Construction Law Alert: COVID-19’s Impacts on Construction Projects

This article was originally published by Nexsen Pruet and has been reposted with permission.

By Eric H. Biesecker

COVID-19 and the ensuing shutdown of much of the economy will affect construction projects dramatically. Projects have become more difficult to perform as industry participants juggle their obligations to their customers, employees, and the public. The impacts will get worse before they get better. This article identifies some construction law issues facing owners, contractors, subcontractors, and suppliers grappling with the impacts of the virus.

When a contractor or subcontractor cannot meet the project schedule, does COVID-19 excuse the delay and warrant a time extension? It depends on the language of the contract. As discussed by my colleague, David Robinson, in his March 3 Insight, in most US jurisdictions, epidemics, pandemics, and other unforeseeable Acts of God do not automatically excuse breaches of contract. In order to determine whether COVID 19 provides an excuse, begin by looking at the terms of the relevant contract.

Does the contract provide an excuse for breaches that result from pandemics, epidemics, or other acts of God? Industry form documents seem to excuse delays resulting from COVID-19:

• AIA: Article 8 of the AIA Standard General Conditions (Document A201 – 2017) provides in pertinent part that the Contract Time shall be extended if the Contractor is delayed by (a) an act or neglect of the Owner or Architect or of a Separate Contractor; (b) unusual delay in deliveries, unavoidable casualties, or other causes beyond the Contractor’s control; (c) delay authorized by the Owner, or (d) by other causes that the Contractor asserts, and the Architect determines, justify delay.
• ConsensusDocs: Article 6 of the ConsensusDocs Standard Agreement and General Conditions between Owner and Constructor (Document 200 – 2017) calls for an equitable extension of time if the contractor is delayed at any time by “any cause beyond the control of the Constructor.” It specifically lists “epidemics” as an example of a cause beyond the contractor’s control.
• EJCDC: Article 12 of the EJCDC Standard General Conditions of the Construction Contract (2007) is similar to ConsensusDocs. It calls for an extension of the Contract Times where Contractor is prevented from completing any part of the work due to delay “beyond the control of the Contractor.” It specifically lists “epidemics” as an example of a delay beyond the contractor’s control

While a good argument can be made that these documents excuse delays that result from COVID-19, the contractor still should follow contractual notice provisions and demonstrate the extent to which the delay resulted from the virus.

Of course, many contracts do not mirror industry form documents. Subcontracts, especially, come in all shapes and sizes. Many subcontracts do not include any provision excusing the subcontractor’s delay under any circumstances. What then?

When contracts do not provide an excuse, non-contractual law in most US jurisdictions provides only a few legal theories that might excuse contractual breaches. Three examples are:

• Impossibility: Non-contractual common law provides an excuse if a contract becomes literally impossible to perform. Literal impossibility, though, is rare. Impossibility does not apply when a contract has become merely more difficult or expensive
• Frustration of purpose: Non-contractual common law provides an excuse if an uncontrollable event occurs that, as a practical matter, destroys the breaching party’s purpose in entering the contract. The purpose must be so frustrated by the event that the value the party reasonably expected to obtain from the contract cannot be realized.
• Mutual mistake: Non-contractual common law excuses contracts when there is a mutual mistake of fact. The mistake must relate to an existing or past fact that is material and forms the essence of the agreement.

Successful defenses based on impossibility, frustration, or mutual mistake are rare. Whether any of them applies to COVID-19 requires careful analysis. It is not clear whether COVID-19 will justify application of any of these doctrines.

Who bears the financial burden of increased costs and delays?  COVID-19 will make performance of many contracts and subcontracts more expensive. Supply chains will be disrupted, material prices may increase, absenteeism will decrease labor efficiency, and general conditions will be extended. Can a contractor or subcontractor recover its increased costs from its customer?

As with the question of excusability, start the analysis by looking at the terms of the relevant contracts. Do the contracts allow a contractor or subcontractor to change its price or pass price increases upstream? Material price escalation clauses are not uncommon, but application of other contractual provisions is less clear. Carefully examine the differing site conditions clauses to determine whether the conditions on your projects meet the contractual definition of a differing site condition. Some provisions may support a claim.

When an Owner or Contractor suspends or terminates a project or part of a project, who bears the cost? Owners and contractors are carefully analyzing whether they should terminate or suspend projects or portions of projects. Some will opt to press forward. Some will opt to terminate or suspend. Virtually every contract and subcontract allows the upstream party to suspend or terminate the project at any time for any reason, without a showing of downstream default.

The disputes center on who must pay for lost revenue (including overhead and profit) and who bears the costs to demobilize and remobilize. Those questions can be answered only by looking at the relevant contracts. Many contracts require the contractors and subcontractors to bear the costs; many others allow recovery.

Labor and Employment Issues. Employment issues related to the virus are complex and numerous. Employers must balance many competing interests: complying with contractual obligations, producing revenue to pay employees and creditors, protecting employees and the public, and complying with existing regulations like ADA and HIPAA. Congress recently passed the Families First Coronavirus Response Act. Other new laws will follow. Serious consideration of employment issues is beyond the scope of this article. For more information, see various Insights published by Nexsen Pruet colleagues available at https://www.nexsenpruet.com/insights/stay-informed-about-covid-19-coronavirus.

What should construction participants do now? Almost every construction contract requires a claimant to notify the other party in writing as soon as an impact occurs. Construction participants should anticipate as best they can how the virus will impact their work. They should consider not only their obligations to their customers but also the obligations of their subcontractors and suppliers. Can the subcontractors and suppliers meet their obligations?

As soon as a construction participant identifies the current or future problems, they should notify their customer in writing ASAP. They should state the reasons for the problems. Relate the reasons to the virus or impact of the virus. Describe how the virus will impact the project’s schedule and costs. Even if the impacts cannot be quantified, it is essential to provide the notice and identify what can be identified. The person giving notice should reserve rights to give more detail later.

Construction participants must remember to communicate expectations downstream to subcontractors and suppliers. They should let subcontractors and suppliers know their expectations about project compliance, staffing, and health and safety.  Further, participants should ensure that their monthly lien waivers do not release claims based on Covid-19.

By anticipating problems and communicating them early, construction participants will not only preserve their contractual rights, but might find the other party is sympathetic. Working together can mitigate the impacts on everyone.

With respect to the giving of any notice, communicating orally or via text is not enough. The best practice is to email and mail an old-fashioned freestanding document like a letter, change order request, or notice of claim.

If your clients have not already analyzed their projects and communicated with their customers, subcontractors, and vendors, they need to act now.