The COVID-19 pandemic has affected every industry throughout the United States, including construction, in innumerable ways. While the health and well-being of all personnel is of paramount importance to everyone, this article focuses on two business issues: first, contractors’ claims due to the pandemic and government-related stoppages and defenses thereto, and second, negotiating contracts on a going forward basis.
Before a contractor asserts a claim arising from the pandemic, it should review its contract. In anticipation of such a claim, an owner should also review its contract. Every contract presumably includes a force majeure provision, which entitles the contractor to an extension of time to perform its work, and possibly, an increase in the contract sum caused by matters beyond the contractor’s reasonable control.
While this article addresses contracts that include a force majeure provision, even if a contract does not include such a provision, or provides that a contractor is not entitled to damages for delays, the contractor may nonetheless be entitled to relief under applicable law. Assuming the matter proceeds to dispute resolution, while the owner may try to persuade the arbiter to abide by the terms of the parties’ contract, the owner should also remain cognizant of this issue.
Again, while both the owner and contractor should review their contract, any of the following, or a combination thereof, may provide the basis for the contractor’s entitlement to relief:
- a government shutdown, in whole or in part, of the project; the unavailability of labor and materials; and
- social distancing rules that impact the progression of the work.
While the foregoing may provide the basis for the contractor’s entitlement to relief, the owner would not be precluded from arguing to the contrary (for example, while the contractor may be unable to obtain certain materials from its usual source, the contractor has a duty to mitigate the delay and any damages and must establish that such materials are wholly unavailable).
If a contractor believes that it is entitled to relief due to the pandemic, at a minimum, it is imperative that the contractor does the following:
- promptly advise the owner of its claim in accordance with its contractual obligations; and
- keep contemporaneous, accurate and easy to decipher records substantiating its claim and timely provide copies of such records to the owner.
It is very much in the owner’s interest to insist that the contractor proceeds accordingly to allow the owner to evaluate the claim. Such records should evidence the impact of the COVID-19 pandemic and related delays on both the schedule and the contractor’s costs, if any (for example, the contractor’s additional general conditions costs).
Negotiation of Contracts on Future Projects
First, the parties need to determine what constitutes force majeure; that is, does force majeure include the catch-all referenced above (matters beyond the contractor’s reasonable control), something more specific, or a combination of the two?
Both parties should understand that force majeure provisions are almost universally included in construction contracts. The only anticipated changes to a pre-COVID-19 force majeure provision are the inclusion of references to pandemics and epidemics and social distancing rules. The foregoing is consistent with an owner and its contractor’s interest in maintaining site safety.
Second, the parties need to determine whether the contract will include a no-damages-for-delay clause, and if not, to what extent the contractor will be entitled to an increase in the contract sum and an extension of the contract time in the event of delays beyond its reasonable control.
Third, while the contractor will argue for ample time within which to assert a claim, it is wholly understandable for an owner to attempt to limit the time between an occurrence and the contractor’s right to assert a claim. The owner and others, including, if applicable, its lenders and insurers, should be able to contemporaneously investigate a claim, and the owner should not be inundated with claims at the end of or after completion of the project.
Also, the parties need to determine if an objective standard will be imposed on the contractor (for example, requiring the contractor to recognize an occurrence within the time in which a similarly situated contractor would), and whether the contractor’s failure to comply with its contract’s notice requirements constitutes a waiver of its claim.
As always, the last tip for all parties is to engage knowledgeable and experienced counsel who can advise them.
