How Does COVID-19 Affect Construction Contracts?
In the construction industry, timely completion of construction projects is always a top priority for owners and developers. With the coronavirus disease (COVID-19) reaching pandemic levels across the world, construction industry clients in the State of Ohio have been particularly focused on how the outbreak will impact their ongoing and future developments. While this pandemic is unprecedented for modern construction, outside forces and market factors have long played a role in the success of a project. How the parties have contractually agreed to handle the potential impact of those factors will also affect the success of a project.
Is COVID-19 force majeure?
The concept of force majeure is common in construction contracts. It’s literal definition of “superior force” is intended to outline situations when all or part of a contract can’t be performed due to various causes outside of a party’s reasonable control. Typically, the definition requires that the circumstances be unavoidable or, more colloquially, “acts of God.”
Contracts and common law definitions of force majeure vary widely. Commonly used industry form agreements vary in the way they handle “force majeure.” For example, nowhere in the American Institute of Architects form general conditions (AIA A201-2017) is the term force majeure actually used. Rather, Section 8.3.1 provides for extensions of time for similar categories that most people consider force majeure. Specifically, it sets forth
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 220.127.116.11, 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.
Section 8.3.1 (emphasis added). Similar to the often-used definition of force majeure, the AIA documents include a general catch-all for “other causes beyond the Contractor’s control” to permit additional time to perform.
Contrast the AIA language to that included in many CONSENSUSDOCS agreements on the extent of delays:
If the critical path of the Project is delayed at any time by any cause beyond the control of the Design-Builder, the Design-Builder shall be entitled to an equitable extension of the Date of Substantial Completion or the Date of Final Completion. Examples of causes beyond the control of the Design-Builder include, but are not limited to, the following: (a) acts or omissions of the Owner or Others; (b) changes in the Work or the sequencing of the Work ordered by the Owner, or arising from decisions of the Owner that impact the time of performance of the Work; (c) encountering Hazardous Materials unanticipated by the Design-Builder, or concealed or unknown conditions; (d) delay authorized by the Owner pending dispute resolution or suspension by the Owner under section 12.1; (e) transportation delays not reasonably foreseeable; (f) labor disputes not involving the Design-Builder; (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.
CONSENSUSDOCS 410, Section 6.3. Although pandemics and epidemics are not expressly addressed in many force majeure clauses, catch-all language such as “events beyond a contractor’s reasonable control” may be interpreted to include a worldwide pandemic.
Even if a force majeure clause does not include the “beyond contractor’s reasonable control” or equivalent language, governmental actions taken because of COVID-19 may be construed as force majeure events, e.g., if such actions affect the delivery of materials because of shut-down ports or embargoes, or if construction activity is ordered to cease. it is possible that many Ohio cities will halt construction projects as the pandemic temporarily as the pandemic continues.
The term force majeure is used widely in the construction context – even haphazardly at times – but the terms of your agreements will govern when and for how long time may be extended.
Are there other potential bases for excusing delay due to COVID-19?
Even if pandemics are not included in your force majeure provision, a contractor could argue that its performance was rendered impossible or commercially impracticable, which are defenses to a party’s performance of a contract in certain jurisdictions. Impracticability may also apply if an unforeseen event occurred to make performance impossible or unreasonably difficult or burdensome. The event typically must be such that the parties cannot have reasonably foreseen it happening, and it cannot have been within the parties' control. A typical example is when due to war, critical components are either impossible to obtain or so expensive that it makes the transaction commercially impractical.
In what construction context will COVID-19 arise?
Unfortunately, COVID-19 will likely impact the construction industry in several key ways. In particular, production, delivery and on-site labor may be affected. Availability of supplies and materials from international suppliers, including, for example, Chinese manufacturers of curtain walls and steel, may be limited given temporary cessation of manufacturing abroad potentially impacting supply chains.
Additionally, transportation delays in delivery may occur, especially if countries and access points are put on lockdown or slowed dramatically. This may spur more production and delivery at a local or domestic level; but, depending on the nature of the product and its source, delivery may become a significant issue.
As of this writing, job sites in most cities are proceeding, at least those with employees under certain limits (e.g., 50 or fewer employees), but shutting down construction sites may not be unexpected, given that large gatherings have been canceled across many major metropolitan areas. The definition of a large gathering could foreseeably include a construction site. Further, on-site protocols for sanitation and cleanliness are more important than ever and susceptible to scrutiny by inspectors and others.
Is there a duty to mitigate?
In Ohio, parties to a contract generally have a duty to mitigate damages, and the construction context is no different. What it means to mitigate in the context of COVID-19 depends, however, on a variety of factors. For those providing design services, working remotely may allow for design to continue or allow for continued review and submission of submittals and similar documentation. Can a contractor stagger on-site employees to allow for limited person-to-person contact within shifts? If shifts cannot be staggered, can different trades work in different parts of a building? Are other measures available to allow for critical path trades to continue their work?
It’s important to note that the duty to mitigate, when required, is typically the responsibility of both parties to a contract. For an owner or developer, even if COVID-19 is not included in the force majeure clause, they are encouraged not to ignore the issue just because it may be seen as the contractor’s problem. First and foremost, owners and developers are encouraged to work with the contractor as a partner to get in front of any potential issues – reaching out to them to discuss the current status of the project, where potential delays in shipments and supplies may be most critical, workers’ availability, and contacts with suppliers to determine if there are any looming delays or other COVID-19 impacts.
Second, if an owner or developer is developing a project on a build-to-suit basis or with an end-user client in mind, it may be helpful to contact the client to address commitments for timely delivery. Developers might seek to transfer the extensions of their own commitments to third parties in the same manner.
How about impact to current negotiations?
We have already seen, and expect to continue to see, contract negotiations to specifically address delays associated with COVID-19. Owners and developers may similarly seek extensions in the same vein in loan or other similar documents that have time components (e.g. development agreements with cities or end-user clients). Nevertheless, such COVID-19 qualification provisions could specifically and narrowly define the COVID-19 virus impacts and require contractors to exercise reasonable efforts to mitigate the effect of COVID-19.
If you have questions about how COVID-19 can affect your construction matters, or have any questions concerning construction projects, please do not hesitate to contact the Law Offices of Kevin C. Cox for further information.