Coronavirus – Are We in For Historic Construction Delay Claims?

C. Michael Shull III | Frost Brown Todd

What if a general contractor’s completion of its work is delayed due to COVID-19 (coronavirus)? Is the contractor in breach? Or, is the delay in performance due to the virus excused? Does the contractor get additional time to complete work or additional compensation for the delay to its work schedule?

There are many ways that coronavirus can cause delays to a project. The supply chain can be disrupted in many ways. While lumber, steel, concrete and other materials are sourced more locally, others come from overseas, such as marble from Italy and fixtures from China. Currently, Italy and China are two of the nations most affected by the pandemic. Local agency closures may delay the issuance of permits, approvals or inspections necessary for a certificate of occupancy required for substantial completion. And, of course, workers and crews may either become ill or wish to stay home to avoid infection. Who bears this risk of delay?

When in Doubt, Read the Contract

Most construction contracts break delays down into three categories: those caused by the project owner or its design team, those caused by the contractor, and a third category where the delay arises due to neither the actions of the owner nor contractor, but from circumstances beyond either party’s control. Whether the general contractor is entitled to an extension of its agreed-upon time for performance (contract time) or an increase in compensation (contract price) in connection with the delay often depends upon the cause of delay’s category. Typically, those delays attributable to the contractor’s failures warrant neither an increase in the contract time or the contract price. Those delays caused by the owner or its team usually warrant an increase to both. Those delays caused by neither the owner nor the contractor – often referred to as force majeure events – will typically warrant an increase in the contract time and therefore relief from any liquidated damages. Still, entitlement to an increase in the contract price varies greatly from contract to contract.

Common Contractual Language Regarding Delays

Contract forms typically used in the construction industry address the issue of force majeure damages a bit differently. The ConsensusDocs Form 200, for example, drafted for use between an owner and a contractor, lists within Article 6.3 four categories where the delay is essentially due to an owner’s action or inaction, and provides both an increase in the contract time and contract price if they occur. For delays caused by force majeure events, an adjustment to the contract time is to be provided, but the provision (6.3.3) neither expressly prohibits nor requires an increase in the contract price. Is the coronavirus such a force majeure event? In fact, the ConsensusDocs 200 specifically mentions “epidemics” as a delay for which the contract time will be equitably adjusted. On March 11, 2020, the World Health Organization (WHO) announced that coronavirus was a pandemic. WHO defines a pandemic as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people.”

If the coronavirus itself did not fall within the force majeure definitions of a particular contract, and “pandemic” or “epidemic” are not specifically mentioned, then possibly one of its consequences does. For example, force majeure situations under the ConsensusDocs 200 also include “transportation delays not reasonably foreseeable,” “adverse governmental actions,” and a catch-all “unavoidable accidents or circumstances.”

Another popular industry form, the AIA A201 (2017), at Article 8.3.1 offers a contractor an extension of the contract time for delays due to “labor disputes, fire, unusual delay in deliveries, unavoidable casualties . . . or other causes beyond the Contractor’s control”, as well as “other causes that the Contractor asserts, and the Architect determines, justify delay.”

The A201 does not provide for an automatic increase in the contract price for these force majeure delays (or even for delays caused by the owner). Instead, it simply says that damages for delay by either party are not precluded.

Frequently the standard terms of both the ConsensusDocs 200 and AIA A201 are revised in favor of one of the parties’ interests. For example, an owner may revise them to provide for no damages due to delay under any circumstance, even those beyond the contractor’s control. But some states have passed legislation declaring void any contract which provides no damages for delay in the event that the owner is the cause of the delay, but leaves open the issue of damages in the case of force majeure events. Even if the contract form does provide for additional time or compensation in such circumstances, however, the contractor will still need to prove that the delay was in fact occasioned by the pandemic, and likely the exact amount of time that the pandemic affected the project’s critical path, as well as the lack of available mitigation measures and the provision of notice as required by the contract.

