Is The Coronavirus Event A Force Majeure Or Changed Condition Event?

David Peden | Porter Hedges

While this coronavirus event grips the nation, contractors and subcontractors are asking whether this qualifies as a force majeure or changed condition event.  We think it qualifies as both. 

When you bid and signed your contracts, if the force majeure clause was given any thought, it likely was about the impact of a hurricane hitting the job site.  Would a hurricane shut a job down for three days, or four?  Well, this coronavirus event is having an impact that will last three months, or more. 

As lawyers, we can work safely from home.  Construction, on the other hand, requires hands-on work.  Laborers are concerned about their safety, but they have bills to pay and a family to feed.  What should you do if a worker shows up sick and works for a day before their symptoms worsen and become obvious?  Do you shut the whole job down, just that crew, or just send that laborer home?  In your safety and other briefings, you should be emphasizing the importance of staying home as soon as you have any symptoms.  Document that you said this in your daily reports. 

We suggest that you read your contracts today.  Look at the delay and other clauses like the changed conditions and claim clauses.  In your contract, a force majeure event may get you more time, but not money.  A changed condition clause might get both.  If you are being impacted, get your Notices of Claim out, tailored to the exact requirements of each contract.  Send it to everyone above you to whom notice must be given.  In most contracts, you are required to use the word “Claim” in your notice, so do it if you are sending one. 

Here is some suggested sample language:

“NOTICE OF CLAIM

DATE:

PROJECT:

We are giving notice of a Claim.  The coronavirus is expected to impact our schedule and our costs.  We are not at fault.  We did not anticipate this event.  We cannot control it.  We do not know how long it will last.  The situation is changing daily.  President Trump has just granted Governor Abbott’s request to declare Texas a Disaster Area.  At this time, we cannot predict how much additional time we will need, nor can we predict how much our costs will increase.  We anticipate disruptions in our labor and in our materials supply lines.  We will do what we can to mitigate these impacts, but with symptomatic workers being required to stay home, our onsite labor forces and our suppliers will all be impacted.  We will update this Claim as we can.  Thank you for your patience and understanding.”

A Few Things You Might Consider Doing Instead of Binging on Netflix

Garret Murai | California Construction Law Blog

Governments throughout the world have issued “shelter in place” orders requiring that residents stay at home except for “essential” purposes. As a result, in the United States, more than a third of Americans have been ordered to stay at home. This, in turn, has had a direct impact on construction projects which have slowed or have been temporarily shuttered altogether, and it will (not may) have an impact on the flow of project funds. So what can project owners and contractors do? We’ve got a few tips.

1.     Read Your Contract, Paying Particular Attention to Force Majeure, No Damages for Delay and Notice Provisions

For the most part, with the exception of statutory rights and remedies which we will discuss below, your contract spells out your rights and remedies should the proverbial “S” hit the fan. It is, in other words, the rules you agreed to, and you should know what those rules provide. Three provisions you should look for, and if they’re in your contract, you should review carefully are: (1) Force majeure provisions; (2) No damages for delay provisions; and (3) notice provisions.

Force Majeure Provisions

Latin for “superior force,” a force majeure provision defines circumstances beyond a party’s control that may render contractual performance by that party difficult or impossible to perform. A force majeure provision is, by its nature, defensive. In other words, it is a defense against a higher-tiered party’s claim that a lower-tiered party has failed to perform its obligations under a contract.

Most people think of force majeure events as being “Acts of God,” or, in other words, earthquakes, tornadoes, tsunamis and other naturally occurring events. That’s not always the case though. Force majeure provisions can include any number of “triggering” events including government actions, terrorism, riots and other events that aren’t naturally occurring.

In short, if your contract includes a force majeure provision, you need to read and understand it, so that you know what events trigger the provision. You also need to understand the intricacies of force majeure provisions. For example, few force majeure provisions that I’ve seen include a trigger for plagues or epidemic outbreaks such as the coronavirus, but many include government actions as a “triggering” event. Thus, while the coronavirus itself may not be a “triggering” event, state and local “shelter in place” orders currently in effect would likely constitute a “triggering” event.

