Lexie R. Pereira | The Dispute Resolver
With loss, comes suffering; and, when it comes to the coronavirus, loss exists in many forms. Attorneys across the country – particularly those representing contractors on public projects – are asking themselves, generally, “how can my client suffer less?” Or, more pointedly, “is there an argument to support my client’s right to entitlement to compensation for COVID-19-related costs?”
On public projects, the short answer is maybe not until the government steps in. Construction lawyers are faced with the unfortunate reality that public sector contracts appear to preclude contractors from seeking adjustments to the contract price because these contracts commonly include (1) a clear “no-damages-for-delay” provision, (2) time as the sole remedy for “force majeure” delays, and (3) a “compliance with laws” provision that is silent as to which party bears the risk of a change in laws. These provisions help public owners properly protect the interests of the citizens by appropriately allocating their tax dollars to a construction project that follows a carefully thought-out contract. However, as a result of these well-intentioned owner-friendly provisions, public contracts can make it difficult for contractors to receive compensation for COVID-19-related costs.
One can draw a parallel between public contracts and some of the insurance industry’s business interruption coverage policies. Of course, every insurance policy is different and must be analyzed on a case-by-case basis; however, the business interruption policies at issue often (1) have a clear “virus” exclusion, (2) require “property damage” to trigger coverage, and (3) are silent as to the application of the “civil authority” exclusion when it comes to partially mandated shutdowns (i.e. when the case is that construction offices, but not jobsites, may have been required to shut down). As a result, policyholders’ business interruption claims arising from COVID-19 are facing blanket denials from insurance carriers.
However, the denials of claims in both the insurance and construction industries alike can have potentially crippling effects. With respect to insurance, the consensus is becoming somewhat clear: the federal and/or state governments may need to step in. In response, several states (including Massachusetts, Rhode Island, New York, and New Jersey) have sponsored bills to provide long-term reimbursement relief to insurance companies and even to create exceptions to the policies’ strict exclusions, like the “virus” exclusion. As follows, attorneys are advising policyholders to follow the old adage “a claim never made is a claim never paid.” Therefore, attorneys who want to help their clients suffer less should encourage strict compliance with the “prompt” notification mechanisms to preserve claims under their insurance policies.
Similarly, attorneys are encouraging contractors to comply with the claim procedures in their public contracts, despite the currently-present contractual roadblocks. This advice is perhaps motivated with the hope that relief will be provided, whether it comes from the owner or as a part of a government-sponsored relief scheme similar to that of the insurance industry. The good news is: over one-hundred and thirty-five members of Congress agree with this approach, at least when it comes to supporting State Departments of Transportation (DOTs). On May 11, 2020, Representatives Conor Lamb and Bob Gibbs led the House in calling on Speaker Pelosi and Leader McCarthy to support approximately $49.95 billion in federal funding for State DOTs in the next COVID-19 response package.1 The request explained how support of State DOTs can help ensure planned transportation projects proceed as planned, which in turn supports the economy by protecting the jobs of State DOT employees and construction workers. Comparably, the Under Secretary of Defense released a memorandum on March 30, 2020, with the subject “Managing Defense Contracts Impacts of the Novel Coronavirus,” stating that “Where the contracting officer directs changes in the terms of contract performance, which may include recognition of COVID-19 impacts on performance under that contract, the contractor may also be entitled to an equitable adjustment to contract price using the standard FAR changes clauses (e.g., FAR 52.243-1 or FAR 52.243-2).”2 This memorandum suggests that contracting officers may have the authority to treat COVID-19 impacts as compensable delays under the FAR Changes clause.
As a matter of public policy, government intervention in line with the above makes sense. Despite the general rules that deny contractor recovery in the face of (1) a clear “no damages for delay” provision,3 (2) time as the sole remedy,4 and (3) a silent compliance with law provision,5 these rules are unfair (and perhaps unlikely to be upheld) considering the ongoing global pandemic. For example, on lump sum and GMP projects in particular, it would be inequitable for a public owner to completely deny claims for additional costs – like those of COVID-19-required demobilization and remobilization – on the basis of (1) a clear “no damages for delay” provision, (2) time as the sole remedy, and (3) a silent compliance with law provision. What’s more, public contracts are often procured via competitive bidding, which naturally means that contractors cut as many costs as safely as possible, not pricing out a ‘just in case a global pandemic shuts down this project for a couple weeks’ cushion. In fact, because public owners want to ensure that workplaces, including construction jobsites, are operating safely and in full compliance with new COVID-19 safety measures, they have a competing interest when it comes to compensating COVID-19-related costs. Since their competing interest brings with it some additional costs that were in no way contemplated by contractors when they priced their jobs, they ought to have some skin in the efforts for recovery as it would be unfair for public owners to ask contractors to simply absorb COVID-19-related costs.