Federal Government Contracts

Some public contract provisions, such as federal government contracts, have their terms as to delay claims determined by statute and regulation. For example, for federal government construction projects the Federal Acquisition Regulations at 48 CFR §52.249-14 “Excusable Delays” (for insertion in cost-reimbursement construction contracts among others) provide that:

. . . the Contractor shall not be in default because of any failure to perform its contract under its terms (within the Contact Time) if the failure arises from causes beyond the control and without the fault or negligence of, the Contractor.

Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, . . . (5) epidemics, (6) quarantine restrictions . . . (8) freight embargoes.

If the contractor’s failure is because one of its subcontractor’s performance is delayed by such causes, a failure to timely perform likewise will not constitute a default. 52.249-14(c) provides that upon request of the contractor of a schedule extension, the contracting officer will determine whether the contractor’s failure to meet the required schedule does, in fact, flow from one of the enumerated causes, and if so the delivery schedule shall be revised. Additional compensation to the contractor is however, not provided in such instances. The Federal Acquistion Rregulation (FAR) provision applicable to fixed-price construction contracts, 48 CFR §52.249-10, likewise provides for an extension of time for completing the work shall be provided, upon adequate proof by the contractor, that the delay in completion is due these same causes.

Relief via a claim of excusable delay due to analogous situations, such an influenza epidemic, however, has not been as easily obtained in the past as one might think. Several claims of excusable delay due to an influenza epidemic have been denied where the contractor has failed to show that the epidemic was the sole cause, not merely a contributing cause, of the performance delay. The contractor must also establish the actual extent of the delay caused by the epidemic. See e.g. Ace Electronics Associates, Inc., ASBCA Nos. 11496, 11781, 67-2 BCA ¶ 6456 (July 18, 1967) Additionally, a contractor will find difficulty alleging that its performance is excused simply because one or more key personnel were affected by an epidemic. Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (August 29, 1995).

One should also take care to remember that if a delay is otherwise excusable, the failure of a contractor to establish reasons for not obtaining the requisite material(s) from another source can result in a denial of excusable delay and an extension of the time of performance. Cryer & Parker Elecs., Inc. ASBCA 15150, 71-2 BCA ¶ 8943.

The world “analogous” is used above hesitantly. Whether the coronavirus pandemic is analogous to anything seen before is surely debatable. Each day brings a fresh set of developments that suggest our current situation is unlike any faced in modern times. Returning to the FAR clauses above, the recitation of epidemics, quarantines, the sovereign action of the government, embargoes, and other circumstances beyond the control of a contractor were likely not listed with the anticipation that they might occur simultaneously.

For Contractors: Remember to provide notice. Contractors whose performance is affected by COVID-19 should provide notice as required under their contract, both in the format and within the time required. Suggest a meeting with the owner to discuss this possibility before it even occurs, if possible. Yes, the owner is no doubt aware of the pandemic in general but not yet as to your specific challenges. If a solution to the delay is possible with the owner and the architect’s approval, propose it. Owners will be keen to get the project completed as soon as possible. If the pandemic causes a full or partial shutdown of the work, remember to protect it and all materials as best as possible. If such protection requires atypical measures, discuss those with the owner to find a solution and protect materials onsite from the elements.

For Owners: If your contractor puts you on notice of a delay due to the pandemic, schedule a meeting. Identify with the contractor whether the delay is due to workforce or supply chain issues, and determine whether their effects might be mitigated by switching to materials from a different source (i.e., local rather than overseas). If the contractor on your project is already severely behind schedule here at the onset of the coronavirus pandemic, make sure to document the status of the project now in order to avoid the pandemic and its effects being used (or attempted) to excuse performance failures, and perhaps liquidated damages which have already accrued.

For Everyone: Communication on projects will be more important than ever before, because whether due to the virus’ effect on the workforce or the government’s reaction to it, all participants on a project will need to be flexible and responsive. If you are about to enter into a construction contract, go ahead and address the pandemic and possible ramifications now if you can.

