By Aileen M. Leipprandt and Jill K. Miller
Predicting what the future holds considering the Coronavirus is anyone’s guess as issues evolve daily, if not hourly. First, Governor Whitmer’s Executive Order 2020-11, barred gatherings of more than 50 people in a single indoor shared space. That changed this morning (March 23, 2020) when the Governor issued Executive Order 2020-21 (COVID-19) temporarily suspending all activities that are not necessary to sustain life.
See the Governor’s Order and the exceptions to this Order related to construction critical infrastructure work, as defined by the U.S. Department of Homeland Security, Cybersecurity & Infrastructure Security Agency.
Given the state of flux, it is important for you – contractors, subcontractors, and suppliers to understand the legal landscape for continuing, completing, or suspending performance on construction projects.
All construction projects involve financial and legal risk. Parties allocate these risks primarily through their construction agreements. Where a party assumes a risk in its contract, it may then transfer that risk through performance and payment bonds and insurance. The question of who bears what risk for projects impacted by the COVID-19 global pandemic will largely be answered by these risk allocation and transfer methods. Most importantly, your rights and responsibilities for project disruption are defined by the specific language of your construction contract and influenced by Michigan common law, the law developed through court rulings.
Force Majeure & Excusable Delay
At the center of any analysis of who bears the risk for project disruption or delay, is the force majeure provision. Force majeure is a fancy French term for “Superior Force.” Considering “flow down” provisions or contract incorporation provisions, force majeure terms at every level of the construction contracting chain may be at play – the Prime Contract, Subcontract, and Supply Agreements – as each force majeure provision may afford different rights and responsibilities.
A typical force majeure provision describes events that provide the grounds for an equitable extension in the time to perform work (excusable delays). That is, the event defers a party’s contractually obligated time to perform. For example, the AIA General Conditions, A201-2017, §8.3.1 provides:
If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; 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.
Notably, this provision does not specifically identify communicable diseases, epidemics, or pandemics as a cause giving rise to an equitable time extension. Arguably, however, the COVID-19 pandemic and the extraordinary consequences arising from the pandemic qualify as “other causes beyond the Contractor’s control.” Some argue that as to events “beyond the contractor’s control,” the question is whether from an objective standpoint, the cause or its consequences were reasonably foreseeable when the parties formed their contract. If so, one could argue that the contractor should have anticipated, mitigated, and allocated risk and responsibility for the event. Convincingly, one can argue that the sheer gravity of COVID-19 and its extraordinary consequences were not reasonably foreseeable as no similar event has occurred in recent history. Even the SARS outbreak in 2003 does not appear to have resulted in mass disruption to material or labor supply or widespread executive orders suspending or closing businesses, cities, and states.
Unlike the AIA force majeure provision, the ConsensusDocs (CD) family of construction agreements specifically identify epidemics and adverse government actions as causes beyond the contractor’s control and the basis for an equitable time extension (See CD 200, Owner Contractor Agreement, §6.3.1). Similarly, the Design-Build Institute of America General Conditions include “epidemics” as a force majeure event. (DBIA 535, §1.2.8). Likewise, the Federal Acquisition Regulations (FARs), typically a part of federal contracts, consider flu epidemics to be grounds for an excusable delay.
Even if a disruptive event qualifies as an excusable delay, the specific contract language addressing delays may nonetheless limit the right to an extension. For instance, standard industry agreements apply the notion of excusable delay to a delay in the “commencement or progress” of the work. (AIA A201, §8.3.1; CD Short Form Owner/Contractor Agreement, 205, §10.1; CD Master Subcontract Agreement, 755, §5.3). Custom contracts typically are more restrictive and provide that a delay is excusable only if it affects the Critical Path of the project or if it affects the Substantial Completion date, or only if the contractor (or subcontractor) is not otherwise responsible for a concurrent delay. And, a contractor (or subcontractor) seeking an extension still must establish that the event/circumstance actually caused the delay and that the contractor/subcontractor could not have avoided the delay through due diligence or another reasonable course of action.
Force Majeure & Non-compensable Delay
Even where one establishes entitlement to a time extension for an excusable delay, the contract may limit whether such event is deemed a compensable delay for which a party make seek an equitable adjustment in the Contract Price. While the force majeure provision of the AIA General Conditions does not expressly provide for compensable delays, recovery of damages is not precluded under “other provisions of the Contract Documents.” (AIA A201, §8.3.3). The ConsensusDocs family of agreements specifically identify which events entitle a contractor to additional compensation; epidemics is not identified as a compensable delay. (CD 200, §6.3.1.) Importantly, many custom industry contracts include a No-Damages-For-Delay clause which prohibits contractor or subcontractor claims for any damages caused by delays.
Force Majeure & Michigan Common Law
There are few cases in Michigan jurisprudence addressing force majeure provisions. Regardless of the paucity of rulings, some general themes control. First, courts narrowly construe force majeure provisions and generally hold parties to their bargain, enforcing the plain terms of a contract. Second, generally speaking, market events that make contracts unprofitable, will not qualify as a force majeure event. Third, a force majeure provision cannot be used to excuse a party’s performance when the underlying condition was caused by the party charged with performance and the condition could have been prevented through prudence, diligence, and care.
