Stevens & Lee: COVID-19 Frequently Asked Construction Questions

Below are some frequently asked questions and answers in relation to COVID-19 and construction.

Question: Is there a force majeure clause in my contract?

Answer: Many contracts contain express force majeure provisions that excuse performance in the event of specifically enumerated, unforeseeable circumstances. However, most of these provisions do not include “pandemic” as a basis for non-performance. To the extent a contract includes a force majeure clause, it is more likely to identify government or court orders as a basis for non-performance. Check for provisions that excuse performance where a specific force majeure event prevents fulfillment of the contract.

Question: Does my force majeure clause specifically define what events constitute force majeure?

Answer: Review your contract for the relevant language.

Question: What is the difference between force majeure and impossibility?

Answer: Unlike force majeure, impossibility of performance is a common law doctrine that may excuse nonperformance where an unexpected intervening event occurs, the contract assumes no such event would occur and a party’s ability to perform has been rendered impossible. Because impossibility is a common law doctrine, whether it will be successful as a defense to performance may need to await decision by a court or arbitral panel. Nevertheless, if impossibility of performance renders a contractor’s performance impossible, the contractor should use best efforts to negotiate an extension of time as described below.

Question: Can I use force majeure or impossibility to avoid performance of contractual obligations?

Answer: Construction contracts typically impose tight schedules and deadlines on contractors. Coronavirus has forced contractors in some states to suspend work on active projects, exposing them to imposition of liquidated damages and/or their own increased project costs associated with delay (e.g., increased overhead and bonding costs, material and labor escalation). Some contracts contain “no damages for delay” clauses that make it difficult or impossible to recapture these increased costs via change order. Even if contractors are not
prohibited from proceeding with work during this public health crisis, many are concerned about their ability to field a workforce, supply appropriate PPE or distance employees in accordance with CDC guidelines. Contractors should take prompt and reasonable measures to prevent the imposition of liquidated damages and minimize unrecoverable expenses.

Withholding performance for any reason is always at the withholding party’s risk. Doing so without consensus of all parties will only foment future claims and litigation. Contractors and owners are urged to openly discuss how Coronavirus, shutdown orders, workforce limitations and material unavailability may impact their respective abilities to perform. Now is the time to negotiate extensions of time and address performance limiting safety concerns, documenting them in the form of change orders. At the very least, the parties should document any agreements in writing or meeting minutes, reviewed and approved by all parties. Take care to
adhere to any contractual notice provisions, which may address the manner in which any compromise/change must be documented.

Question: What do I do if I receive a force majeure notice from one of my contract counter-parties?

Answer: Either invite a frank and honest conversation with all project participants and document the results as discussed above or consult with counsel.

Question: How does a choice of law term in a contract affect whether a force majeure defense is available?

Answer: Your contract will dictate whether a force majeure defense is available, and the choice of law term should not supplant a contract term. If your contract does not contain a force majeure clause, the law of the specified jurisdiction will determine whether the common law defense of impossibility is available to excuse no or slow performance.

Question: What strategies exist to resolve contract payment or performance disputes short of litigation?

Answer: See above recommendations concerning negotiations between owner, design professional and contractors. Adhere to them – the sooner, the better. If those efforts fail, contact counsel who can often assist in negotiating a resolution that will minimize the potential for litigation. If project participants are unable to agree, the contract may specify mediation as a form of alternative dispute resolution, and it may be available in the midst of a project. The longer Coronavirus shutdowns are in effect and disputes remain unresolved, the more likely all parties are to experience financial stress. Eventual litigation will only heighten that stress.

Question: Is there a liquidated damages clause and is it enforceable?

Answer: Liquidated damages loom large. For that reason, early and open negotiations to extend project schedules and deadlines are essential to avoiding imposition of liquidated damages. If an owner imposes liquidated damages and withholds payments from a contractor at the back end of a project due to delays associated with Coronavirus, consult with counsel immediately. There may be contractual time and notice provisions that pertain to claims, and there are statutory limitation periods that apply to lawsuits and lien claims.

Question: What if the owner does not make prompt payments? May contractor seek an injunction or mandamus order?

Answer: Projects that are in progress are generally financed, and financing should remain in place. Moreover, various prompt payment statutes (Miller Act, Little Miller Acts, Contractor/Subcontractor Payment Acts and, in some cases, mechanic’s lien statutes) are available to encourage owners to continue to fund completed work, even during government-ordered shut-downs.

However, most contracts contain termination for convenience clauses that often favor owners. Terminations may occur if owners reevaluate the need for projects based on unfavorable revenue projections brought on by the Coronavirus. In the event of project termination for convenience, contractors are generally entitled to payment for completed work. Read the contract provisions carefully to ensure prompt payment.

Injunction or mandamus actions to force payment are rarely successful and are recommended in only the clearest of cases.

If you have any questions concerning the above frequently asked questions, please contact Marianne Gilmartin at mjg@stevenslee.com or the Stevens & Lee attorney with whom you regularly work.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.