We really are all in this together. Owners are anxious to get their projects completed without delays and additional costs. Contractors are worried about completing their current projects as well and maintaining the safety of their workforce. It is best to try and work mutually towards a solution as each challenge arises.

Signing a Construction Contract in the Middle of the Coronavirus Pandemic . . . Two Contract Clauses to Consider

R. Thomas Dunn | Solid Foundation: A Construction Law Blog

There is rightfully a lot of buzz in the industry about force majeure clauses. Authors are writing about how far and how much they protect contracting parties from unforeseen and uncontrollable events that cause delay.

While the standard AIA, ConsensusDocs, or other industry form contract time extension and/or force majeure clauses will likely provide some relief as to time extensions in appropriate situations, contracting parties may be best served to acknowledge the uncertainties our industry is confronting by crafting specific language for delays and increased costs resulting from the COVID-19 pandemic.

Sample language for consideration:

Notwithstanding the requirements and obligations set forth in the Contract Documents and this Agreement, Contractor shall be entitled to an extension of the Contract Time and an equitable adjustment of the Contract Price, due to labor shortages, material escalation, or otherwise, for the performance of Subcontractor’s Work due to events and conditions beyond Contractor’s control, including the present impacts from the Coronavirus pandemic which was declared a national emergency by President Trump on March 13, 2020 and a pandemic by the World Health Organization on March 11, 2020. Contractor will employ efforts to mitigate such delays and increased costs, in consultation with Owner, and will provide regular updates to Owner as to any time or cost impacts resulting from this provision. Disputes as to the entitlement of extensions of Contract Time or increases in the Contract Price shall be resolved pursuant to the Dispute Resolution provisions* of this Agreement.

* In addition to the clause that allows for claims of additional time and money, parties should consider agreeing upon the processes of a Project NeutralInitial Decision Maker (AIA terminology), or Dispute Review Board (larger / governmental projects) so that prompt decisions may be made during project performance. This would allow for the numerous issues likely to arise during this pandemic to be responded to in real time allowing the project to move forward. These can be drafted as advisory or binding decisions – or a mix of both – binding during project performance subject to rights to preserve an ability to appeal/contest the interim finding.

Many owners may object and/or push back to such a clause, but proposing this specific language to address projects being performed during this unprecedented coronavirius outbreak will start the contract negotiations and performance off in the right direction by encouraging the parties to proactively collaborate and communicate regarding impacts arising from the global health crisis.

Coronavirus and Construction Contracts

Meghan DiPerna, Kenneth H. Lazaruk and Brian A. Shue | Duane Morris

As COVID-19 continues to spread throughout the country, it will impact project performance.

As you have undoubtedly heard, coronavirus disease 2019 (COVID-19) is affecting the global construction industry.

Notably, as of March 17, Boston halted all construction jobs in the city for two weeks due to the COVID-19 pandemic. This decision has affected approximately 21.4 million square feet of new or renovated development across 97 projects. Other municipalities have implemented travel restrictions and shelter-in-place orders requiring individuals to stay at home except as necessary to provide certain essential business and government services. These domestic actions, coupled with tighter border controls and quarantines at the international level, will inevitably result in supply chain disruption and labor force shortages.

As COVID-19 continues to spread throughout the country, it will impact project performance. Below are some important contract considerations that parties should keep in mind as they evaluate their response to project delays and closures, safety concerns, and vendor and workforce unavailability.

Force Majeure

A force majeure clause in a construction contract sets forth the conditions under which one party is excused from performing. These conditions tend to have two predominant elements: that the condition was unforeseeable and that parties lacked control over the condition. A force majeure clause should be read carefully, as it will specifically identify what events excuse a party from performance.

Some force majeure clauses, such as Section 8.3.1 of the AIA A201-2017, General Conditions of the Contract for Construction, will refer generally to “causes beyond the Contractor’s control” and “other causes that the Contractor asserts, and the Architect determines, justify delay.” Others, such as 48 CFR 52.249-10, a Federal Acquisition Regulation (FAR) provision applicable to government contractors, may specifically mention “epidemics” and/or “quarantine restrictions.” Still others will reference acts of governmental bodies that affect the supply or availability of labor or materials.