No Damages for Delay Provisions

The current crisis is going to cause delays on construction projects, whether because the project itself is temporarily shut down due to “shelter in place” orders at the state or local levels, because of an inability to get workers out to the job site because they are sick or scared, because your work is impacted because other trades are not coming out to the project site, or because of delays in the delivery of or the inability to purchase materials and equipment.

There are many grey areas here, but the impact is the same: Delays on the project. Some contracts, recognizing that there could be delays on the project which no one could have foreseen or controlled, include “no damages for delay” provisions. An example of what a “no damages for delay” provision might look like is the following:

In the event that Subcontractor’s performance of its Work is delayed through no fault of its own, Subcontractor may request an extension of time for performance of its Work, but in no event shall be entitled to any increase in the Contract Price or damages arising from such delay.

In short, a “no damages for delay” provision, while allowing a contractor to seek an extension of the contract time due to delays, prevents a contractor from seeking an increase in the contract price, whether due to the need to pay workers for overtime or hazard pay, for increases in material costs, for extended general conditions, etc.

Notice Provisions

Most construction contracts include notice provisions setting forth when, under what circumstances, and how notice may be given. Importantly, they often also set forth happens if you don’t give proper notice. In the current situation, notice provisions are extremely important as contractors face delays and time-related costs impacting their ability to meet contractually agreed upon completion dates and ability to perform their work without coming out at a financial loss.

Many notice provisions provide that if notice is not given, or not timely given, that a contractor waives its right to pursue claims in which notice was required. An example of notice provision related to delays and time-related costs is the following:

In the event that Contractor claims that its Work has been impacted through no fault of its own, Contractor may request an extension of the Contract Time and/or increase in the Contract Price by providing written notice to Owner no later than fifteen (15) days of the event giving to the claim. Provided, however, that should Contractor fail to provide timely notice, Contractor waives any right to an extension of the Contract Time or increase in the Contract Price.

In short, notice provisions are extremely important right now. In fact, even if your contract doesn’t include a notice provision requiring that notice be provided of delays and/or time-related costs, my suggestion, is that you consider sending notice anyway. To successfully bring a delay and/or time-related cost impact claim a contractor needs to show that the delay was both compensable and excusable.

2.     Understand Your Statutory Payment Rights

In California, there are three primary statutory payment remedies available to those performing work on construction projects: (1) mechanics liens and design professional liens; (2) stop payment notices; and (3) payment bond claims. Who can assert these payment remedies, when they can be asserted, and how they are asserted, varies. You can read more about each of these payment remedies by clicking the links above, but here’s a snapshot:

Who Can Assert These Payment Remedies

Only design professionals, that is, licensed architects, registered engineers, and registered land surveyors, can assert a design professional lien.

Only direct contractors, subcontractors, material suppliers, equipment lessors and laborers may asset mechanics liens.

And, only subcontractors, material suppliers, equipment lessors, and laborers may assert stop payment notices and payment bond claims.

When Can They Be Asserted

Here’s where it gets interesting, most people think that mechanics liens can only asserted after completing their scope of work. For direct contractors who are serving as general contractors that usually means when the entire project is completed. For all others it is when their work is completed.

But, importantly, given the situation we are in, “completion” under Civil Code section 8180 includes, not only completion of the entire project (in the case of general contractors) or completion of a party’s scope of work (in the case of all others), but also “cessation of labor for a continuous period of 60 days.”

Thus, in a situation where project sites may be closed for a prolonged period of time due to the various “shelter in place” orders, if this includes a cessation of labor for a continuous period of 60 days, contractors, subcontractors, material suppliers, equipment lessors and laborers would be able to record a mechanics lien even though the project or their scope of work has not yet been completed.

As to stop payment notices and payment bond claims, there is no requirement that that a subcontractor, material supplier, equipment lessor, or laborer complete its work before serving a stop payment notice or making a payment bond claim.

