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By: Catherine Bednar, Jake Carroll and Ben Dunlap
On March 17, 2020, Boston became the first U.S city to order a halt to work on all construction sites due to the coronavirus, shutting down work two weeks. Since then, other states and cities have issued shutdown orders due to the pandemic, varying significantly in their scope and impact on the construction industry. Pennsylvania’s governor ordered a shutdown of all “non-life sustaining business”, including both residential and nonresidential building construction in that list. In contrast, California issued a statewide “stay-home” order which initially appeared to encompass the construction industry, but a day later issued a list of “Essential Critical Infrastructure Workers” which exempted construction workers from the order, including housing construction. Georgia’s governor lifted certain time restrictions for owners to retain private inspectors to approve plats and perform building inspections for code compliance. In some areas, it is anticipated that construction workers may be moved from their previous assignments to new priority projects, such as temporary hospitals.
Regardless of jurisdiction, it is inevitable that the construction industry will be significantly impacted by the current pandemic, whether due to government-ordered shutdowns, supply chain delays, the absence of sick or quarantined employees, or other business interruptions. The legal consequences and available remedies will depend upon the individual contracts governing a particular construction project. The following is an overview of some relevant contract provisions and remedies which may come into play on construction projects affected by the present crisis. In particular, parties to a construction contract may benefit from invoking contract remedies that preserve their ability to successfully complete the project in the future, rather than unilaterally terminating the agreement when performance is impeded due to difficult and unforeseen circumstances.
Potential Claims for Delay Damages and Liquidated Damages: An immediate concern of owners, contractors and subcontractors is the potential for delay-related claims, including those based on liquidated damages clauses in construction contracts triggered by delays in project completion. A liquidated damages clause specifies the amount of money that must be paid as damages for failure to perform under a contract. Some construction contracts contain “no damage for delay” provisions which can prevent a party from recovering time-related costs when the project is delayed. The potential for delay damages or liquidated damages depends upon the contract language.
As discussed below, some contracts contain force majeure clauses that may excuse delays based on a construction ban or generally caused by the coronavirus pandemic. Others contain extension of time clauses that govern whether and how delay damages will be calculated. Alternatively, parties to a construction contract may be able to suspend work, terminate the contract for convenience, or enter into a forbearance agreement to avoid or mitigate these damages.
Overhead and Mobilization Costs: Aside from direct delay damages, state and local government bans and other impacts of the pandemic will likely result in increased project costs as leased equipment sits idle and crews eventually have to be remobilized to continue their work when the bans are lifted. Contractual parties may dispute who should bear the added cost of extending equipment leases through the period of the moratorium or remobilizing crews and equipment to sites. The costs of securing construction sites at the beginning of the ban and of preparing sites for continuation of work at the end of the moratorium – as well as maintenance of skeleton crews – may also be substantial, and parties should consider how such costs should be allocated under the contract.
Force Majeure Clauses: Some construction contracts contain a force majeure clause, which serves as a defense against non-performance due to factors beyond the breaching party’s control. A force majeure clause may excuse performance altogether or may provide for an extension of time to perform. Force majeure clauses may specifically reference emergencies declared by the state or federal government, prolonged shortages of supplies, or may more generally refer to extreme and unusual events amounting to an Act of God. Whether the coronavirus pandemic triggers a force majeure clause depends on the contract language and applicable law.
Extension and Suspension of Work Clauses: Many construction contracts provide for parties to request extensions of time to complete performance, while other contracts permit suspension of work or production for a defined or indefinite time. The contract should dictate the procedures for the schedule change: many contracts require that the contractor notify the owner of a delay beyond the contractor’s control and make a written request for an extension of time, while others provide that additional time may be requested through change orders. Both extensions and suspensions of work allow the Project schedule to be revised once the parties determine an extension or suspension is warranted. Still, the language of the contract would determine what, if any remedies are available to the contracting parties, such as recovery of re-mobilization and extended duration costs.
Termination for Convenience Clauses: Typically, a general contractor or owner can terminate the contract “for convenience”—for any reason. In these scenarios, the general contractor or owner would likely be required to pay for work completed or produced before the termination, but typically not unearned profits on work not performed. Such clause would result in an orderly and fairer termination of the contract. Termination of a contract is a drastic remedy, and should not be undertaken lightly. Should a termination be deemed as “wrongful,” the terminating party could be liable for additional damages, including attorneys’ fees, lost profits, and interest of any amounts outstanding.
Forbearance Agreements: a forbearance agreement is a contractual agreement that can address delays or non-performance without resorting to termination or default. In the commercial lending industry, forbearance agreements can extend the time for a borrower to make payments on a construction loan. Construction companies should keep in mind that forbearance agreements are not limited to financing contracts, and can also be used to postpone termination of a construction contract. Under such an agreement, for example, an owner might refrain from declaring the contractor in default or terminating the construction contract, provided that the contractor meet certain agreed-upon milestones. Or, the owner might simply agree to toll any claims of breach against the contractor for non-performance during the construction ban and for a period of time thereafter.
Insurance and Financing: In addition, project-related insurance policies may need to be extended, resulting in higher costs. For project owners and developers, construction delays caused by COVID-19 may lead to added financing and carrying costs. Parties to construction contracts should work to ensure they continue to meet the contract’s insurance requirements. Parties to construction costs will also be well-served by identifying added costs and seeking solutions early.
Surety Bonds: Keep in mind that many surety bonds require that notice of a change to a Project’s costs or duration must be timely given to the obligated surety. Failure to comply with such requirements could serve as a defense to payment or performance by the Surety at a later date.
The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues every day for the next week. We will discuss the impact of Coronavirus for companies in general, but also for business in insurance, healthcare, California specific issues, cybersecurity, and tort. Click here to register.
FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the Coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.
You can also contact your FMG relationship partner or email the team with any questions at [email protected].
**DISCLAIMER: The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19. The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement. We can only give legal advice to clients. Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG. An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest. As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you. We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such. We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**