Contractors intending to rely on a force majeure clause in a construction contract to excuse timely performance as a result of COVID-19 must pay close attention to the notice provisions therein. Failure to notify a party of a force majeure event within the stated timeframe may waive that party’s right to any extension of time to which they might otherwise be entitled. Moreover, contractors should be aware that some force majeure clauses require that the contractor demonstrate efforts to minimize the period of delay by commercially reasonable means, which in a situation involving the stalled import of materials from overseas may include finding alternate sources of the goods domestically.

In addition to seeking an extension of time for performance in the wake of COVID-19, contractors may try to recover additional compensation to offset the impact of the outbreak. However, many owner-friendly construction contracts provide that in the event of force majeure, the contractor is entitled solely to an extension of the contract time, and not to any additional compensation as a result of the force majeure event. For instance, owner-developers are often encouraged to include in their construction contracts language making clear that force majeure events and other contemplated delays cannot give rise to any claim for damages or other compensation in the form of an increase to the contract sum, although most sophisticated general contractors and construction managers will negotiate this point.

In New York, “no damage for delay” clauses are enforceable.[1] That said, courts narrowly construe these clauses. Despite the existence of a no-damage-for-delay clause in a construction contract, the courts will allow a contractor to recover delay damages if the contractor can prove that the delays fall within one of the following four exceptions:

  1. Delays caused by the contractee’s bad faith or willful, malicious or grossly negligent conduct;
  2. Uncontemplated delays;
  3. Delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee; and
  4. Delays resulting from the contractee’s breach of a fundamental obligation of the contract.[2]

The contractor bears a heavy burden of proving that one of these exceptions applies.[3] In the context of COVID-19, the relevant question will be whether delays caused by the pandemic were contemplated at the time of contract execution. The case law on this point by and large focuses on the types of delays that are more typically encountered on construction projects, such as whether delays caused by changes, design errors or inept supervision were contemplated by the parties.

Here, parties will have to debate whether the current COVID-19 outbreak was foreseeable or could have been anticipated. Owner and developers, where they can, will point to specific provisions in their contracts that contemplate epidemics, pandemics, quarantines and delays arising from governmental acts to argue that none of the above exceptions apply. Contractors, on the other hand, will argue that the last large-scale quarantine in the United States took place during the Spanish flu epidemic of 1918 and that the current restrictions in effect could not have been anticipated at the time of contracting. Ultimately, whether a particular no-damage-for-delay clause is upheld in the wake of COVID-19 will depend on the specific contract language at issue, as well as the ripple effect of the containment measures, the full degree of which may not be known for weeks or months.

Suspension of Contract

Owners and developers should also look closely at the termination and suspension provisions in their construction contracts when considering their response to the COVID-19 outbreak. If uncertainty and changing circumstances on the ground make continuing with work impossible in the short term, a suspension clause may be a helpful tool in controlling cost and impact for a finite period of delay. This is particularly true when the contract requires the contractor to hold its price for the suspension period.

The parties can also consider if a temporary suspension of the project would allow them time to determine how to proceed with the project in a manner that is mutually acceptable. Owners should be aware, however, that many construction contracts provide that a suspension lasting longer than a specific duration may trigger the contractor’s right to terminate the contract.

In the event of a project suspension, whether voluntary or by order of governmental authorities, the parties must make arrangements to secure the project site and heed all applicable safety requirements. Owners and contractors must ensure that the site is adequately monitored throughout the closure and that the proper insurance remains in place. Careful consideration and discussion should also be given to what will happen when work resumes following such a suspension.

Insurance

Insurance policies, particularly commercial property policies, may help in offsetting the effects of a project shutdown. Many of these policies contain an endorsement for business interruption coverage. Policyholders should carefully read such endorsement to determine whether delays caused by COVID-19 constitute an “occurrence.”