Similarly, for design professionals, a design professional does not need to complete its work before recording a design professional lien. However, there are three requirements that must be met first: (1) a building permit or other “governmental approval” must have previously been obtained; (2) construction must not yet have commenced; and (3) the design professional must make demand for payment not less than 10 days before recording its design professional lien.

Requirements Prior to Assertion

In order to record a mechanics lien, serve a stop payment notice or make a payment bond claim most claimants, with the exception of direct contractors, but then only if there is no construction lender on the project, must have first served a preliminary notice. More information on each of these statutory payment remedies, as well as forms, can be found in the Blueprints and Toolbox section of our blog.

3.     Know How You Can Statutorily Shorten Deadlines 

While there are statutory payment remedies available to contractors and others who furnish labor, materials and equipment on a construction project, project owners are not without their own remedies. For projects that are at our near completion, or that are mid-way through construction, a project owner can shorten the deadlines for a claimant to record a mechanics lien, serve a stop payment notice, or make a payment bond claim, by recording a notice of completion or notice of cessation.

Notices of Completion

A notice of completion may be recorded upon the occurrence of any of the following events:

  1. Actual completion of a work of improvement;
  2. Occupation or use by the owner accompanied by cessation of labor;
  3. Cessation of labor for a continuous period of 60 days; or
  4. For public works projects, acceptance by the public entity.

A notice of completion may be recorded on or before 15 days after completion of a work of improvement.

Notices of Cessation

A notice of cessation can be recorded if there has been a cessation of labor for period of 30 days.

When statutorily permitted, by recording a notice of completion or notice of cessation, a project owner may shorten the time period for potential claimants to record mechanics liens, serve stop payment notices and make payment bond claims, by shortening the time to make such claims by as much as two-thirds.

Leveraging the 50-State Initiative, Connecticut and Maine Team Secure Full Dismissal of Coverage Claim for Catastrophic Property Loss

Regen O’Malley | Insurance Coverage Law Blog

On behalf of Gordon & Rees’ surplus lines insurer client, Hartford insurance coverage attorneys Dennis BrownJoseph Blyskal, and Regen O’Malley, with the assistance of associates Kelcie ReidAlexandria McFarlane, and Justyn Stokely, and Maine counsel Lauren Thomas, secured a full dismissal of a $15 million commercial property loss claim before the Maine Business and Consumer Court on January 23, 2020. The insured, a wood pellet manufacturer, sustained catastrophic fire loss to its plant in 2018 – just one day after its surplus lines policy expired.

Following the insurer’s declination of coverage for the loss, the wood pellet manufacturer brought suit against both its agent, claiming it had failed to timely secure property coverage, as well as the insurer, alleging that it had had failed to comply with Maine’s statutory notice requirements. The surplus lines insurer agreed to extend the prior policy several times by endorsement, but declined to do so again. Notably, the insured alleged that the agent received written notice of the non-renewal prior to the policy’s expiration 13 days before the policy’s expiration. However, the insured (as well as the agent by way of a cross-claim) asserted that the policy remained effective at the time of the loss as the insured did not receive direct notice of the decision not to renew coverage and notice to the agent was not timely. Although Maine’s Attorney General and Superintendent intervened in support of the insured’s and agent’s argument that the statute’s notice provision applied such that coverage would still be owed under the expired policy, Gordon & Rees convinced the Court otherwise.

At issue, specifically, was whether the alleged violation of the 14-day notice provision in Section 2009-A of the Surplus Lines Law (24-A M.R.S. § 2009-A), which governs the “cancellation and nonrenewal” of surplus lines policies, required coverage notwithstanding the expiration of the policy. The insured, the agent, and the State of Maine intervenors argued that “cancellation or nonrenewal” was sufficient to trigger the statute’s notice requirement, and thus Section 2009-A required the insurer to notify the insured directly of nonrenewal. In its motion to dismiss, Gordon & Rees argued on behalf of its client that Section 2009-A requires both “cancellation and nonrenewal” in order for the statute to apply. Since there was no cancellation in this case – only nonrenewal – Gordon & Rees argued that Section 2009-A is inapt and that the insurer is not obligated to provide the manufacturer with notice of nonrenewal. Alternatively, it argued that the statute is unconstitutionally vague and unenforceable.

