The coronavirus pandemic presents significant risks and potential losses and liabilities to contractors, so here is a quick snapshot of where and how this disease is most affecting the construction industry.
Project Delays
The Coronavirus pandemic is already causing project delays, which are likely continue for the foreseeable future. As the disease spreads and more construction employees become ill or are quarantined after testing positive for the virus, expect personnel shortages and work slowdowns.
State and local government mandates can also lead to project delays. Most states imposed “shelter in place” orders that prohibited individuals from leaving their homes, except for those services considered “essential.” Fortunately, construction has been deemed an essential service in many states. The pandemic may also lead to material shortages that delay projects, especially of building materials and systems manufactured in China, by far the largest provider of these commodities.
Shortages of American-made goods are cropping up as well. Unfortunately, when projects are delayed, clients often look to others to share the blame and often that includes the contractor, since that is who is responsible for purchasing the materials to begin. Clients eager to complete their projects may file delay claims in an attempt to recoup direct losses. Making matters worse, they may also seek consequential as well as liquidated damages. What contractual protection does a construction firm have from being held liable for project delays caused by circumstances such as the coronavirus pandemic? The key phrase is “force majeure.”
Force majeure is a legal concept which states that individuals and entities are not liable for “acts of God” and other forces beyond their control. A typical force majeure contract clause between a client and a contractor states that neither party is liable to the other for delays or other failures to perform according to contract terms when the failure to perform is due to causes such as wars, riots, revolutions, terrorism, wildfires, floods, earthquakes, storms, epidemics, pandemics and other acts of God beyond the control of either party. The concept of force majeure may be upheld as common law by courts and other dispute resolution venues in various jurisdictions, even absent specific contract language (contractors should check the specific laws in states where they work). Still, it never hurts to include a force majeure clause in contracts with clients, subcontractors and other third parties.
Cost Overruns
Project interruptions caused by the coronavirus can result in cost overruns. The longer the project is delayed, the greater the chances of unanticipated expenses. When contractors are forced to extend the amount of time to complete construction, the result is often added hours and likely overhead overruns. The cost of materials may also increase as they become scarcer and more difficult to find. Materials become unavailable altogether and more expensive substitutes may be required. As the extra costs to the client mount, the greater the chance that the contractor will be blamed.
As with project delays, the concept of force majeure may be the basis of a solid common law defense in the case of cost overruns that are the result of a pandemic or other act of God. If as part of a contractor’s services, cost estimates are provided, these should be qualified and ideally referred to as an “opinion of probable cost.” An “opinions” clause should acknowledge that the contractor has no control over the eventual cost or availability of labor, materials, equipment and systems. It should state that the contractor’s opinion is based on professional judgment but that the contractor makes no warranty or guarantee of the eventual cost, which may vary significantly from projections.
Suspension of Services
Eventually, a client dealing with the financial strains caused by the coronavirus may suspend an ongoing project. This results in loss of future income to the contractor and the probable need to layoff employees idled by the suspension. Chances are, the principle of force majeure will protect the client from liability arising out of work stoppage. But what about the work completed to date on the project? Is there anything a contractor can do to ensure payment for work already performed? A suspension-of-services contract clause may provide leverage for a contractor looking to get paid for work completed. Such a clause may state, for example, that if a client suspends a project for more than 30 days, the contractor will be immediately be compensated for all services performed prior to the notice of suspension.
Further, the clause may specify that if a project is suspended for more than 90 days, the contractor has the right to terminate the agreement and add compensation for the additional time and expenses related to restarting the project. If there is suspension of services contract language in current contracts, contractors should have added leverage in negotiating a mutually acceptable solution. For instance, they may negotiate a payment plan that fits the clients limited resources. Pursuing litigation to force the client to pay may be unfruitful unless it can be shown that the client is financially able to make those payments.
In light of the above, and other liabilities, the contractor and attorney should review all active contracts with clients and subcontractors to gauge the extent of liability for losses created by the pandemic. Do any of the contracts include force majeure clauses? Are epidemics and pandemics specifically included as causes of loss? Do contracts include cost-estimate or opinion-of-probable-cost contract clauses? Are there suspension of services clauses? Under what conditions can operations be suspended or contracts terminated completely?
It’s Time for Contract and Insurance Reviews
Look for contract language that addresses rights and responsibilities related to unforeseen conditions, including the right to expand schedule and original cost estimates. Look for any “express notice” provisions that may require the contractor to report delays, additional costs or other unexpected conditions to specific parties (client, design professionals etc.) within a specific timeframe. Create a written record of notification activities and seek written confirmation from the client and other parties that the contractor complied with these notice provisions. Of course, current contracts that lack protection from the coronavirus-caused losses cannot be amended without written agreement of the client or other party to the contract. Contractors and their attorneys should certainly consider adding such protective clauses in future contracts.
Policies to review for possible coverages include:
- General Liability-Bodily Injury. Should someone allege they received bodily injury due to contracting COVID-19 at the office or project site, the general liability policy would likely not kick in unless the injured party could prove negligence on the contractor’s part.
- Property Losses. Most property policies contain a specific microbe or virus exclusion. Absent the exclusion, a contractor may have coverage for the cost of the cleaning services to remove the virus from a premises. A first party pollution policy may offer coverage. Regardless the exposure to property itself is fairly small.
- Workers’ Compensation. Should an employee become infected with COVID-19 arising out of occupational employment or being put in “peculiar” high-risk conditions (e.g., attending a large company gathering during a pandemic), workers’ compensation insurance coverage for pandemic-related losses may be available. Policy language will determine the extent of coverage.
- Environmental or Pollution Losses. An environmental or pollution policy may cover some of the cost of cleanup activities. Check the policy language for coverages and limits.
- Business Interruption. Most Business Interruption policies will have a microbe or virus exclusion. Even if they don’t, in order to trigger coverage there would have to be direct damage to an insured property. If people can’t come to work or if a job site is shut down or a project is delayed because of a government mandate, there is no direct damage to covered property and coverage would not apply. Regardless, it is the insurance company’s responsibility to adjust claims.
A quantifiable loss, whether or not it might be covered, should be turned in to the insurance company for evaluation. Ultimately it is their decision as to whether or not coverage would apply. Policy language is key to determining whether any COVID-19-induced losses will be covered. As a rule, it’s advisable to file a claim or pre-claim incident and let the insurance company make a determination of whether coverage is triggered and what is or is not covered.
Ask clients to explain their state of affairs and what they would like to see happen during work stoppages and delays. Review contract language to determine rights and duties previously agreed to. Discuss interim steps to stabilize the situation or possibly move the project forward. Discuss possible addendums to contract agreements. Schedules and budgets may need to be adjusted to reflect the new reality. The health of the team and the public in general is the first priority. Clear minds, common goals and an esprit de corps among all parties to the project can go a long way toward surviving these troubled times.