Loan Documents

Owners and developers must also look closely at any underlying loan documents on a project to determine what, if any, notice has to be given to a lender if the project being funded is delayed by COVID-19. Agreements between a lender and borrower will typically contain language requiring that the borrower notify the lender of any force majeure events that it anticipates will materially affect the required project completion date. Owners should be proactive in reviewing all covenants (including financial information and other deliverable requirements), notice requirements and other credit document provisions for potential breaches, and proactively seek to address the concerns of lenders before they become a crisis.

Conclusion

In conclusion, the COVID-19 outbreak continues to be a dynamic situation and the ultimate impact and timeline remain unknown at this juncture. As construction project participants navigate the novel issues it has raised, they should closely evaluate their construction contracts in order to make the best decisions regarding ongoing work and project safety, as well as to implement strategies to mitigate financial and schedule impacts as much as possible. To the extent parties can mutually agree to a resolution or workout plan now, jobs will proceed more smoothly when COVID-19 subsides.

Is Coronavirus a Force Majeure Event?

Michael Kelley | Shutts

Coronavirus (or COVID-19) is already causing significant disruption to businesses around the world, including quarantines and travel bans affecting trade and commerce, manufacturing, construction, hospitality and service industries in an unprecedented way. Now the disruptions are impacting society-at-large, from the closing of restaurants and attractions to remote work models for corporate staff members, “social distancing” and now even mandatory lockdowns in some locations. With this heightened sense of precaution (which is good) bordering on anxiety and panic (which can be very bad), it is crucial for businesses to apply the same level-headed approach to their dealings as they always have. The fact is that COVID-19 would likely not excuse non-performance or even cancel existing contracts, with very rare exceptions.

So what does the coronavirus mean for business, particularly in real estate development, finance and construction? How does it impact real estate transactions, acquisition and finance closings? Are you in breach if you cannot fulfill your agreement, even if your inability is linked to effects – even extraordinary government action – that are linked to COVID-19? While some may assume that the craziness of the pandemic excuses performance altogether, effectively canceling agreements, the reality is that, unless you are dealing with an extremely rare situation, any valid agreement is not simply canceled as a result of coronavirus. Businesses need to carefully review the language of their agreements, which may (or may not) provide for any relief – or the contracted relief may be challenged. And if the contract doesn’t have the right language, one cannot assume any certainty about the consequences of failure to perform.  More than likely, businesses are going to be expected to take action to fulfill their contractual obligations, and the failure to be proactive may end up costing them dearly. How folks need to treat and respond to what certainly appears to be a pandemic will in the vast majority of cases depend solely on the specific language of the contracts involved, including upfront contingencies agreed to by both parties, provisions granting certain relief to either party, and, the hot topic circulating the internet right now, “Force Majeure.”

What is a force majeure clause?

A force majeure clause is commonly included in commercial contracts, addressing what parties are supposed to do under certain defined force majeure (“superior force”) circumstances.  These are recognized events that prevent performance of contracts.  They are usually “acts of God” (earthquakes, floods, tsunamis) and certain disruptive, unplanned acts of people (war, labor strikes, terrorism). These clauses are unique to most contracts and have very specific language identifying the types of events covered, the process for claiming or notifying the other party of the force majeure event, and what to do going forward (excused from performance / suspended performance / additional time and/or money / termination, etc.).

In common law jurisdictions, like the overwhelming majority of the U.S., force majeure is not implied as a matter of law – that is, there’s no common understanding of what a force majeure is such that it could be applied by judges or tribunals to normal contract interpretation.  Force majeure clauses must be express, and they will be interpreted strictly according to their precise language. Even a widely-worded force majeure clause may not necessarily capture events such as COVID-19, and the party relying on the clause will still likely need to prove that the event was not “reasonably contemplated” by the parties when making the contract, and that the event is “beyond reasonable control” of the party seeking relief.

What should my next steps be?

Review – In light on the current pandemic, it is important to review every contract you have that requires some form of fulfillment of goods or services, or some sort of financial action or commitment over the next 90 days.