The Court agreed with Gordon & Rees’ client that the statue is unambiguous because the terms “cancellation and nonrenewal” are not “mutually exclusive,” as was argued by the insured, agent and State intervenors. In doing so, the Court held that it was not bound by the definitions of “cancellation” and “non-renewal” found in Maine’s personal lines statutes (the definitions there expressly do not apply) and must interpret those terms based on their plain and common meanings. Based on this, the Court held: “the phrase ‘cancellation and non-renewal’ refers to the termination of a surplus lines insurance policy prior to the end of the policy period, with a failure to renew the policy.” The Court dismissed the complaint and cross-claim as no cancellation occurred, and the statute does not apply. Accordingly, there was no need to reach the arguments regarding constitutional infirmity.

Building a Case for Force Majeure in Construction Contracts

Alston & Bird

Does your construction contract include a force majeure provision that covers the coronavirus pandemic? Our Construction Group weighs in on the availability of force majeure and other related doctrines to excuse contractual performance on construction projects.

  • Establishing a force majeure event
  • Asserting and defending against force majeure claims
  • Understanding other similar doctrines and their applicability on construction projects

Alston & Bird has formed a multidisciplinary task force to advise clients on the business and legal implications of the coronavirus (COVID-19).

Building a Case for Force Majeure in Construction Contracts

The coronavirus pandemic is disrupting our lives and our businesses. Contractual commitments entered in ordinary times are proving difficult or—in the short term—impossible to perform. This is particularly acute in the development and construction world where contractual obligations are being rendered difficult or seemingly impossible to perform. Against this backdrop, is the coronavirus an event that excuses contractual performance?

Coronavirus as a Force Majeure Event

Force majeure is a common-law doctrine or principle broadly applicable in the commercial context that excuses contractual performance when an extraordinary event or circumstance beyond the control of the parties intervenes to prevent performance. Force majeure excuses nonperformance for the duration of the force majeure event. It does not void or vitiate the contract.

In the construction context, the occurrence of a force majeure event does not automatically excuse performance or entitle one or both parties to additional time or money. This determination requires a multistep analysis, beginning with a determination of whether a force majeure event has occurred. 

What constitutes force majeure?

There is no generally accepted definition of what constitutes “force majeure.” Construction contracts typically define the term, and whether the coronavirus pandemic qualifies as a force majeure event will depend on how force majeure is defined in the contract at issue.

The American Institute of Architects (AIA) A-201 does not use the term force majeure per se, but traditional concepts of force majeure are reflected in Section 8.3.1:

§ 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 15.1.6.2, 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.

The enumerated force majeure events are labor disputes, fire, unusual delay in deliveries, and unavoidable casualties, followed by the catch-all phrase “or other causes beyond the Contractor’s control.” The catch-all phrase is likely to cover nonperformance caused by the coronavirus pandemic because the outbreak and the government’s responses to the outbreak are outside the control of the contracting parties.

If the force majeure clause in your contract does not contain a broad catch-all phrase tied to a lack of control, focus on the enumerated events of force majeure. Terms like “disease,” “epidemic,” “pandemic,” “national emergency,” or “quarantine” are all likely to capture the coronavirus pandemic.

Relief is also likely if the clause makes reference to an “act of government.” Governors and government bodies are shutting down construction sites and issuing orders to shelter at home. These types of directives excuse nonperformance under a force majeure clause covering acts of government.

Other force majeure clauses make reference to “acts of God.” The case law generally limits “acts of God” to natural disasters and weather events, so a force majeure clause containing an “act of God” provision may not be interpreted as covering the coronavirus pandemic, depending on your jurisdiction.

