Matthew D. Stockwell and Laura Bourgeois LoBue | Pillsbury
Last Friday, New York issued updated guidance that halted all construction in the state, except for “essential construction” which consists of roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters. As a result, most commercial construction and condominium projects are now on hold, with the exception of work that must be completed for safety purposes and emergency work. The New York guidance is a drastic departure from the state’s previous guidance, which generally exempted construction as an essential service. The Empire State Development’s website provides further detail as to what constitutes essential health care operations and infrastructure.
Like New York, most states have issued orders regarding the closure of nonessential businesses. Some states have allowed construction to continue as an essential service, while other states have stopped construction or narrowed the types of construction that are allowed to continue. Before taking any action, make sure you understand what orders and guidance, if any, your state has issued with respect to construction services in the wake of COVID-19.
Most construction contracts require contractors to comply with rules, regulations and orders of public authorities related to project safety. Naturally, these restrictions on construction will have a financial impact to owners and contractors alike. Owners are concerned with having their projects completed to avoid extended carrying costs and loss of business income, as well as the impact that the delay will have on project financing and/or construction completion guarantees. Contractors will suffer lost income as well, downtime, and in most cases will incur additional costs for the delay and may face similar claims from their subcontractors and suppliers.
This article discusses actions that parties can and should take if their construction projects get suspended because of COVID-19 and certain contractual provisions and legal issues that parties should be considering.
What to Do When Your Project Gets Shut Down
First and foremost, owners, contractors, subcontractors should prioritize the health and safety of their employees. Even if your construction project is in a state that has not expressly restricted or stopped construction, you should be taking steps to reduce worker exposure on your site. OSHA has provided guidance specific to the COVID-19 pandemic. And if workers on your project do test positive for COVID-19, even if your state has not ordered construction halted, you will likely need to take additional—potentially significant—steps to protect your employees.
In addition to safety of employees, there are other actions parties must take in light of New York’s shutdown of nonessential construction (and similar orders in other states). Contractors on affected projects have a responsibility to safely shore and secure their sites until work is permitted to resume. Parties should take photographs depicting the status of the work and the site at the time of shutdown. More likely than not, owners and contractors remain liable for costs incurred for work already performed, so affected contractors and subcontractors should immediately seek payment for work performed. Contractors should put the owner on notice of all compensable costs (such as General Conditions) that will continue to accrue during the shutdown. All parties—owners, contractors and subcontractors—should also begin documenting all additional costs, impacts and delays as a result of the shutdown. Contemporaneous documentation of impacts will be critical if the cause or the valuation of the claim is later disputed. Additionally, contractors should also keep track of the date they last performed work, and be aware of the lien laws and timing requirements in their jurisdictions.
Parties must also carefully review their contracts for applicable notice provisions. Most contracts require written notice be given within a certain number of days following the event that gave rise to the claim. It is imperative that the contract’s procedure for submitting claims (including the correct recipients, and whether the claim must be submitted electronically or by mail) and the information the contract requires in support is followed. On both the owner and contractor side, if there is a decision to suspend construction or terminate the contract, those contractual provisions must also be strictly complied with. Owners and contractors must also timely respond to notices of claim they receive. Owners should also reach out to their lenders and seek extensions of completion dates and guarantees.
In addition to contractual rights of recovery, contractors and owners should also carefully review their insurance policies and speak with coverage counsel. Many insurance brokers are advising their clients that there is no coverage for COVID-19-related losses because many insurers have taken the position that, except in limited circumstances, the coronavirus does not cause physical property damage necessary to trigger coverage, or are taking a broad view that viruses are excluded from coverage. But the insurance industry’s position is not necessarily accurate under all policies and for all insureds. And several jurisdictions have introduced legislation that would require insurance companies to cover certain COVID-19 losses. A close look at your particular policy language and factual circumstances by qualified counsel is necessary to determine whether there might be coverage under your specific circumstances.
Finally, for contractors that have not signed contracts for future projects, particular care must be given to the provisions mentioned in this article and how the project will be managed and operated in light of the COVID-19 pandemic.
What Does Your Contract—and the Law—Say?
Standard-form construction contracts will contain Force Majeure and Excusable Delay clauses, which are key to assessing which party bears the risks of delays. Although clauses do not always address pandemics, New York’s order would generally qualify as an Act of Government, likely entitling affected contractors to a time extension as a result of an excusable delay. Nevertheless, contractors and owners should carefully review the language in their respective contracts to assess their rights and remedies in light of the legal restrictions that have been placed (or will be placed) on projects in their respective states. This article summarizes the relevant contractual provisions that appear in most construction contracts.
1. Delays/Extensions of time/Force majeure
Most construction contracts contain provisions allowing an extension of time for various issues and conditions, which may or may not be compensable. Likely the most relevant in this situation is the “Force Majeure” clause. Generally speaking, force majeure clauses excuse a party’s performance of its contractual obligations when circumstances beyond the party’s control arise inhibiting performance. Force majeure clauses vary from contract to contract so it is important to consider the specific language in your contract. In contracts that define Force Majeure to include epidemics/pandemics, states of emergency, or acts of the Government, it would seem that New York shutting down a construction project as a result of COVID-19 would certainly be considered an event of force majeure. By way of example, Section 6.3 of ConsensusDocs 200 expressly includes both epidemics and adverse governmental actions gives among examples of causes beyond the control of contractors.
The AIA A201-2017 form, on the other hand, does not expressly include these specific causes. However, the force majeure provision includes other causes that would seem to apply:
- 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.
