The size and scope of the ongoing coronavirus disease 2019 (COVID-19) pandemic continues to increase, seemingly by the hour. The impact of the pandemic on our economy will resonate for some time. We know that adverse impacts of COVID-19 on the construction industry will include: (i) supply chain disruptions of materials made abroad and at home; (ii) construction workers who may contract COVID-19 and cannot work from home; and (iii) economic disruption in parties’ ability to pay, whether it be an owner, contractor or subcontractors. Construction contracts often include provisions that govern such disruptions, called force majeure provisions.
We’re about to hear a lot about the term force majeure. The term force majeure has Latin and French origins and means “superior force.” Force majeure provisions protect contractors against extraordinary events that render parties unable to fulfill their contractual obligations. These provisions are not intended to protect against events that are anticipated or are able to be controlled.
The types of events that trigger force majeure provisions include fires, floods, labor strikes, riots and war. Regardless of whether the phrase “force majeure” is used, a well-written construction contract should include such provisions. For example, the American Institute of Architects (AIA) form contract documents do not refer to force majeure provisions using that term. Section 8.3.1 of the 2017 AIA form A201, General Conditions of the Contract for Constructions, provides:
If the Contractor is delayed … by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions …, or causes beyond the Contractor’s control; … the Contract Time shall be extended by Change Order.
Force majeure provisions, then, allocate risk among parties to a contract. These provisions usually consist of: (i) a list or inclusive definition of triggering events; (ii) a detail of the relief granted upon such events (in the example above, an extension of time to complete performance); and (iii) procedural obligations, such as written notice, that parties must follow.
What Parties to Construction Contracts Should Do Now
Parties to construction contracts should review those contracts for force majeure provisions now. What obligations does a party claiming under a force majeure provisions have? What notice provisions exist? What type of documentation may be required? Failure to abide by notice and documentation requirements may preclude a party from the relief otherwise provided.
For example, Section 18.104.22.168 of the 2017 AIA form A201, General Conditions of the Contract for Constructions, provides:
If the Contractor wishes to make a Claim for an increase in the Contract Time, notice as provided in Section 15.1.3 shall be given. The Contractor’s Claim shall include an estimate of cost and of probable effect of delay on progress of the Work.
Section 15.1.3 provides that notice “shall be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.”
COVID-19 was unquestionably unanticipated and outside of the control of owners and contractors. Contractors likely know now that COVID-19 will cause delay in deliveries. Parties adversely impacted by COVID-19 should be proactive in providing required notice. Be sure to review your contract and follow any specific methods of notice. Depending upon the information required by contract to be provided in such notice, parties should be specific regarding the impact of COVID-19 on time extensions, delay costs and material escalations. Providing formal notice now will be helpful in opening the lines of communication between parties regarding increased costs, delays and any steps that can be taken now to mitigate them.
Other contract provisions may require specific documentation of the event triggering the force majeure provision and its implications. Contractors should understand that they must demonstrate a causal connection between COVID-19 and delays. It is not enough to simply show both the existence of a pandemic and coinciding delays on a project – you must show that the delays were directly related to the pandemic (for example, that the materials were critical path materials that were delayed because of supply chain issues out of China).
Contractors should begin to document now adverse effects of COVID-19 on existing projects. Document how the virus has interfered with delivery of materials, access to a project, interruption of work flow or labor shortages, and bring these issues up at Owner Architect Contractor meetings to have them documented in meeting minutes and daily field reports. Owners, on the other hand, should push contractors to confirm right now what delays, if any, are expected.
What Parties to Construction Contracts Should Do Moving Forward
One major implication of living through the COVID-19 pandemic is how parties will negotiate force majeure provisions going forward. By definition, force majeure clauses are not intended to protect against events that can be anticipated. Obviously, we are all acutely aware of COVID-19, and this should be considered in current and future contract negotiations. As for on-going construction projects, existing contracts should be reviewed. Parties need to review the contracts for any terms that may have some application, Notice and claim requirements need to be identified and followed. Additionally, parties need to focus on particular impacts of the pandemic on their ability to perform, keep contemporaneous records and documents, and consider action plans of how to appropriately protect their interests, now and in the weeks and months to come.