Timely notice

Force majeure clauses typically impose stringent notice requirements, and a failure to comply with the notice provision may well cause a waiver of the right to assert force majeure. If you are asserting a force majeure claim, or are the recipient of such a claim, be careful to confirm that any notice requirements in the contract have been satisfied.

Again, proper notice may be project-specific depending on the circumstances giving rise to the event. Likewise, when the event comes to an end and the project may resume is a project-specific inquiry.

Proving causation

In addition to timely notice, it is essential to be able to prove that there is a causal connection between the force majeure event and the failure to perform. Force majeure excuses nonperformance caused by the force majeure event, not by some other cause. It does not excuse nonperformance that predates the event, nor nonperformance that occurs after the event concludes. In this instance, the party claiming force majeure must be able to demonstrate that the coronavirus pandemic directly caused the failure to perform or the delay in performance. 

In a construction context, and to prove causation, it is essential that the project schedule be current and up to date as of the occurrence of the force majeure event. Causation needs to be shown with a schedule that accurately reflects the as-built condition of the project as of the date the force majeure event occurred. Force majeure will excuse nonperformance for the duration of the force majeure event but will not excuse delays that were already in existence at the time the force majeure event arose or delays after the force majeure event concludes. Proper scheduling will also help clearly establish the overall impact of the force majeure event upon project restart.

The relief

Once the existence of a force majeure event has been confirmed, and a causal connection between the force majeure event and the failure to perform has been established, the next step in the analysis is to determine what relief the affected party is entitled to obtain under the contract. Under the common law, force majeure extended the duration for contract performance but did not entitle one or the other of the parties to monetary compensation. In the construction context, some construction contracts follow the common law and provide time relief only, while others provide that the contractor is entitled to payment by the owner of its extended general condition costs if a force majeure event exists for a specified period. Other contracts are less definitive and allow for “equitable” compensation or relief.

Impossibility or Impracticability of Performance

In commercial contracting, the doctrines of impossibility and impracticability of performance apply and may excuse contractual nonperformance. There is some question as to whether these doctrines apply in the construction context, where risk is heavily negotiated and extensively addressed in the contractual provisions. Unless your jurisdiction has definitively ruled on the application of the doctrines in the construction context, you need to know about these doctrines and their potential application to this situation.

In Georgia, for example, the doctrine of impossibility is limited to acts of God and is codified at O.C.G.A. § 13-4-21, which states: “If performance of the terms of a contract becomes impossible as a result of an act of God, such impossibility shall excuse nonperformance, except where, by proper prudence, such impossibility might have been avoided by the promisor.”

California’s doctrine is broader and is codified at Cal Civ Code § 1511. It provides: “The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate: … When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary….” 

If the doctrine in your jurisdiction is tied to an act of God, like in Georgia, the doctrine of impossibility will not be of much benefit unless the courts decide the coronavirus pandemic is an act of God. In a state like California, which has a broader definition, the potential for relief is greater. If your contract does not contain a force majeure provision, or if your force majeure provision is restrictive in scope, you may need to invoke or defend against a claim of impossibility of performance.

A related doctrine is commercial impracticability, which also excuses performance. Article 2 of the Uniform Commercial Code pertaining to the sale of goods states in Section 2-615(a):

Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Since Article 2 of the UCC applies to the sale of goods, the doctrine of impracticability will apply to vendor contracts pertaining to the purchase or sale of materials and equipment. It probably will not apply to construction contracts since they are typically viewed as services contracts not sales contracts. However, some courts look to the UCC even when addressing non-sale transactions since the legal concepts embodied in the UCC are consistent with the common law. Check the law in your jurisdiction to see how the law of impracticability has developed, since there will undoubtedly be claims that the coronavirus pandemic is a contingency the nonoccurrence of which was a basic assumption on which the contract was made and excuses contractual nonperformance due to impracticability.

