The coronavirus (“COVID-19”) pandemic has impacted almost every corner of the world, requiring businesses of all sizes to re-assess their ability to maintain operations and fulfill contractual obligations.
The federal and local governments have imposed restrictions on travel and gatherings, and in many instances, have forced businesses to temporarily shut their doors.
One industry that has been grappling with how to react with COVID-19 is the construction industry.
In a recent survey of the Associated General Contractors of America on the effects of COVID-19, 28% of respondents stated that an owner or government agency ordered halt to current work. In addition, 16% experienced project delays or disruptions due to shortage of materials, equipment or parts, and 22% have had suppliers send notice that deliveries will be late or cancelled.
Force majeure is a French term meaning “superior force” making performance impractical. Force majeure clauses generally excuse a party’s nonperformance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations.
- Read Your Contract – Does It Contain a Force Majeure Clause?
Force majeure is not a term used in the AIA A201 General Conditions, the contract form widely utilized on commercial projects. However, section 8.3.1 of the A201 General Conditions states that if the Contractor is delayed by “unusual delays in deliveries, unavoidable casualties…or other causes beyond the Contractor’s control;…then the Contract Time shall be extended for such reasonable time as the Architect may determine.” If this clause is found in your contract, you must look to the Architect to decide its applicability.
Moreover, section 10.4 of the A201 General Conditions details additional relief for contractors in the case of emergencies. Specifically it states, “[i]n an emergency affecting safety of persons,” the contractor has the discretion “to prevent threatened damage, injury or loss.” If this happens, the contractor may be entitled to additional compensation or an extension of time as provided under Article 15 (governing procedure for contractors to file claims) and Article 7 (governing procedure for changes in the work).
If your construction project is not governed by the AIA A201, and a force majeure clause was negotiated into your contract, you will need to read the specific language. If you establish that your contract contains a force majeure clause, the next step is to determine the precise language of the clause and whether it would cover the COVID-19 pandemic.
- Does Your Force Majeure Clause Cover COVID-19?
The following is an example of a force majeure clause:
Should either Party be prevented or hindered from complying with any obligation created under this Agreement by reason of fire, flood, storm, act of God, governmental authority, labor disputes, pandemics, or war, then the performance of any such obligations is suspended during the period of, and only to the extent of, such prevention or hindrance.
The scope and application of a force majeure clause is dependent upon the terms of the contract in which it appears. In other words, when the parties themselves define the contours of force majeure in their agreement, the precise language dictates the application, effect, and scope of force majeure. Courts are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended.
COVID-19’s classification as a “pandemic” by the World Health Organization will trigger a force majeure clause that expressly accounts for “pandemics.” The declaration of pandemic standing alone—without a reference to pandemics in a force majeure clause—will not automatically constitute a force majeure. Clauses that are silent on pandemics are likely to be insufficient for a force majeure defense due to COVID-19.
Additionally, declarations issued by government, mostly on the State and local level to limit interactions among groups of people, may similarly trigger a force majeure clause based on the “governmental authority” language. Contractors may be able to invoke force majeure provisions to excuse any contractual nonperformance resulting from governmental declarations if the clauses at issue enumerate governmental orders or regulations that make performance impossible. As such, contractors should closely monitor COVID-19 developments at all levels of government to determine their effects on day to day operations.
- Notice Requirements
If an applicable force majeure clause is available, contractors must look to any requirements that must be met in order to invoke the clause. Many force majeure clauses require written notice within a fairly short number of days after commencement of a triggering event. Contractors must be aware of these notice requirements, as the application of force majeure could be precluded absent compliance. If a contractor receives a force majeure notice from a subcontractor, contractors should confirm receipt of the notice with the subcontractor and inquire about the subcontractor’s reasons for invoking force majeure if not already abundantly clear from the notice given. Contractors should make a determination on whether the invocation of force majeure is valid or if it should be challenged. With the COVID-19 landscape changing daily, it may be difficult to conclusively determine when the force majeure event occurred, and will likely be a hotly contested issue surrounding any notices.
- Impracticability of Performance
Many contractors are reviewing their contracts to determine if force majeure declarations provide relief for delayed or interrupted projects and operations. Before deciding to invoke or accept the invocation a contract’s force majeure clause, contractors should assess and document alternative means of performance or the availability of steps that may be taken to mitigate disruption to operations. If all mitigation options have been attempted, and performance is truly impracticable, a force majeure clause that clearly covers COVID-19 can likely be invoked. The fact that performance has become unprofitable, or even economically ruinous, does not, by itself, qualify under this standard.
This article is for information purposes only and is not intended to be legal advice or substitute for consulting an attorney. We recommend that you discuss your particular situation with your attorney when you need legal advice.