Adam P. Banks, Lauren A. Triebenbach, Michelle Wagner Ebben and Roy E. Wagner | Michael Best & Friedrich
As the country braces for the continued spread of COVID-19, the disruptive effect of this virus is already evident as enumerable events, business, and schools shut their doors. This disruption is also likely to impact the construction industry in the form of labor availability, delays, and costs overruns.
Cononavirus’ impact on global supply lines is expected to be significant. Michael Best partner, Joseph Olson writes HERE about practical steps to consider to remedy supply line issues. China is one of the largest exporters of building materials. Data recently released by the Chinese government shows a 17.2 percent decline in Chinese exports compared to this time last year. Construction suppliers will likely soon feel the strain of supply shortages, followed shortly thereafter by contractors unable find the construction materials, parts, and components required to complete projects. In these scarcity situations, a contractor’s limited option may be to locate more expensive replacements consistent with the contractual terms, where the contractor might be required bear the increased costs associated with replacement parts.
The availability of labor will also suffer under the effects of COVID-19. While the current number of confirmed cases of COVID-19 in the U.S. remains somewhat manageable, health officials are signaling that a sharp increase in the number of confirmed cases and related quarantines is expected in the upcoming weeks. Contractors and project owners can reasonably expect that the virus will add insult to injury, as labor shortages throughout the construction industry are already a well know problem (read Associated General Contractors article HERE). Similarly, certain “crowded” projects may be impacted, if the site is shut down. Owners and General Contractors should anticipate slower progress on construction projects as Subcontractors struggle to keep their workforces healthy and out of quarantine.
The party that bears the risk and the losses resulting from construction delays and increased costs associated with materials shortages will be dictated by contract. Contractors and project owners would be wise to have their contracts reviewed to determine if the contract contains a force majeure or price escalation provision to address potential losses associated with COVID-19.
The party who bears responsibility for the increased materials costs likely depends on whether or not a price escalation provision was negotiated. Escalation provisions allow a party to request additional funds to cover increased materials costs associated with upward price fluctuations. It’s possible for both the Owner/General Contractor and General Contract/Subcontractor to agree upon price escalation provisions that pass increased materials costs up and down the contractual chain. Escalation provision terms vary. Most escalation provisions are tied to a standard index, for example the Consumer Price Index (CPI), and only allow for increased material costs to be passed on after an increase to the index beyond a negotiated threshold. As COVID-19 continues to disrupt world supply lines, the cost of everyday construction materials may be unpredictable. For businesses engaged in long term projects, immediate action is needed to develop a strategy to address potential price increases.
Contract language dealing with delay damages varies. Some contracts provide for liquidated damages, which entitle the aggrieved party to a set amount of damages per day/month of delay, whiles others bar damages for delay through “no damages for delay” provisions. Regardless, a force majeure provision (a/k/a Act’s of god clause) may provide the contractor with a mechanism by which to seek additional time to perform. Force majeure clauses typically provide grounds for non-compensable “excusable delay” for unexpected disruptions which are outside the control of the contractor. For example, under American Institute of Architects General Conditions of the Contract for Construction (AIA Form A201-2017), “unusual delay in deliveries” and/or “other causes beyond the Contractor’s control” may provide the contractor justification for additional time to perform. Likely, the COVID-19 pandemic would qualify for excusable delay under the AIA form, but attention should be given to individual contracts to ensure a similar remedy exists. Going forward all construction contracting drafting should anticipate COVID-19 disruptions.
As the delays and costs overruns become larger, we expect some parties may be forced to look for legal relief using non-contract arguments. Supervening events are unexpected events that occur after a contract has been executed, but before the time to complete performance is due, without the fault of either party, and the non-occurrence of which was a basic assumption of the contract. Two supervening event theories arguably applicable to the COVID-19 outbreak are “Impossibility” and “Commercial Impracticability.” Essentially, these theories allow a party to breach a contract or delay performance if performance becomes impossible or so costly that it’s commercially senseless to perform. While a government mandated quarantine likely qualifies as an “Impossibility,” other situations require a case-specific analysis. The case law on supervening events is state specific and filled with exceptions, so consultation an attorney is needed. We encourage you to reach out to one of the authors of this article, your Michael Best attorney, and/or our firm’s COVID-19 Task Force.
As the coronavirus (COVID-19) continues to spread around the world, we know there is widespread concern about public safety and business disruptions. Michael Best has formed a COVID-19 Task Force to stay up to date on the latest information from governments, public health officials and experts in various industries so we can help our clients adopt best practices for business continuity and mitigation of losses.