It is March 2020 and there is much in the news about the “COVID-19” coronavirus outbreak. The volume of material on this topic already is staggering. We’ve become overwhelmed with the vast majority of the material looking at the here and now. Looking at the here and now is essential, but it is also important not to be myopic and to use some of our time to plan for when we come out the other end … and we will come out the other end. Very little of what we have seen addresses this topic.
We know from studying the history of other quarantines and their impact on the economy that there are certain issues we simply must prepare for and do to help ourselves get to and recover once we reach the other side of this.
Supply chains have been disrupted. With inventories often being limited to “just in time,” the pipeline of key materials may start dwindling and be unavailable on a timely basis. If material shortages are not the issue, it is not unimaginable that enough people could get sick so that the domestic labor force in various industries, including construction, could become significantly impaired. Even if sufficient labor and materials are available, “social distancing” requirements (which have been imposed by executive orders in many states) have slowed many trades and projects. Many projects have timing issues and force majeure clauses.
These issues acutely impact the construction industry. So, what can you do now to help your own business suffer less, and how can you position your business to succeed once we make it through this crisis?
PICK UP THE PHONE/VIDEO CONFERENCE
Nobody is happy when work is delayed. But it is worse for an owner/upstream contractor to learn it in the field by non-performance than it is to learn it from the performing party in advance.
Use this time to BUILD YOUR RELATIONSHIPS both upstream and downstream. Call or video conference your suppliers regularly to keep tabs on material availability. Monitor your available workforce and the workforces of any subcontractors for impacts on a daily basis. By all means, convey this information to your customers with your plan to maximize existing resources, rescheduling if possible and to supplement where necessary. Even a call just to say “we’re OK at the moment” works wonders. We are in business just like you. People who contact us in tough times are the first ones we will call back when times get better.
BRIEFLY REVIEW YOUR CURRENT CONTRACTS
COVID-19 has spared few businesses from having to manage, in some way, shape or form, its effects. You’ve got plenty to do, so your review for your own peace of mind should be brief. We’ve found most people to be understanding of the legitimate impacts of COVID-19. But if your pool of customers is large enough, you are bound to run into someone who doesn’t give a rat’s behind of the circumstances we’re all facing: “Do this job now or we’ll replace and sue you!” Or sometimes, despite doing everything you reasonably could, COVID-19 wipes out your workforce or material availability is zero. What then?
So much has been written recently about the applicability of “force majeure” provisions and COVID-19 that another article would just be piling on. We’re familiar with the law in this area and can assess your individual contracts if you like, but here is what to look for to prepare yourself if you have a problem client.
Every contract is different, and form contracts can be changed by agreement. You should know what type of force majeure clause you have in your contract(s). Is it limited to specific events or types of events? Does it broadly cover events outside of your control? Maybe both, or neither. You should know if you want to sleep at night.
For “original” (usually general) contractors, which may apply to trade/subcontractors via a “flow-down clause” in its subcontracts):
The use of an unaltered, preprinted AIA A201-2017 form probably will leave you in good shape; an unaltered ConsensusDocs 200 in even better shape. Section 8.3.1 of the AIA A201-2017 General Conditions does not expressly use either “force majeure” or “Act of God,” but the third and fifth clauses in § 8.3.1 provide examples of what many consider to be force majeure events that excuse timely performance:
8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by * * * (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 126.96.36.199, or other causes beyond the Contractor’s control; * * *; 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.
The unaltered section 6.3.1 of ConsensusDocs 200 provides as follows:
6.3.1 If Constructor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of the Constructor, Constructor shall be entitled to an equitable extension of the Contract Time. Examples of causes beyond the control of Constructor include, but are not limited to, the following: (a) acts or omissions of Owner, Design Professional, or Others; (b) changes in the Work or the sequencing of the Work ordered by Owner, or arising from decisions of Owner that impact the time of performance of the Work; (c) encountering Hazardous Materials, or concealed or unknown conditions; (d) delay authorized by Owner pending dispute resolution or suspension by Owner under § 11.1; (e) transportation delays not reasonably foreseeable; (f) labor disputes not involving Constructor; (g) general labor disputes impacting the Project but not specifically related to the Worksite; (h) fire; (i) Terrorism; (j) epidemics; (k) adverse governmental actions; (l) unavoidable accidents or circumstances; (m) adverse weather conditions not reasonably anticipated. * * * (Emphasis supplied).
There is ample case law addressing the language of the AIA document. The reason we said above that the contractor probably will be in good shape with this language, partly on account of the case law, but mostly because of the human factor. Most of the published cases address situations that are unknown to the general public and fact-finders (judges, juries or arbitrators) who will be charged with determining whether an event falls into the AIA definition of one justifying an extension of time. For example, if a labor strike in a foreign country causes a shortage of materials, the fact finder likely has never heard of, much less been affected by, the event. On the other hand, very few people on the planet will not have heard of or will not be affected by COVID-19, and it seems likely that few will hold the view that a contractor should have seen it coming, much less could control it. We expect fact-finders are likely to excuse delay that can be directly or indirectly traced to COVID-19, and probably, to an extent, the time period during which the outbreak hit.
The ConsensusDocs provision appears even more likely to permit a time extension, not only because of the specific reference to “epidemics” and “transportation delays not reasonably foreseeable,” but also the general reference to “unavoidable accidents or circumstances” and in the preamble the use of “by any cause beyond the control of Contractor” followed by “[e]xamples … include but are not limited to ….” Any upstream party who tries, several years from now, to convince a judge, jury, arbitrator or any reasonable human being that COVID-19 does not fit this definition is likely spitting into the wind.
If you have one of these provisions, does this mean that you can give your customer or upstream party the one-fingered salute when it gets demanding? Of course not. Even if you might get off the hook for delays on an individual job, you are likely to lose future business unless you follow item no. 1 above: BUILD YOUR RELATIONSHIPS.
We have seen some owners, particularly public owners whose contracts often are not negotiated, insert clauses that may not alter the scope of events entitling the contractor to a time extension, but require the contractor to prove that it did everything it could to avoid or minimize the delay. Contractors should beware of such additions, but if they exist, the contractor should make sure it complies with the provision.
For sub (usually individual trade) contractors:
First, any minimally sophisticated subcontract we have seen in the commercial world contains a “flow-down” clause that binds the subcontractor to perform for the original contractor all provisions of the contract between the original contractor and the owner related to the subcontractor’s work. This is a broad requirement and assuredly includes the time within which the subcontractor must perform.
In addition to the applicability of the original contract requirements, subcontracts often contain other, more stringent, provisions for the subcontractor’s performance. Depending on the customer, subcontractors may be starting with a standardized form (i.e., AIA A401-2017) or, often times, a general contractor’s proprietary form.
As a general rule, the subcontractor should negotiate a force majeure provision that is at least no more stringent than the original contractor’s obligation to the owner. However, if there are events occurring in the world affecting its trade about which the subcontractor knows but the upstream party(ies) may not know, it is important to raise these items at the time of the contract and to work them into the subcontract. That said, few if any people saw COVID-19 coming as fast as it has. We should learn from that and seek to insert, at all levels, a broad clause providing that matters outside the control of the performing contractor entitle it to an extension of time to complete its work.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.