Be proactive – It is also important to be proactive in seeking information and communications from your business relationships (suppliers, contractors, customers, owners) regarding the impact of the virus and how best to avoid or mitigate potential disruptions.

Seek legal advice – If you or your real estate investment, development, or construction business is at risk, contact a construction attorney with significant experience in contract delay litigation, insurance coverage disputes, bonding issues – performance and payment challenges, and particularly force majeure clauses. An experienced attorney with a solid understanding of how these events are likely to be resolved by the courts can help avoid potential disasters to existing business and long-term relationships.

Managing Project Risk Associated With The Coronavirus Outbreak Through Force Majeure Provisions

Sara Beiro Farabow | Seyfarth

Globally, many developers and contractors are scrambling to identify available contractual relief as the Coronavirus (COVID-19) disrupts cross-border supply chains. US businesses will recall a similar effort just eighteen months ago, when the Trump Administration announced increased tariffs on $300 billion of Chinese goods. That trade war prompted companies to scrutinize remedies and mitigate associated project risks by tapping alternative sources originating in other Asian countries and Canada. Once again, construction industry stakeholders should reexamine delay provisions in pending and future contracts to mitigate risks arising from project disruptions caused by COVID-19.

This article provides an overview of US case law interpreting the doctrine of force majeure in the context of disease-related delay claims. Drawing on that guidance, we then identify practical considerations for applying existing force majeure or related delay provisions and how they may be modified for future projects.

Project Risk Associated with the Spread of the Coronavirus

Reports of a slowdown in the construction industry have been growing in the past weeks across multiple respected industry publications, including Engineering News-Record.1 Because of its severity, the Coronavirus outbreak is expected to disrupt supply chains across the globe in the construction industry, as well as in manufacturing and other sectors. This ranges from worker shortages, transportation disruptions, and closures of production plants and ports of entry to restrictive governmental action, such as bans on travel and mandated quarantines. Yet the full impact remains largely speculative as scientists and construction executives assess the daily breaking news. As recently observed by the Chief Economist of the Associated General Contractors of America (AGC):

The coronavirus outbreak continues to spread globally each day but the impact on U.S. construction remains speculative. So far, there do not appear to be any reports of cancelled, deferred or interrupted construction projects, nor of delays or shortages of construction equipment, parts or materials. However, the disruption to Chinese production and shipping is increasing, adding to the likelihood that some construction products and projects will be affected.2

To cut out much of the media’s speculation and potential misinformation, readers may check the official CDC and WHO guidelines at CDC Coronavirus Disease 2019 (COVID-19) and WHO Coronavirus Disease (COVID-19) Outbreak webpages.

What is a Force Majeure Provision and Where is it Buried in Your Contracts?

Force majeure clauses operate to excuse performance obligations or to extend time of performance on a contract when an unforeseeable event, or one that is “beyond the contractor’s control,” causes project delay. While not well standardized in the United States, such provisions often include both “acts of God” and “acts of Governmental Entities,” as well as an assortment of other possible delaying events. Two of the most commonly-used industry published contracts forms—The ConsensusDocs© Coalition (ConsensusDocs©) and the American Institute of Architects (AIA®)—do not use the term “force majeure.” Instead, the operative language is in the overall delay provisions of the contracts.

In the AIA® suite of contracts, the delay provision is found in the AIA Document A201″ – 2017, “General Conditions of the Contract for Construction,” incorporated into many of the contract forms. In particular, Section 8.3.1, “Delays and Extensions of Time,” describes some force majeure-type events which may permit an extension to the Contract Time:

§ 8.3 Delays and Extensions of Time

§ 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.

§ 8.3.2 Claims relating to time shall be made in accordance with applicable provisions of Article 15.

§ 8.3.3 This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.