Suspension

Owners and contractors should also look closely at the suspension provisions in their construction contracts. Suspension clauses typically provide the owner the right to suspend the project for some time period before providing the contractor the right to terminate. This clause may also be a vehicle to control costs.

Practical Tips For Ohio Construction In Response To The Coronavirus Pandemic

Thomas Rosenberg | Roetzel & Andress

On March 22, 2020, Governor DeWine issued a Stay at Home Order that permits essential infrastructure projects to continue performance. Essential infrastructure includes construction projects and specifically, the Governor’s Order makes it clear that public health emergency, hospital construction, construction of long-term care facilities, public works construction, school construction, essential business construction and housing construction constitute essential infrastructure projects. The Governor’s Order indicates that essential infrastructure is to be construed broadly in its definition and therefore all construction projects are deemed essential infrastructure projects. Note, other states including border states such as Pennsylvania have taken a contrary position and have ordered all construction contractors to cease work. For the time being, in Ohio, contractors can continue to work however, they have to follow the social distancing requirements, including maintaining six-foot social distancing from other individuals, washing hands with soap and water for at least twenty seconds as frequently as possible or using hand sanitizer, covering coughs or sneezes, regularly cleaning high touch surfaces and not shaking hands. 

Even though work can proceed, it is important for contractors to examine their construction contracts to determine their rights and obligations under the current coronavirus pandemic circumstances. 

First, determine whether your contracts have a force majeure clause. Force majeure is a term commonly used for contract clauses that deal with unexpected events beyond the control of the contracting parties. The coronavirus pandemic qualifies as a force majeure event. When a contract includes such a clause, it will control the party’s rights, obligations and potential remedies. 

If a force majeure clause exists, it is important to provide notice within the contractually prescribed time-frame to the Owner or other entity the construction contractor has a contract with, of any impact upon performance. The notice requirements of the contract must be met and they often specifically require written notice, not e-mail notice, and may require notice to be sent to a specific individual. While you may not know the full impact or monetary impact of the delays caused by the virus, you are likely obligated to put parties on notice within a limited amount of time after becoming aware of the potential impact. Since the full extent of the impact is not known, the notice should state that supplemental information will be submitted when you are in possession of more detail about the impact and monetary costs incurred. 

The impact to construction contractors may include delays in meeting the contract schedule, potential delays in acquiring materials especially if the materials are being delivered from a location out of the country, shortages of labor, potential demobilization and re-mobilization costs, and further additional costs. To the extent applicable, a construction contractor should identify these types of circumstances in its notice letter even though it may not know the full extent of the impact at present. 

If a force majeure clause does not exist in your contract, you still may be excused from complete performance as a result of the present circumstances. Give timely notice as set forth above. Most construction contracts have clauses in them that still require timely notice of any impact to a contractor’s ability to perform or circumstances that could give rise to delays, increases of costs, schedule delays and other circumstances impacting performance. 

All contractors have an obligation to mitigate the damages resulting from any delay. In this case, certain steps may not be able to be taken, but contractors should consider what they can do to minimize the losses being sustained. Is there work that can be performed partially off-site, or elsewhere? Is there rental equipment that could be returned so that continuing rental costs are not incurred if you are unable to perform? 

On federal projects, the coronavirus is clearly established in federal regulation as a limitation on performance. Federal Regulation 52.240-14 provides that a contractor shall not be in default of any failure to perform if the failure to perform arises from causes beyond the contractor’s control and without the fault or negligence of the contractor and includes epidemics and quarantine restrictions as examples of such causes. On federal projects, however, construction contractors still must provide notice. 

In summary, while construction currently can proceed in Ohio, circumstances exist that may cause delays, increased costs and other losses to construction contractors. Closely follow the contract documents in all respects to provide timely, proper notice, keep track of costs and delays incurred and supplement notice on a regular basis if able to do so. Even though presently the Governor’s Order allows construction to proceed, there are going to be many circumstances where it cannot in full, in part or as expeditiously as desired as a result of the virus’ impact on labor, material availability and the like.