On Wednesday March 11, Arizona beat Washington in the first round of the Pac-12 Men’s Basketball Tournament and all seemed right in the world. Within 24 hours, everything changed. Not only has every sports league suspended operations to help slow the spread of Coronavirus (COVID-19), but this unanticipated global pandemic has disrupted every aspect of the World, US, and Arizona economies. Although the full impact remains to be seen, anyone who walks down the paper aisle of their grocery store can see something is amiss.
Construction projects are particularly susceptible to the challenges Coronavirus presents insofar they rely on labor and global supply chains. These difficulties, unimaginable just a month ago, will delay countless projects and increase costs in ways that owners, contractors and subcontractors could not have anticipated. The question is who should bear these additional costs?
Ordinary Circumstances
Commercial construction projects often involve thorough contracts that allocate the risks and responsibilities of the parties. When faced with delays and increased costs, the parties should first examine how the contract allocates these risks.
Delays have numerous causes, from errors in plans to unexpected subsurface conditions and ordinary incompetence. Delays deprive the owner of the benefit of occupancy – the property will not be productive. Delays costs a contractor its field-office overhead, including the salary of its superintendent.
When the delay is the fault of the contractor or a subcontractor, construction contracts ordinarily assess liquidated damages, reducing what the owner pays the contractor. When the delay is the owner’s fault, a contractor may be entitled to compensation for its field-office overhead. If the delay is the fault of neither party, each bear its own losses.
With increased costs, the contract also determines which party bears them. For example, in a contract with allowances or a price escalation clause, each party with a price-escalation clause passes the increased cost upward; ultimately, the owner may bear the risk of fluctuations in market prices. In a fixed-price contract without an escalation clause, the party who incurs the increased cost bears them.
Extraordinary Circumstances – Force Majeure
Sometimes extraordinary circumstances beyond the reasonable control or contemplation of the parties makes performance so difficult, expensive, or impossible that one or both should be relieved of their contractual obligations. To that end, construction contracts frequently contain a “force majeure” clause.
Force majeure, French for “superior force,” is commonly defined as “[a]n event or effect that can neither be anticipated nor controlled.” Black’s Law Dictionary. “A force majeure clause is not intended to buffer a party against the normal risks of a contract.”[1] Instead, these clauses typically include “acts of God” (e.g. forest fires, floods, epidemics) and other unusual events (e.g. war, terrorist attacks, labor strikes).
The extent to which a force majeure clause protects a party depends on whether its language has been drafted in general or specific terms. But however drafted, the triggering events usually must be unforeseeable, unavoidable, and externally caused.[2] In other words, if a party could have anticipated and avoided the harm or was, in fact, its cause, that party should not be relieved of its obligations to perform or to compensate the other for damages.
Another important consideration is the remedy a force majeure clause provides. In a construction context, the contractor is usually entitled to an extension of time for as long as the event prevents performance. In some cases, it may allow for termination or rescission of the contract. Again, the language of the contract will determine or limit the remedies available. Finally, a party looking to invoke a force majeure clause should be careful to follow notice and documentation procedures the contract requires.
What If My Contract Has No Force Majeure Clause?
Even when a contract does not include a force majeure clause, many common law doctrines offer similar protection. For example, a party’s obligations may be discharged when an event makes performance impracticable; i.e., there is no commercially reasonable alternative.[3] For example, if an owner hires a contractor to renovate a loading dock but the building is destroyed by fire, the contractor will be excused. Similarly, government action may frustrate a contract, whether by eminent domain or conscription of private facilities.[4] For example, a manufacturer hired to supply a project may be relieved of its obligations if the government requires it to produce personal protective equipment. Likewise, under Frustration of Purpose, construction of a temporary concert venue may be excused if the festival is cancelled due to limits on the sizes of gatherings. [5] Parties should be mindful, however, of whether the decision to cancel the “frustrated purpose” was discretionary or mandatory.
Parties should also be mindful of whether the event has a total or partial impact on a project and whether it is temporary or permanent.
Pointers for Navigating Issues Related to Coronavirus
Whatever the impacts of Coronavirus will be on your construction project, a few pointers will help parties find optimum solutions. The first is to communicate. Not only should parties be open with the challenges they face, they should document them as their contracts require. Both owners and contractors will suffer significant losses – in that respect we are all in this together. For projects that are currently underway, owners and contractors should prioritize finding solutions to the emerging problems that will surface in the coming days, weeks, and months.
Some experts predict that Coronavirus will remain an issue over the next 12-18 months. For construction projects that break ground during this period, the issues we are facing have become foreseeable. Accordingly, parties should decide now how they will address these issues if and when they arise.
If you have questions regarding delays in your construction project or other legal issues do not hesitate to contact the Construction Attorneys at Mesch Clark Rothschild.
[1] N. Ind. Pub. Serv. Co. v. Carbon County Coal Co., 799 F.2d 265, 275 (7th Cir. 1986).
[2] David A. Senter et. al, It’s a Catastrophe, But We Have a Force Majeure Clause, So No Worries, Right?,American Bar Association Forum on Construction Law (2016).
[3] Restatement (Second) of Contracts §§ 261, 263.
[4] See Restatement § 264.
[5] See Restatement § 265.