Similarly, ConsensusDocs© describes various force majeure type events in the main agreement between the Owner and Constructor—but also specifically identifies “epidemics.” The ConsensusDocs© 200, “Standard Agreement and General Conditions Between Owner and Constructor (©2011, Revised May 2017) includes a non­exclusive list of thirteen force majeure events in Section 6.3.1, “Delays and Extensions of Time.” This provision cites “epidemics” in addition to a more general reference to “transportation delays not reasonably foreseeable” as shown below in the excerpted provision:

6.3. DELAYS AND EXTENSIONS OF TIME

6.3.1 If Constructor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of Constructor, Constructor shall be entitled to an equitable extension of the Contract Time. 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.

6.3.2 In addition, if Constructor incurs additional costs as a result of a delay that is caused by items (a) through (d) immediately above, Constructor shall be entitled to an equitable adjustment in the Contract Price subject to §6.6.

6.3.3 NOTICE OF DELAYS If delays to the Work are encountered for any reason, Constructor shall provide prompt written notice to Owner of the cause of such delays after Constructor first recognizes the delay. The Parties each agree to take reasonable steps to mitigate the effect of such delays.

The nine causes listed in ConsensusDocs© Section 6.3.1’s subsections (e) through (m) are customary force majeure events. Like the AIA®, the above Section 6.3.2 of the ConsensusDocs© provides for an equitable adjustment to the contract time, but not the contract price, should a force majeure event occur.

US Case Law Interpreting Delay Claims Predicated Upon Disease Outbreak

While the question of whether a particular disease outbreak constitutes a force majeure event turns on the language of the provision and applicable law, there is not extensive published case law in the United States involving disease outbreak. In the relatively small number of judicial opinions that have analyzed whether a certain disease outbreak constituted a force majeure event, courts have focused on the extent to which the outbreak was an unforeseeable event precipitating a dramatic change in market conditions.

In a 2003 case involving the supply of hogs from three farms, the court noted that an outbreak of Porcine Reproductive and Respiratory Syndrome (PRRS) which affected hog production constituted a force majeure event for purposes of summary judgment.3 In SNB Farms, Inc. v. Swift & Co., the contract at issue provided: “[w]here either party claims an excuse for nonperformance under this Section, it must give prompt telephonic notice, promptly confirmed by written notice, of the occurrence and estimated duration of the Force Majeure Event to the other party; and shall give prompt written notice when the Force Majeure Event has been remedied and performance can recommence hereunder”4 (applying Colorado law). At issue on summary judgment was whether the non-performing parties had provided sufficient notice, as required under the force majeure clause, to be entitled to the excuse of force majeure. For one breaching party that had notified the non-breaching party of PRRS in a letter and orally, the court held that the notification question was appropriate for a jury to decide.5 However, for the remaining two breaching parties, who did not raise the PRRS issue or claim force majeure in their quarterly estimates, the court held that they were precluded from asserting the defense.6 Accordingly, summary judgment was appropriate against those two entities.

By contrast, in Rexing Quality Eggs v. Rembrandt Enterprises, Inc., a federal court in Indiana applying Iowa law held that falling consumer demand did not constitute a force majeure clause.7 In reaching its holding, however, the court noted “[u]nlike the avian flu example, which may plausibly constitute an unforeseeable event precipitating a dramatic change in market conditions, a change in purchaser demand—even a substantial change—is a foreseeable part of doing business.”8

Regardless of whether it is ultimately declared a pandemic, courts may logically find the Coronavirus outbreak to be beyond the “reasonable control of the party” and fall within the meaning of “acts of God.”9 If the quarantines and travel restrictions put into place by governments render the contractor or subcontractor unable to perform, these actions may constitute a valid “Governmental Entities” act excusing performance.10 For some construction project stakeholders holding contracts that are silent with respect to disease-related delay, they must rely upon these more general contractual language referring to events beyond its control, acts of God or Governmental Entities.

