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By: Thomas H. Welby Gregory J. Spaun Published: May 2020

Contractual Issues in the Covid-19 Era

Typically, this column reports on recent decisions of our courts, in an effort to summarize recent developments in the law or, just as often, situations in which tried and true principles of law are applied to everyday situations in the construction industry. However, these times are far from typical, and deviating from this format to provide timely information is clearly warranted.

FORCE MAJEURE

Force majeure is a French term meaning “superior force”. In the law, it is defined as an event or effect that can be neither anticipated nor controlled; an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. Essentially, it’s a legal excuse for not doing something you’re otherwise under a contractual obligation to do. If properly triggered, the contractor would be entitled to an extension of time until the force majeure event passes. Often such events are termed an “Act of God.”

Force majeure, unlike many concepts in the law, is not a common law concept but, rather, a creation of contract. So, in order to invoke the concept for relief, the operative language needs to be written into the contract from which you are seeking relief. Further, under the Court of Appeals’ holding in Kel Kim Corp. v. Cent. Markets, Inc. (70 NY2d 900 [1987]), the event which would trigger the clause has to be listed in the contract. Essentially, at the time you draft the contract, you must anticipate the unknown.

When a party seeks relief under a force majeure clause, the burden of proof is on the party seeking relief. When dealing with a global pandemic where there are governmental mandates shutting down construction sites, that burden is easy to meet—provided that the required language is in the contract. However, beware that when reviewing your contract for the provision, the relevant language may not be called a force majeure clause. Rather the language is often found in the delay provision. So, once you’ve found the clause, the first thing you must ascertain is whether the clause is narrow, or broad.

An example of a broad force majeure clause (found in a delay provision of a contract) is contained in the AIA A201 General Conditions (both the 2007 and 2017 versions), which provides that:

If the Contractor is delayed at any time in the commencement or progress of the Work by…unusual delay and deliveries, unavoidable casualties or causes beyond the Contractor’s control…or by other causes that the Architect determines may justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine.

By using broad terms such as those highlighted above, an event such as the current COVID-19 pandemic would be considered to be included, yet one would not have had to specifically foresee this specific event. Further, this language avoids the danger of trying to create a comprehensive list, which nevertheless misses something. Typically, narrow force majeure clauses take this approach, or only list a few events that someone thinks are likely to happen. One such example of a narrow clause is found in the NYS Office of General Services standard form, which provides that “Force majeure includes … actions of the elements, floods, or other similar causes beyond the control of the Contractor”. While no clause will reference COVID-19, this clause doesn’t even mention epidemics, generally. A clause such as this would prove of little value in today’s crisis.

OTHER RELEVANT PROVISIONS

Unlike force majeure provisions, which provide only for an extension of time for performance, delay provisions may also provide for financial relief. Further, even if there is a no-damage-for-delay clause in the contract, an event like COVID-19 may fall into the “uncontemplated delay” exception to such clauses crafted by the Court of Appeals in Corinno Civetta v City of NY (67 NY2d 297 [1986]). Affecting the analysis is whether COVID-19 is the direct cause of the delay (because a governmental directive shut down the jobsite) or an indirect cause (the jobsite is still open, but you are being proactive in reducing your workforce so your employees can “social distance”). The less responsibility that you had for the delay, the more likely that you can build a case for monetary relief.

Similar clauses that could provide monetary relief are price escalation clauses, which could permit recovery for increased costs suffered after a delay of some time. Likewise, a suspension clause, which permits the owner to “pause” the project, can provide the contractor relief in the form of reimbursement for demobilization/remobilization costs. Further, these provisions often give the contractor a “relief valve” in the form of a provision permitting the contractor to terminate in the event that the “pause” exceeds a certain amount of time. A related clause, a termination for convenience by the owner, could also offer the contractor certain termination costs if the owner exercises its rights.

Finally, in the event that none of the foregoing clauses are in your construction contract, a contractor may be able to avail itself of the common law doctrine of impossibility of performance. The impossibility doctrine excuses performance if either the subject matter of the contract is destroyed or, as may be relevant here, the means of performance make performance objectively impossible. Examples of the second situation would be where a crucial supplier of custom goods has gone out of business as the result of an extended COVID-19 closure of its business. Importantly, in order to avail oneself of this doctrine, performance must neither be possible, nor commercially practicable; increased difficulty in performing, alone, is not sufficient.

NOTICE PROVISIONS

Typically, the prerequisite for any relief under a contract is to notify the owner. In the context of a contract for a private project, while adherence to contractual requirements is required, contractual requirements can be altered by the parties’ general course of conduct. However, with a contract for a public works project, adherence to notice provisions is a strict condition precedent, and a failure to give notice in the manner set forth in the contract will result in a forfeiture of the claim. Further, what constitutes notice under a contract, and what constitutes the event triggering the requirement to give notice, varies from contract to contract, and from agency to agency. For instance, the AIA form requires notice to be given within 21 days of the event giving rise to the claim, while the DASNY standard form contract provides that notice be given within 15 days of the commencement of the delay, and the New York City School Construction Authority’s standard form provides that notice must be given within 2 business days of the commencement of the delay.

Comment

When faced with a situation where your jobsite is either shut down, or is facing reduced productivity, contactors would be well advised to, first and foremost, give notice of the delay and the condition which led to the delay, as well as any other information required by the particular contract. Because the events triggering the notice provisions, and the times for giving such notice, can vary greatly, contractors would be advised, to borrow a phrase, to “notify early, notify often”. Further, contractors should track their impacts, showing a causal connection between those impacts and the event of delay, and show the efforts you undertook to mitigate the impacts of the delay (such as trying alternate sources for materials, or alternate methods that may not be as affected by the event of delay). As always, good construction counsel can help you navigate these requirements so that you are in the best possible position after the crisis to recover your costs.

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