event (or excusable delay)?
A force majeure event is typically one that is unforeseeable and beyond the reasonable control of the contracting party. Contracts will often include a laundry list of events specifically covered, such as “acts of God,” earthquakes, extreme weather events, embargoes, strikes, or civil unrest. “Epidemics” are often included (while “economic hardship” or “market conditions” are often excluded).
If you are using an industry-standard form document such as AIA or ConsensusDocs, you may not see the term “force majeure.” The AIA General Conditions, for example, lists certain events excusing delay without using the term:
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 184.108.40.206, 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.
See A201 § 8.3.1 (emphasis added). The AIA’s broad use of “other causes beyond the Contractor’s control” presents a good argument that delays due to COVID-19 excuse performance.
Similarly, the ConsensusDocs 200 lists certain “causes beyond control” for which delay may be excused:
Examples of causes beyond the control of Constructor include, but are not limited to, the following: (a) acts or omissions of Owner, Design Professional, or Others; (b) changes in the Work or the sequencing of the Work ordered by Owner, or arising from decisions of Owner that impact the time of performance of the Work; (c) encountering Hazardous Materials, or concealed or unknown conditions; (d) delay authorized by Owner pending dispute resolution or suspension by Owner under §11.1; (e) transportation delays not reasonably foreseeable; (f) labor disputes not involving Constructor; (g) general labor disputes impacting the Project but not specifically related to the Worksite; (h) fire; (i) Terrorism; (j) epidemics; (k) adverse governmental actions; (l) unavoidable accidents or circumstances; (m) adverse weather conditions not reasonably anticipated. Constructor shall submit any requests for equitable extensions of Contract Time in accordance with Article 8.
(ConsensusDocs 200 § 6.3.1(j).) The ConsensusDocs’ inclusion of “epidemics” provides an even better argument that delay is excused due to COVID-19.
The bottom line is that the contract should define what specific circumstances allow for nonperformance or delay in performance.
What notice is required to take advantage of the force majeure or excusable delay clause?
You should always be cognizant of what notice is required to preserve a claim of excusable delay for unforeseen events. The standard AIA General Conditions, for example, point to the usual “Claims” process in Article 15 of that document. The ConsensusDocs 200 takes a similar approach. Owner-modified contracts might change these notice requirements. They might also say that failure to give the required notice waives associated claims for delay. While such a waiver will always depend on the circumstances, the best practice is to immediately ascertain the notice required and comply where possible.
To what extent is performance excused, and is the delay compensable?
The contract will often say whether delay is compensable. For example, while ConsensusDocs allows for an adjustment in the contract price for delay caused by the owner (or the design team), it excludes compensation for the typical force majeure events—these are a basis only for additional time. Likewise, the AIA’s standard excusable delay provision mentions only adjustment in time (although it does not prevent parties from seeking damages for delay under other provisions of the contract).
Regardless of whether you claim additional compensation or only time, contracts will typically excuse performance only to the extent caused by the covered force majeure event. If there is a dispute, you will need to prove a connection between the event or circumstance and the delay or costs claimed.
The following is a checklist of steps to take to minimize risk in the event your work is delayed by the Coronavirus outbreak (or any other unforeseen cause):
- Determine the contract’s parameters for force majeure/excusable delay. Review the force majeure or excusable delay clause and answers the questions posed above in this article. While it is unlikely that termination is an available remedy, there is a good chance performance may be excused.
- Follow the contract’s notice provisions. Immediately determine the notice required, who you must send it to, and what information or documentation must be submitted to begin the claims process. Some contracts will require an immediate notice followed by more detailed claim submissions. As discussed above, some contracts may require strict compliance.
- Preserve evidence substantiating the delay. Preserve all communications, records, and documents showing an impact on your performance.
- Draft a contemporaneous narrative that reflects the impact. Be prepared to tie the impact to the excused cause of delay. Catalogue your specific proof. For example, when did the event occur? When did you have notice of it? What personnel or supplies were affected, and for how long? What efforts were made to continue performance despite the delay?
- Document and continue mitigation efforts. Excusable delay is not an excuse to do nothing. You will likely have an obligation (whether under the contract or generally under the law) to mitigate the impacts. Be prepared to show what steps you took.
- Keep your insurance advisor and legal counsel in the loop. Have a clear understanding of your rights and obligations under the specific contract for the project. Know whether your (or the owner’s) insurance provides any coverage for business interruption or related losses.
- Where possible, negotiate this term in advance. For new projects, review the excusable delay provisions in advance and, if necessary, negotiate modifications. For example, not only could the covered events and compensation be clearly defined, but language can be incorporated that specifically accounts for increased costs in materials or supply. For example, we have incorporated similar escalation clauses recently in anticipation of tariffs and increased materials costs.
As the economic impacts of COVID-19 are rapidly unfolding, it is imperative for contracting parties to assess the situation carefully and be prepared to protect their interests.
For additional information regarding this topic or any construction issue, please contact Patrick F. Estill, or the Jackson Kelly Construction Industry Group co-chairs Mark W. Bernlohr or John W. Hays.