April 13, 2020
Time is money. Costs on a construction project increase the longer it takes to complete. Project delays are common and costs associated therewith are allocated to the at-fault party as defined by and/or assigned under applicable contract terms. Courts are often involved in this allocation process, but it is usually guided by the use of project delay software, expert testimony, or standards set by applicable case law. Unfortunately, there is no guide for the situation owners and contractors face due to the COVID-19 pandemic. Although this varies state to state, construction projects have been shut down, limited, or affected by non-essential work restrictions, labor shortages or supply chain issues. Some construction projects have been abandoned at various states of progress with no timeline for when work can resume.
The purpose of this article is to help contractors understand what steps should be taken, now, to comply with contractual duties and minimize exposure for costs associated with COVID-19 related project delays. If contract performance becomes untenable either suddenly or once work is able to resume, this article also discusses what breach of contract defenses might be available under these extraordinary circumstances.
What contractors should do right now:
- Determine exactly what work is prohibited under relevant state and local orders. Even if an order has defined construction as non-essential (and therefore prohibited) work, read the exceptions. In your state, construction might generally be deemed essential, or at least for certain purposes.
- Comply with your contract’s notice provisions. Proper notification regarding changes, conflicts, and problems is essential. Most contracts impose a duty upon the contractor to provide written notice to the owner (or prime contractor) as soon as it is cognizable that there will be a delay. In addition to delay requests, written notice may be required in situations associated with changes in the work, differing site conditions, plan or schedule conflicts, change order requests, making claims or protests, requests for more information, payment issues, scheduling updates, and others.
- Communicate with the owner, the project’s other contractors, materials and supply chain contacts, and employees. Nobody is immune to the effects of the COVID-19 shutdown, and flexibility and a willingness to cooperate can go a long way. Keeping other parties updated will help make them amendable to working with you on issues you may face.
- Protect the jobsite. If you are not permitted to undertake construction work, take reasonable precautions to keep the construction site safe. This might include removing equipment or supplies to a storage space, or having a skeleton crew monitor the site for safety or to make sure materials are protected.
- Identify and schedule any emergency or necessary work.
- Speak with the owner and get approval as necessary from state or local government agencies.
- If you must resume work as noted above or as otherwise considered essential under state and local orders, do not proceed unless and until appropriate health and worker protection measures are in place, and ensure the job site allows for social distancing in the manner prescribed by OSHA or applicable local health regulations.
- If work can proceed, draft an update to your safety policy addressing the pandemic and train employees on the unique safety requirements associated with it. Do not host meetings larger than your state currently allows and maintain distance. Ensure employees do not come to work sick. Keep the jobsite clean and disinfected.
- Document everything. This includes photographing the work, materials, and/or equipment left at the jobsite. It is also a good idea to confirm in writing any conversations you might have with other parties regarding the project. Keep invoices or notices from material suppliers. Evidence of any potential claims should be collected for ease so that they can be prepared and/or filed after the pandemic is over. Organize all items related to delay, labor, materials, etc. in different folders.
- Update your schedule and prepare change order requests as necessary. Make schedule updates as necessary for the duration of the pandemic (as shelter-in-place and non-essential business closings may be extended) as it will require additional evidence that they were caused by the pandemic and nothing else.
- Contact suppliers. If there are supply chain issues, look for suitable alternative sources. Again, keep the owner or other affected contractors or parties apprised of any issues.
- File liens or other notices. This is important since statutory or other deadlines may not be extended.
- Call your insurance agent and determine if you have a claim for business interruption or other coverage.
- Look into the possibility of pursuing a completion bond. Completion bonds are posted to guarantee a project will be completed according to plans and specifications, on time, and without any liens incurred as a result of unpaid bills to subcontractors or suppliers. It guarantees a project will be paid even if abandoned.
What happens if you have been forced to breach a contract due to the pandemic? You can either pay for the damages stemming from your breach or rely upon the various defenses available to you by law. Contract nonperformance is excusable under certain limited circumstances. The following are some possible defenses:
A Force Majeure clause can be included in contracts to remove liability for a natural and/or unavoidable catastrophe that interrupts the expected course of events on a project and restricts parties from fulfilling contractual obligations. If force majeure is not specifically provided for in your contract, then it does not provide a defense to a breach of contract claim. Force Majeure clauses do not blindly cancel contractual duties, and courts narrowly construe such clauses. Nonperformance will be excused only where the intervening event reasonably falls under the protective language of the clause.
If your contract does not contain a Force Majeure clause, or it does not apply under these circumstances, it does not necessarily mean you have no grounds to excuse contract performance. There are other possible legal defenses in the event you face a breach of contract claim.
Impossibility of Performance
Under the impossibility of performance defense, a party can be released from a contract due to unforeseen circumstances that render performance under the contract impossible. For instance, death or disability of a necessary and irreplaceable party, destruction of the project property, or when performance would be illegal. In order for this defense to apply, the impossibility cannot be attributable to the nonperforming party.
Impracticability of Performance
Impracticability of performance is a defense where performance is still physically possible, but has become too difficult or costly to perform. Courts are not inclined to allow this defense where a party simply decides continued performance would be a financial burden. Furthermore, it excuses nonperformance only when that party had no control over the condition making performance impracticable.
Frustration of Purpose
The frustration of purpose defense excuses performance when an unforeseeable event (or non-occurrence of an event) undermines a party’s primary purpose for entering into the contract, such that the contract becomes valueless to one or both parties. This does not apply where the event (or non-occurrence) is the nonperforming party’s fault or the contract reasonably contemplated it. The applicability of this defense is based on foreseeability, surrounding circumstances and the primary purpose of the contract as understood by both parties.
Act of God
An “Act of God” defense is statutorily created and state-specific. Generally speaking, however, it excuses delay or failure to fulfill contractual duties when an unpreventable natural catastrophe occurs, like an earthquake. It may not apply to claims based on delays or an alleged breach of contract associated with the COVID-19 pandemic since the act must generally be attributable to nature without human interference.
For current updates on the rapidly evolving situation, please visit our COVID-19 Hub. The attorneys at Gordon Rees Scully Mansukhani are prepared to help answer questions or address your concerns about construction project issues during the COVID-19 pandemic. If we can help you navigate these extraordinary times, please contact us.