Garret Murai | California Construction Law Blog
It’s scary, uncertain times as the world grasps with how to deal with the coronavirus pandemic that has now spread to every continent on the globe with the exception of Antarctica. Although this is a global crisis, it has, and for the immediately future will continue to have, a direct impact on us individually as well our industry.
While the impact of the coronavirus on the construction industry is uncertain, what is certain, is that it will have an impact, whether on the construction labor market, on construction supply chains, on the ability of contractors to deliver projects on time and within budget, and on decisions by owners whether to move forward with projects altogether.
According to Ken Simonson, chief economist with the Associated General Contractors of America, during an interview at the ConExpo conference this past week in Las Vegas, while the coronavirus crises “is a story evolving by the hour . . . the impacts on construction are going to happen, but it’s hard to say how extensive, how long they’ll last, [and] how soon they’ll show up.”
From a legal perspective, the coronavirus, and really any natural disaster, from the “Campfire Fire” in Northern California in 2018 to the “Big One” which can happen anytime, has the potential to adversely impact a construction project or shut it down completely. This in turn raises two different, but interrelated legal concepts: (1) force majeure; and (2) delay and time-impact claims.
In a natural disaster situation they are flip sides of the same coin, with force majeure being a defense by a contractor to avoid being held in breach of contract, and delay and time-impact claims being a claim by a contractor for extra time and money on a project impacted by a natural disaster. So, let’s look at each.
Force Majeure
Force Majeure, Latin for “superior force,” as our California Supreme Court has stated, “is not necessarily limited to the equivalent of an act of God.” Rather, “[t]he test is whether under the particular circumstances there was such an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.”
A force majeure clause defines circumstances beyond a party’s control that may render contractual performance difficult or impossible. When a force majeure event occurs a party may suspend or be relieved from its obligations under contract. As such, force majeure is a defense against claims that a party has breached its contract.
Unlike certain other legal obligations, like the duty of good faith and fair dealing, which, under California law, is implied in every contract, force majeure is not implied and is purely a creature of contract. As such, unless you have a force majeure provision in your contract you can’t argue that a force majeure event allows you to suspend or be relieved of your contractual obligations.
Because force majeure provisions are a creature of contract they take many forms. Typical force majeure events contained in construction contracts include earthquakes, floods, fires, tornadoes, wars, strikes, epidemics and government actions. Some force majeure provisions even broadly excuse performance outside of the control of a party.
Force majeure clauses sometimes also include limitations. The most common are limitations on the types of events that can be considered force majeure events. Another is limitations based on the degree of severity of the force majeure event and whether commercially reasonable efforts could have avoided the force majeure event either in whole or in part. Finally, force majeure clauses may include notice provisions which require that notice be given of force majeure events, or the defense is waived.
Delay and time-Impact Claims
The flip-side of force majeure provisions are delay and time-impact claims. While delay and time-impact claims can arise from events beyond those enumerated in a force majeure provision, force majeure events are among the events that can give rise to delay and time-impact claims.
Delay and time-impact claims are only as successful as they are compensable. To be compensable, two requirements must be satisfied. First, the event must be critical rather than non-critical. That is, the event must be one that affects the project completion date or other contractually agreed upon milestones. In other words, it must impact the “critical path,” or necessary activities needed to be performed at certain times, and in a particular order, for another necessary activity to begin. An example might be site grading. If there are delays to site grading, construction of a building foundation cannot begin until site grading is completed, and this delay to the critical path may ultimately delay timely completion of the project.
The second, is that the event must be excusable rather than inexcusable. For an event to be excusable, the event must be out of the contractor’s control, such as a force majeure event. An event is inexcusable, if it was within the scope of the contractor’s contractual obligations or was caused by the contractor. An example might be a general contractor whose subcontractor becomes insolvent, requiring the general contractor to scramble to find a replacement subcontractor. While the general contractor was not responsible for the insolvency of the original subcontractor, the contractor was contractually obligated to complete the project on time and within budget, and the delay and possible cost escalation caused by the insolvent subcontractor would be an inexcusable.
In short, to be compensable, a delay must be both critical and excusable. However, not all critical and excusable delays are compensable. For example, if a delay is concurrent, or, in other words, there are several overlapping events giving rise to delays, some of which are the fault of the contractor (i.e., they are inexcusable) and others that are not (i.e., they are excusable), then the extent to which the inexcusable and excusable delays overlap are not compensable. Another example is a contractual limitation on delays found in so-called “no damages for delay” clauses that permit a contractor to seek extra time but not time-related costs due to a critical and excusable delay.
Fitting the Pieces Together
Using the coronavirus outbreak as an example, if the coronavirus impacted supply chains or caused labor shortages on the project which in turn caused delays on the project, and the parties had a force majeure provision that included epidemics, then the contractor could use the force majeure provision as a “shield” against claims by the project owner that the contractor had breached the contract. At the same time, the contractor could use those same facts as a “sword” to argue that the impact of the coronavirus outbreak on supply chains and labor shortages was a critical and excusable delay giving rise to the right of the contractor to extra time and time-related costs.
It has yet to be seen whether the coronavirus epidemic will trigger wide-spread force majeure and/or time and time-related cost claims on construction projects. However, we are still in early days. According to news reports, the United States is trailing other countries along the supposed coronavirus timeline. And, as well, suppliers in China had built up stock in advance of the Chinese New Year before the coronavirus hit and we are still working through those supplies.
However it may turn out, as I tell both my contractor and owner clients, being reasonable can go a long way and produce unintended benefits, while being unreasonable, usually never will. Stay safe everyone.