The COVID-19 pandemic has affected almost all ongoing and/or planned development and construction projects. Although each project and project agreement is unique and fact-specific, this brief guide identifies: (1) how to determine if your project may proceed in light of COVID-19, (2) common contractual language found in design and construction contracts that may apply to COVID-19-related claims, (3) summarizes where to look for those provisions, and (4) provides general analysis as to how that contract language may apply.
May my project proceed?
Nearly all local, state, and/or federal authorities have issued some order, declaration, or guidance on the issue of whether construction projects may continue in light of COVID-19. The touchstone analysis in most jurisdictions is whether an ongoing project constitutes an “essential business” or “critical infrastructure” as defined in the applicable orders. However, some jurisdictions, like the state of Pennsylvania, have halted most ongoing projects. Statewide shutdown orders like Pennsylvania’s are not the norm though. Most jurisdictions allow projects to proceed subject to other requirements set forth in the various orders or guidance documents, such as maintaining applicable social distancing requirements, so long as that project fits within the definition of either an essential business or critical infrastructure.
For a more detailed discussion of this analysis, please see The Effect of Stay-at-Home Orders on Business prepared by the MMM COVID-19 Task Force team members, Bonnie Hochman Rothell and Jessica Rodriguez.
The first step is to determine if your project may proceed. To determine this, first obtain all the relevant orders and guidance documents issued by the project’s authorities having jurisdiction. This may include both local government orders and state government orders, as well as any applicable guidance interpreting those orders. Next, carefully review the applicable orders and guidance documents to determine if your project fits within the definitions of an essential business or critical infrastructure and may therefore continue. Alternatively, if the project does not fit within those definitions, or the applicable government authorities have otherwise suspended construction projects, the project may need to be shut down or suspended. If the project must be halted, shut down, or suspended, then review the order to determine if the contractor is allowed to perform wind-down operations to protect the work in place prior to shut down or suspension. On the other hand, if the project may proceed, then determine what requirements and guidelines must be followed during the continued performance of the work. For example, it may still be necessary to comply with any applicable social distancing requirements or limitations on the number of employees on the jobsite.
The next step for any owner or developer is to gather and organize the relevant contracts for each project. Contracts with architects, interior designers, engineers, consultants, and contractors should be reviewed and evaluated together in order to evaluate COVID-19’s cumulative effect upon the project and to prepare a cohesive response to potential claims.
Once organized, review the contracts to see if COVID-19-associated impacts are covered under any remedy-granting contract provisions and, if so, to what relief the impacted party may be entitled. Some standard contract provisions that may be triggered by COVID-19 include provisions addressing project delays (force majeure provisions) and the contracting parties’ suspension and termination rights. Next, determine the process for the affected party to file a claim, including how much notice must be given to the owner before asserting the claim and whether claims are waived if proper notice is not given.
Finally, the owner should look to see what remedies may be available if applicable contract provisions are triggered. For example, in the event a COVID-19-related delay interrupts or delays completion of the project, is the contractor entitled to an adjustment in the contract time, an adjustment in the contract sum, or both? Is there a liquidated damages provision that provides recourse for the owner in the event the contractor fails to achieve substantial completion as required in the contract? If so, those contract provisions must be analyzed together as the contractor will be exempt from liquidated damages during any period of excusable delay. Other delay-related provisions that may apply include provisions addressing claims for increased cost of the work due to labor shortages, limited availability of materials and/or equipment, and price escalation. Depending on the contract type, a construction contingency fund may be included in the contract sum. The owner should review any restrictions for its use as the contingency funds may be available and allow the contractor to offset some of the increased costs of construction resulting from COVID-19. The owner will also need to evaluate remedies that may be available to the owner in the event the owner suffers COVID-19 and/or other delay-related damages. For instance, the owner will want to determine if there is a complete waiver of consequential damages. If not, the owner may be able to seek more substantial relief from the contracting party and/or available insurance in the event of a project delay.
Where do we look?
For typical Owner-Contractor AIA documents, the A201 General Conditions of the Contract for Construction will contain the relevant provisions addressing delays, extensions of time, termination rights, and required notice. Meanwhile, deal-specific terms like liquidated damages for contractor-caused delays and any construction contingency fund provisions, will be in the standard AIA construction agreement form, typically the A101, A102, or A133 Agreement form. There may also be contractor clarifications, qualifications, or exceptions documents attached as exhibits to the base contract that also address these issues.
Unlike the standard AIA Owner-Contractor Agreement forms discussed above, the AIA Owner-Architect contract forms, and MMM-prepared Owner-Consultant Agreement forms, do not typically contain any force majeure provisions. However, this does not mean that relief is unavailable to the designer in the event of a project delay outside of the designer’s control. Under the standard AIA B101 Owner-Architect Agreement, for example, the architect may be entitled to increase their construction administration costs as an additional service in light of the extended contract time resulting from a COVID-19 delay. Clients whose design contract consists of a standard form proposal or agreement prepared by the architect or consultant should also be mindful that such forms likely include some remedy-granting provisions in favor of the architect or consultant. Even in the absence of any relief-granting contract provisions, state common law doctrines such as impossibility, frustration of purpose, or commercial impracticability may apply to both design and construction contracts to excuse the designer and/or contractor from performance in light of COVID-19’s impacts.
What do we know?
Clients should keep in mind that the existence of COVID-19 in itself is usually not enough to trigger remedy-granting provisions in design or construction contracts. COVID-19 must affect the project by causing a critical delay to the work, a shortage in available labor, impact the price of materials, or contribute to a COVID-19-related shutdown (such as the recent events in Boston, where city inspectors and permit officials were prohibited from conducting inspections/walk-throughs of projects). Therefore, it is important to review delay and force majeure provisions with the actual cause of the delay in mind, which typically will require more than just the existence of COVID-19. Additionally, COVID-19 may not trigger relief under many jurisdiction’s interpretation of what constitutes an “act of God.” For example, an event deemed an “act of God” is routinely interpreted to be an unforeseen natural phenomenon or disaster like an earthquake, the sudden onset of a tornado, the opening of a giant sinkhole, a tsunami or tidal wave, etc.
What can owners and developers do at this time?
As the global community continues to grapple with COVID-19 and its impacts on everyday life continue to evolve each day, its full effects on construction projects remain uncertain. Applicable governmental authorities are still determining if and when construction projects can proceed in the midst of the COVID-19 crisis. Owner and developer clients who cannot obtain a certain timetable for continuity of their construction project may want to consider exercising their contractual right to suspend the project or terminate for convenience in order to avoid project delay and interruption claims.
What if we have additional questions?
The Construction Team and the COVID-19 Task Force at Morris, Manning & Martin, LLP are fully versed in assessing COVID-19-related claims pertaining to new and ongoing construction and real estate development projects. Please do not hesitate to reach out if you have any questions or concerns regarding COVID-19’s impact upon your project.