CONSTRUCTION IN THE TIME OF CORONAVIRUS
As the Coronavirus spreads across the United States, construction projects will see delays and impacts. Projects may be shuttered because of court and public safety orders, or they may wind down as contractors and subcontractors are unable to work at full capacity.
The legal rights of contractors, subcontractors, vendors, sureties and owners on these projects will largely be determined by the language in their contracts, whether an event has occurred that permit the parties to shut down a project (e.g. force majeure), and what remedies and/or provisions in the contract are available to each party in that event.
Work Under Shelter-in-Place Orders
Several municipalities have already issued orders which, generally, close all “non-essential” businesses. Municipalities differ with respect to whether “construction” is an “essential activity” and some make a distinction between residential and commercial construction. A sample survey of municipalities reveals that:
- NYC, Philadelphia, Las Vegas and Dallas – All construction is “essential” and permitted to continue.
- San Francisco – Only residential construction is permitted to continue.
- Boston – No construction is permitted to continue.
Force majeure is French for “superior force”. A force majeure clause in a contract is often referred to as an “act of God” clause. Force majeure clauses generally provide that in situations where an unforeseen force beyond the control of either contracting party prevents a contractor from performing its work, the contractor is relieved from further performance or is entitled to additional time to complete the work, and is potentially entitled to damages. There are two important considerations when evaluating a force majeure clause in a contract: (1) has an unanticipated event occurred that triggers the force majeure clause, (2) is there a causal connection between the event and the inability to perform the work, and (3) if so, what remedies are afforded the parties.
The AIA contract documents do not limit the events that trigger its force majeure clause to natural disasters. Section 8.3.1 of AIA A201-2007 and AIA A201-2017 reads as follows:
The AIA force majeure provision provides that a contractor who believes the performance of its work has been delayed by an event beyond the contractor’s control is entitled to an extension of the contract time.
If your work has been or is being delayed by a force majeure event as that term is defined in your contract, it is important to carefully comply with the notice provisions of your contract in order to preserve your rights under the contract. While different contracts handle the issue differently, Section 15.1.3 of AIA A201-2017 (Section 15.1.2 of AIA A201-2007) requires written notice of claims to be initiated within 21 days after the occurrence of the event giving rise to the force majeure event or within 21 days after the claimant first recognizes the condition giving rise to the claim, whichever is later. Depending on the requirements of you particular contract, such claims based on force majeure should include: (1) a description of the event giving rise to the claim; (2) a description of how the event caused a delay in performance, (3) the anticipated extent, impact or length of the delay on performance of the work, (4) the anticipated costs attendant to the delay, including anticipated increase in material cost, and (5) the remedies you are seeking. The remedies to which you may be entitled due to a force majeure event will be defined by your particular contract. In a standard AIA contract, the aggrieved contractor may only be allowed an extension of the contract time and not additional compensation.
Suspension of the Work
Most contract documents give the owner and contractor the right to suspend work under certain circumstances. The AIA documents contemplate a situation where a project has been shut down due to a court order or national emergency. Section 14.1 of AIA 201-2017 permits a contractor to terminate a contract if work is stopped for 30 consecutive days through no fault of the contractor. Such conditions may result from: (1) issuance of an order of a court that all work be stopped, or (2) an act of government, such as a declaration of national emergency, that requires all work to be stopped. Under such circumstances and after the expiration of 30 days, the contractor must give the owner a seven-day notice if it intends to terminate the contract. If the contractor does elect to terminate the contract under such circumstances, it will not be entitled to further payment from the owner until the work is completed.
Impossibility and Commercial Impracticability
If your written contract does not contain a force majeure clause or if you do not have a written contract, a contractor may be able to use the common law doctrines of impossibility and commercial impracticability to excuse its further performance of work on the project. Impossibility requires a showing that continuing the work has become impossible because of an occurrence that was beyond the control of the parties and that neither party could reasonably foresee the occurrence when they made the contract. Commercial impracticability requires that a contractor show the cost of performance has become totally unreasonable or impracticable because of an occurrence that was beyond the control of the parties; and neither of the parties could reasonably foresee the occurrence when the made the contract. Note that under both the doctrines of impossibility and commercial impracticability, the party claiming impossibility or commercial is relieved of the duty to perform a contract but also has the burden of proving the “impossibility” or “commercial impracticability” in order to benefit from the protection afforded by these common law doctrines.
In the event you are negotiating a contract that does not contain a force majeure provision, you should think carefully about requesting the inclusion of such a provision. While force majeure events may not occur often, when they do they can be devastating to a contractor or owner that is not protected from the consequences of a force majeure event.