Michigan recognizes the common law Doctrine of Impossibility and Doctrine of Frustration of Purpose as defenses that may excuse one’s performance under a contract. The Doctrine of Impossibility is reserved for extremely rare situations. A party raising the Doctrine must prove a severe or extreme impracticality and that the party would suffer extreme difficulty, injury, loss, or expense if required to perform. Economic unprofitability, such as an increase in costs, is not enough to excuse performance. The Doctrine of Frustration of Purpose concerns situations where the purpose of the contract no longer exists due to an unforeseen circumstance that makes one party’s performance practically worthless to the other. In other words, the underlying reason or purpose for the contract has disappeared. Courts hold parties to a high standard to establish this defense and require a party to prove: (i) the contract is in the midst of performance, (ii) the frustrated purpose of the contract was known to both parties when they formed their contract, and (iii) that purpose was frustrated by an event not reasonably foreseeable to the parties when they formed their contract.
The COVID-19 pandemic and the resulting state or federal government orders shutting down businesses may make certain contracts impossible or frustrate the purpose of a contract and courts may be receptive to excusing a party’s performance. Don’t bank on it though.
Notice Provisions
Typical construction contracts require a contractor and subcontractor give written notice of any impactful event that may give rise to a claim and/or give notice of the actual claim itself. The purpose of such notice requirements is to allow the parties to take action to mitigate the impact of the disruptive event.
When assessing whether the obligation to give notice is triggered, it is critical to examine the precise language of the construction agreement. Custom construction contracts may be very broadly drafted to require notice of any event that might provide the basis for a claim, even if an actual impact has not or cannot yet be established. This type of broad language may result in a flood of Impact Notices arising from various circumstances associated with COVID-19, even though a claim may never actually transpire. Under the AIA General Conditions, parties must give notice of a “claim.” A claim is defined as a “demand or assertion” seeking a change in contract time, the payment of money, or other relief under the contract. (AIA A201, §15.1.1). In that respect, one can argue that no notice is required as the basis to extend the contract time or increase the contract price has not been established, so there is no “claim.” That is, fear of potential impacts from the fallout of the coronavirus does not itself establish the basis for a claim. Regardless, cautious contractors will deliver claim Notices.
Timing, form, and delivery of required notices is crucial. Most custom construction agreements impose very short notice periods, sometimes as short as 24 hours from the circumstance causing an impact. Under the AIA general conditions, notice of a “claim” must be given within 21 days after the event giving rise to the claim. (AIA A201, §15.1.3.1). Custom contracts may require that notices be verified (sworn to be true) and include specific supporting evidence. Under the AIA general conditions, a claim must include an estimate of the cost and of the probable effect of delay on the progress of the Work. (A-A201, §15.1.4.2, §15.1.6.1). Delivery of such notices may be restricted to certified mail. (AIA A201, §1.6.2). Importantly, notice provisions may contain “condition precedent” language requiring strict compliance with the requirements as to timing, form, substance of the claim, and delivery of the claim, otherwise the claim is barred. Given this drastic consequence of imperfect compliance, expect to see a flood of Notices concerning potential impacts related to COVID-19.
Suspension & Termination Provisions
Standard industry contracts give the owner a right to suspend a project for convenience. In such circumstances, the contractor is typically provided the right to an adjustment in the Contract Price and Contract Time. (See AIA A201, §14.3). Similarly, an owner typically has the right to terminate a contract for convenience. In the event of a termination or suspension, whether the contractor (and correspondingly, the subcontractor) is entitled to claim damages for remobilization and demobilization charges, idled equipment or labor, lost profits, restocking fees, salvage for specially manufactured goods, and the like is determined by the contract.
Under standard industry documents, the contractor is typically afforded the right to terminate a contract when a project is suspended for a stated duration. For instance, under the AIA General Conditions, the contractor may terminate a contract if work is stopped for a period of 30 consecutive days, through no fault of the contractor, due to the act of government, such as the declaration of national emergency, that requires all Work to be stopped, or the Contractor may terminate the agreement if the project is suspended for a period of 120 days. (AIA A201, §14.1.1; §14.1.2). Whether a contractor should exercise any termination right is highly dependent upon business considerations including business relationships and allocation of resources.
Claims arising from Safety Obligations
Most construction contracts impose upon the general contractor sole responsibility and control over construction means, methods, techniques, procedures and circumstances, and sole responsibility for coordinating all subcontractor work. Furthermore, the general contractor is generally responsible for maintaining and supervising all safety precautions and programs on the project. Likewise, subcontractors typically bear these same contractual responsibilities. In addition to this contractual duty, the MIOSHA general duty clause imposes on every employer the obligation to keep a workplace free from recognized hazards that cause or are likely to cause death or serious physical harm. Furthermore, even though claims for personal injury arising from contracting the coronavirus on a job site may be very difficult to prove, contractors and subcontractors may be exposed to such claims under common indemnity provisions.
Considering the contractual and regulatory safety requirements, the coronavirus may dictate new work practices, new safety protocols, and disruptions to the ordinary flow of a work on a project site. (See OSHA Guideline.) “Social distancing” of workers may not be feasible. A change in crew size may affect productivity. Shortages in personal protective equipment may disrupt work. Labor may be disrupted due to forced quarantines. Such circumstances may be the basis for a change order. Furthermore, changes in laws, regulations, or industry guidelines, occurring after a contract is signed may also be grounds for a change order.
Knowledge is power. In these uncertain times, having a firm understanding of your contract rights and responsibilities is critical. Every contract is drafted differently, so a contract-by-contract review is required.