A more compelling claim of force majeure delay caused by the Coronavirus outbreak is found in construction contracts that specifically identify “disease,” “epidemic,” or “pandemic” in the definition of a force majeure or delay event. This is especially crucial in some jurisdictions, such as New York, where courts have ruled that a delay beyond the control of the claiming party may only excuse performance if the event has been expressly listed in the governing delay or force majeure clause.11

The fact that currently 61 countries have reported COVID-19 cases to the World Health Organization distinguishes it from other epidemics.12 With that, courts in the United States may be more willing to find that both the outbreak and governmental responses were unforeseeable or beyond the control of either party. Notably, this is only the sixth time that the WHO has declared a disease outbreak to be a Public Health Emergency of International Concern (PHEIC) since being vested with that authority in 2005, two years after the SARS outbreak.

Practical Considerations for Modifying Force Majeure-Related Provisions

Below are some practical issues businesses should consider when reviewing or re-negotiating their force majeure clauses:

  • Does your contract specifically include some reference to delay caused by disease, such as quarantine, outbreak of disease, epidemic, or pandemic? Or does it only generally reference events that are beyond the parties’ control?
  • If a force majeure event occurs, does it entitle the contractor to an equitable adjustment in the contract time?
  • If a force majeure event occurs, is the contractor also entitled to an equitable adjustment in the contract price? Should any entitlement to an increase in the contract price be limited to the contractor’s direct costs?
  • Consider whether the contractual definition of a force majeure event should include both epidemic and an increase in tariffs, given the recent volatility in the tariff wars and the extent to which the project’s supply chain originates outside of the United States.

Below we provide a sample robust definition of force majeure that includes both disease and tariffs:

Force Majeure Event includes, but is not limited to, any intervening act of God or public enemy, war, invasion, act of terror, hurricane force winds, tornados, strikes or labor disputes, riot or other public disorder, disease outbreak, epidemic, pandemic, or other declaration of public health emergency, quarantine restriction, and any act of any governmental body or authority that results in the imposition of a tariff or duty on imported materials required under the Contract Documents which was not applicable as of the Effective Date of this Agreement.”

Owners, contractors, and subcontractors should carefully negotiate the definition of force majeure to allocate the risk in a commercially reasonable manner. Rather than seeking to shift the risk disproportionately to the party with the weaker bargaining strength, parties should consider an allocation of risk that is both fair and furthers the shared goal of achieving successful project delivery.

Seyfarth Shaw’s Workplace Safety and Environmental Group has organized a Coronavirus task force that presented a webinar, “Coronavirus Part 2: Preparing for a Potential Pandemic — New Employer Challenges,” on March 2, 2020. This webinar updated employers about the latest information on coronavirus. You can view the slides and view to the recording.

Footnotes

[1] https://www.enr.com/articles/48595-supply-chain-impacts-rise-as-china-coronavirus-spreads.

[2] Ken Simonson, Coronavirus impacts loom but have yet to affect construction inputs or projects, AGC Data Digest, Vol. 20, No. 8, Feb 17-28, 2020.

[3] No. C01-2077, 2003 WL 22232881, at *10 (N.D. Iowa 2003).

[4] Id.

[5] Id.

[6] Id.

[7] 360 F. Supp. 3d 817, 841-42 (S.D. Ind. 2018).

[8] Id. at 841 (emphasis added).

[9] See, e.g.Am. Nat. Red Cross v. Vinton Roofing Co., 629 F. Supp. 2d 5, 9 (D.D.C. 2009) (“‘[a]n Act of God’ is the result of the direct, immediate and exclusive operation of the forces of nature, uncontrolled or uninfluenced by the power of man and without human intervention, and is of such character that it could not have been prevented or avoided by foresight or prudence”).

[10] See, e.g.Harriscom Svenska, AB v. Harris Corp., 3 F.3d 576, 580 (2d Cir. 1993) (finding that government’s prohibition on sale of goods classified as military equipment to be “government interference” within the meaning force majeure clause).

[11] See, e.g.Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989) (citing Kel Kim Corp. v. Central Markets, Inc., 524 N.Y.S.2d 384, 385 (1987)).

[12] https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—2-march-2020 (WHO Director-General’s Opening Remarks at Media Briefing on COFID-19, March 2, 2020)