Construction Contracts and Coronavirus Complications

As a result of the novel coronavirus (COVID-19), many construction projects around the United States have been, and are being, significantly delayed or curtailed. In many instances, the delays have arisen from supply chain disruptions, state or local government stay-at-home orders, new safety protocols, and workforce disruptions on every level of the construction project — design, field construction, manufacturing, and inspection.

One thing certain to change in the post-COVID-19 world will be protection clauses in construction contracts. Boilerplate legal terms typically couched in fine print, such as “force majeure” and “frustration,” will be closely reviewed by contractors, owners, and their attorneys in the future.

Depending on the circumstances and the terms of the construction contract, the effects of COVID-19 may allow a party to invoke different rights to relief and compensation, or otherwise excuse delays or non-performance. Whether a party to a construction contract will be relieved, compensated, or excused from performance will depend on, among other factors, the language of the force majeure clause, the facts at issue, and the law governing the contract.

Construction businesses should consider the following with regard to current and future contracts:

• Does the COVID-19 disruption constitute a force majeure event under the contract?
• Is epidemic, pandemic, or illness specifically identified in the force majeure clause?
• If not, does COVID-19 fall under some other event often referenced in force majeure clauses, such as an “act of God,” a “natural disaster,” or something beyond the contractors’ control?
• Does the force majeure clause entitle parties to extensions, termination, or some other form of relief or modification?
• Does the law that controls the contract — federal, state, or international — reinforce or limit how the force majeure clause is applied?
• Are there alternate avenues for relief outside of the force majeure clause, such as commercial impracticability or impossibility?
• How should parties impacted by COVID-19 reserve their rights or document their position?

Force Majeure Clauses: Events and Interpretation

Force majeure clauses set forth certain conditions under which a party is permitted to extend, suspend, or terminate a contract as a result of unexpected and unavoidable events. Under U.S. common and civil law, force majeure protection generally extends to natural and unavoidable catastrophes that impact the parties’ ability to perform their contractual obligations and allocates the risk in such events.

So, what constitutes a force majeure event? Generally, a force majeure event exists where said event is unforeseeable and outside of the contractor’s control. In addition to the specific facts at issue, determining whether a force majeure clause offers relief for such an event will likely depend on three factors: (1) whether the language in the force majeure clause specifically references the event as beyond the parties’ control; (2) whether the force majeure event was unforeseeable; and (3) whether the force majeure event caused the party’s non-performance.

In analyzing the contract language, look to see if the force majeure clause specifically references events like “epidemic,” “pandemic,” or “outbreak of disease.” If so, then COVID-19 is almost certainly covered by that cause. Courts will generally construe the precise language of the force majeure clause to exclude events that are not specifically identified. To that end, if the force majeure clause limits covered events to those involving nature, such as “severe floods,” “hurricanes,” or “earthquakes,” the court may be less likely to find that the parties intended to cover the COVID-19 pandemic.

Analysis of specific language used in construction contracts is critical. Standard form contracts, such as AIA and ConsensusDocs, do not have specific force majeure clauses but do, however, contain excusable delay clauses that could likely be applied to COVID-19 delays. For example, AIA forms generally contain language concerning excusable delays, termination, and suspension of work while ConsensusDocs expressly provide relief for “epidemics” as well as termination and suspension of work.

In some instances, the force majeure clause may contain both specific and broad forms of events and include a catchall provision intended to cover potential scenarios other than specific events. Some courts have deferred to common law principles such as unforeseeability to determine whether the event in question is covered by the contract. There, the determination would ultimately depend on what the parties contemplated and if the parties voluntarily assumed the risk of COVID-19, or, more likely, a general pandemic.

Finally, the force majeure clause may reference “acts of God” as an excusable delay or grounds for suspension or termination of the contract. Whether COVID-19 falls under the definition of “acts of God” is dependent on the state where the contract was entered into or where the contract will be performed. Where a state defines an “act of God” to include wars, riots, floods, epidemics, and natural disasters, COVID-19 would likely be covered. However, where a state more narrowly defines “acts of God” as something caused by nature, COVID-19 may not be covered and the court will likely defer to what the parties contemplated with regard to risk allocation.

Other Force Majeure Considerations

A construction business seeking to invoke a force majeure clause must follow the contractual requirements for doing so. A party should pay particular attention to the form and substance of any required notice as well as time limits to provide such notice as required by the contract. Many states demand strict adherence and compliance with the notice requirements, and failure to adhere to even one aspect could render a claim or request for extension void or result in a waiver of entitlements to relief. Parties should keep in mind that a force majeure event that is continuing in nature, or otherwise evolving, such as COVID-19, the contract may require regular updates and reporting of extra costs in order to obtain relief.

COVID-19 will likely not be interpreted as an event that completely relieves a party from its contractual obligations. As such, the general principal of construction contracts that all parties to the contract must mitigate and minimize the impact of adverse events, will apply. Depending on the circumstances and the terms of the contract, the duty to mitigate could include incurring extra costs as the affected party or serve as a condition to relief.

Generally, a force majeure event will only temporarily excuse performance of those obligations impacted by the event, meaning both the affected party and unaffected party must continue to perform contractual obligation not impacted by the event. Upon the occurrence of a force majeure event, an affected party may, however, claim extension of time for performance based on the impact of the event or as long as the event prevents performance, provided that the contract permits such extension. In drastic situations, the contract may also permit termination of the contract should the event continue for a certain extended period of time. Such clauses may require that all or substantially all of a party’s obligations be affected for a specific period of time before termination is permitted. In these situations, parties generally agree to share the costs of the delay.

Planning for the Future

Contractors entering into construction contracts in the future should take necessary steps to minimize the likelihood of disputes, claims, and litigation resulting from the occurrence of force majeure events. When seeking to limit exposure, contractors must be specific and clear in their contract language when defining the scope and effect of a force majeure clause to protect themselves from unexpected liabilities. Moving forward, parties to a construction contract should address future concerns by drafting more precise force majeure definitions, develop flexibility in supply chains to reduce risk of disruption, maintain appropriate records of cost increases, and consider the inclusion of a well-drafted termination clause.

About the author: Keith A. Boyette is an attorney with Anderson Jones, PLLC in Raleigh, North Carolina, a law firm with attorneys licensed in North Carolina, South Carolina, and Georgia. For more information or questions about this article, please email him at [email protected].

Author’s note: This article is intended only for informational purposes and should not be construed as legal advice.