Indeed, the ramifications of allowing owners (and insurers) to benefit from such harsh claim denials could have detrimental effects on the entire construction industry. Consider the alarming fact that if contractors continue to be denied compensation for COVID-19-related costs, then numerous contractors, subcontractors, and suppliers will inevitably goes out of business, thereby crumbling the industry and, likewise, the economy. While public owners and insurance companies may suffer in the short-term in light of legislation that requires exceptions to their contracts, they are in a much more stable position to weather this storm over the long-term. In other words, at present, they are not the string that will make the sweater unravel. After all, the greater suffering ought to be borne by the owner anyway, even if it is the state. One can reason that even though neither the owner nor the contractor could have ever predicted COVID-19, it is the owner – not the contractor – who remains the ultimate beneficiary of the project. As follows, maybe relief for public contractors should come from thoughtful legislation, like that already pending for the benefit of the insurance industry.
2 https://federalconstruction.phslegal.com/2020/04/articles/contractor-information-sources/delays-resulting-from-coronavirus-may-be-both-excusable-and-compensable/; https://www.nationaldefensemagazine.org/articles/2020/3/16/industry-may-find-relief-for-coronavirus-delays; https://www.jdsupra.com/legalnews/delays-resulting-from-coronavirus-may-58448/↩
3 Although a contract has a clear “no damages for delay” clause, the contractor is not necessarily foreclosed from recovery if there exist other avenues for recovery within the contract. In fact, in many jurisdictions, “no damages for delay” clauses are not enforced where the delay for which recovery is sought was not reasonably contemplated by both parties at the time of contracting. JWP/Hyre Elec. Co. v. Mentor Village Sch. Dist., 968 F. Supp. 356, 360 (N.D. Ohio 1996); see Corinno Civetta Const. Corp. v. City of New York, 493 N.E.2d 905, 910 (N.Y. 1986). That is not necessarily the case in Massachusetts; however, there exist other ways a contractor can avoid the harsh effects of a “no damage for delay” clause. Joel Lewin & Eric Eisenberg, Delays, Suspensions and interruptions—No damage for delay clauses—Exceptions, Massachusetts Practice Series on Construction Law § 6:22 (2018). For example, a contractor may point to other contract provisions that provide relief. Id. (citing Stone/Congress v. Town of Andover, 6 Mass. L. Rptr. 330, 1997 WL 11737 (Mass. Super. Ct. 1997) (denying a summary judgment motion in favor of a contractor that argued that its damages were not for delays, but rather for changes in the work for which it was entitled to compensation under the changes clauses in the general contract). A closer look into the specific contract language is necessary in order to determine whether there exist other avenues for recovery.↩
4 Despite the fact that the sole remedy is time, there may still be room for a claim for additional compensation if contractor has a separate delay claim. “Force majeure” events, like abnormally bad weather and presumably the COVID-19-related costs at issue here, normally entitle the contractor to time, but not money. However, similar to the idea above that a contractor can avoid the harsh effects of a “no damage for delay” clause by pointing to other contract provisions, a contractor may recover for “force majeure” events when they are coupled with other compensable delay events. See id.; Philip J. Bruner & Patrick J. O’Connor, Jr., §3.7.2—Contractor’s Compliance with Law, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update). For example, in Appeals of Bechtel Environmental, Inc., a contractor was adversely affected by weather when a government-caused design delay pushed toxic waste landfill remediation activities into the hotter summer months, resulting in lower efficiency. Philip J. Bruner & Patrick J. O’Connor, Jr., §220.127.116.11—Weather delays, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing Appeals of Bechtel Environmental, Inc., E.N.G.B.C.A. No. 6137, E.N.G.B.C.A. No. 6166, 97-1 B.C.A. (CCH) ¶ 28640, 1996 WL 686423 (Corps Eng’rs B.C.A. 1996)). Perhaps the express language in the AIA A201-2017’s § 8.3.3 provides the support for this: “This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.”↩
5 As a general rule, if the contractor agrees to perform the work for a stipulated sum and further agrees to comply with all laws and regulations governing the performance of the work, then, in the absence of any contractual provision permitting relief, it bears the risk. Philip J. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing DiCara v. Jomatt Const. Corp., 52 Misc. 2d 543, 276 N.Y.S.2d 11 (Dist. Ct. 1966) (contractor who agreed to sell a house at a specified price bore a responsibility for increased costs due to a 2% sales tax made applicable to the sale after the parties had reached agreement); Edwards v. United States, 19 Cl. Ct. 663 (1990) (government contract’s “permits and responsibilities” clause obligated the contractor to comply with all local laws and regulations regardless of whether they became effective before or during the term of the contract and applied to zoning changes affecting the work)).↩