Here, a widespread pandemic such as COVID-19 that causes disruption to a construction project as a result of a government shutdown should be considered an unavoidable casualty or a “cause beyond the Contractor’s control” sufficient to allow the contractor a time extension. In New York and other states where the government has ordered nonessential construction to stop, clearly that is a circumstance beyond the contractor’s control.
Some of these contracts will allow the contractor to recover costs as a result of the delay, and some will not. If associated costs are to be claimed, careful attention must be given to the contract’s “changes” provisions, which should be strictly followed. In any event, the extension is important for the contractor so that it is not penalized or assessed liquidated damages.
2. Emergency Clause
Some contracts may have what is known as an “Emergency Clause” which could provide a potential avenue of recovery for emergency situations. For example, the AIA A201-2017 General Conditions form, Section 10.4 provides, “In an emergency affecting safety of persons or property, the Contractor shall act, at the Contractor’s discretion, to prevent threatened damage, injury, or loss. Additional compensation or extension of time claimed by the Contractor on account of an emergency shall be determined as provided in Article 15 and Article 7.”
Article 15 allows the contractor to submit a claim to the Initial Decisionmaker, which is usually the architect. Although this clause is typically utilized for more immediate emergent threats (such as imminent structural failure) if a contractor decides to stop working because the risk of COVID-19 poses a demonstrable imminent and emergent threat to the safety of its workers, the contractor may be able to recover for the delay and other costs associated with responding to that threat. If the contractor is not satisfied with the outcome from the Initial Decisionmaker, then the contractor may follow the dispute resolution provisions in the contract. Many other contracts have similar or modified versions of the AIA Emergency Clause.
Note, however, that Article 15 of the A201-2017 form contains a mutual consequential damages waiver which, unless the form has been modified by the parties, prevents the contractor from recovering home office expenses, loss of financing and lost profit. Not all contracts contain a consequential damages waiver and these clauses are often modified or even removed, so it is important to carefully review the contracts applicable to your project.
3. Termination by Contractor
In some situations, a contractor may determine that terminating its work on a project halted due to COVID-19 is in its best interests. Termination clauses are materially different from one contract to the next. The A201-2017 form allows the contractor to terminate the contract if work is stopped for 30 consecutive days through no fault of the contractor and its downstream subcontractors, if a court order or order of a public authority requires the work to stop, or if an act of government, such as a declaration of national emergency requires all work to be stopped. In New York, under this clause, after 30 consecutive days of no work due to New York’s decision that nonessential construction must stop, a contractor will be permitted to give seven days’ notice that it is terminating its contract. Under the standard AIA language, then, the contractor may recover payment for work it performed, reasonable overhead and profit on work it did not perform, as well as costs incurred as a result of such termination. Contractors must be mindful that these provisions are often modified by the parties in the negotiation stage, and most owners will not agree to permit recovery of unearned sums in these situations.
Of course, contractors must first review the provisions in its subcontracts and determine any liability it may have to its subcontractors before deciding to terminate.
4. Suspension or Termination by Owner
Similarly, the owner may decide to suspend work or terminate the contract as a result of the COVID-19 situation, or as a result of a government shutdown. In almost every contract, the owner has a right to terminate or suspend the contract for its own convenience. Generally, the contractor will be entitled to a cost increase and time extension as a result of a suspension for convenience, as long as the contractor is not responsible for a concurrent delay.
If the owner terminates the contract for convenience, the contractor is generally permitted to recover for all of the work it performed, as well as costs it incurs as a result of the termination and costs associated with terminating its subcontracts.
5. Common Law Doctrines of Impossibility and Impracticability
In the absence of an express force majeure provision in one’s contract, if performance of the contract is impossible, and in some cases, impracticable, performance may be excused. Generally, impossibility of performance requires a showing that an unexpected occurrence has taken place and, because of that occurrence, performance of the contract is impossible. This is a difficult standard to meet. Under New York law, for example, performance will only be excused if:
- the destruction of the subject matter of the contract or the means of its performance makes performance objectively impossible; or
- performance is rendered impossible by an act of God.1
The contract must not allocate the risk of the occurrence of the event that made the performance impossible; because the purposes of contracts are to allocate risk, New York courts apply the defense of impossibility narrowly and only in extreme circumstances.2
The Doctrine of Impracticability of Performance generally requires a party to show that, as a result of an unforeseen event beyond the party’s control, although performance may be possible, it is impractical from a commercial perspective. The nonoccurrence of the event must have been a basic assumption upon which both parties contracted, and the impracticability must not be the fault of the party seeking to excuse its performance.
Although these defenses are rarely successful in New York, there is precedent for excusing performance as a result of legal prohibition. (See RSB Mfg. Corp. v. Bank of Baroda, 15 B.R. 650, 654 (S.D.N.Y. 1981).) Under these circumstances, New York’s prohibition on nonessential construction may, under certain circumstances and depending upon the length of the construction freeze, excuse performance of construction contracts under the doctrines of impossibility/impracticability. Outside of New York, it will be important to compare the restrictions on construction with the law in that particular jurisdiction.
Other Sources of Relief
In addition to the parties’ respective rights and remedies under their particular contracts, the fact that COVID-19 is a worldwide pandemic affecting much more than just a single construction project, affected parties must remember to look beyond only their contract for potential sources of relief. Much has already been written about potential avenues of insurance coverage, small business loans and assistance, and other emergency government assistance, all of which should be given due consideration and assessed in light of the specific circumstances potentially affecting your project. The full list of our alerts covering these topics, and more, can be found at our COVID-19 Resource Center.
[1] Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900 (1987).
[2] Sher v. Allstate Ins. Co., 947 F. Supp. 2d 370 (S.D.N.Y. 2013).