By Diana Parks
In the event COVID-19 takes a toll on the American workforce and directly affects U.S. construction projects, know what’s defined in your construction contract.
CONTRACT CLAUSE, DEFINITION
First, dust off that prime construction contract. Find the force majeure clause and determine if an epidemic or pandemic is expressly included in its definition. Even if those precise words are not included, common boilerplate language in such clauses, like “an act, event, or occurrence caused by acts of God, explosion, public enemy, civil disturbance, unusual and adverse weather, or other similar act, event or occurrence that is beyond the reasonable expectation or control of the parties” arguably encompass large-scale outbreak of a novel disease. Some federal contracts will benefit from express terms like “epidemics” and “quarantine“—perhaps not written into the contract itself, but in the Federal Acquisition Regulations which govern the contract, and thus provide a basis for excused non-performance. No matter the contractual or code provision you look to, remember that notice and preservation of rights must be part of your communication and action plan.
As coronavirus spreads, some may suggest its impact will no longer be “unforeseeable” or “beyond the reasonable expectation” of the parties. That is especially true if a contract was made in recent months, after concerns over the virus were made public. Nevertheless, there may be good arguments that coronavirus should still give rise to excusable delay under many force majeure clauses because, even if it is foreseeable that it may spread to your project (i.e., not beyond “expectation”), such a spread of infection is still beyond a party’s “reasonable control.”
What if, in your contract, there is no force majeure clause or the one written excludes outbreak or spread of disease as giving rise to an excusable delay? While it may be true that, by default, all or most of the risk of project delay rests with the contractor, project owners should give careful consideration to the consequences of forcing or attempting to force continued construction activities amid an outbreak of a novel disease in their project’s location. State and federal government, through (among other things) health and safety regulations, likely have the power to stop a project through a stop work order or injunction. It seems a more prudent course of action would be to negotiate favorable terms of a suspension of work with the contractor and maintain good relations among the project team and the authorities having jurisdiction over the project.
Owners should also look to their suspension rights in the contract. Often, these rights allow an owner to suspend for a period of time without increase to the contract price. Other provisions may permit a contractor to request a change order, but only for project-site overhead and other standby charges. Even if a suspension right is limited to 30 days, that is valuable time to watch how infection spreads in your project location and develop a corresponding plan for how to proceed with the work. If your project is suspended, use that time wisely—work among your project team to implement a daily jobsite health screening plan, better sanitary amenities, and infection control procedures. Contractors rarely have a suspension right written into their contracts but may wish to advocate for such a right in upcoming projects to account for specific issues that may arise during construction, like an outbreak of coronavirus in or around the project location.
What if the applicable contract is silent as to unavoidable delay protections and a no-cost suspension right? There are common law doctrines such as frustration of purpose, commercial impracticability and impossibility, that a court may use to grant relief if a party to a construction agreement is struggling to meet its demands due to disease. However, seeking this relief takes time and courts are often reluctant to use these common law tools to interfere in projects. Instead, perhaps it’s time for the parties to call a meeting among decision makers to come up with a plan. That plan should be evidenced by an amendment to the prime construction contract and a revision to the construction schedule.
CALL YOUR BROKER
Your first question should be: Do I have insurance coverage for an interruption to my business and projects due to coronavirus? Coverage may come from more than one source. Business interruption coverage is a common endorsement to a commercial property policy. This may or may not offer coverage, depending on the terms of the policy and whether the impact of the virus on your business constitutes an “occurrence.” But there are other possible avenues for coverage. Consider trade disruption insurance, especially if you have a supply chain originating outside of the United States. Consider also travel insurance. If project managers, project executives, owner’s representatives or others on your team frequently fly to, and use temporary lodging while at, a project site, these costs might be covered if a trip is canceled due to outbreak. However, as the virus becomes more widespread and is deemed “foreseeable” for insurance purposes, you may need to add to or modify such a policy to cover cancellation for “any reason.” Consider additional voluntary workers’ compensation coverage that includes outbreak of sickness or disease. Lastly, consider looking to your builders’ risk coverage in the event a shutdown causes physical loss to covered property. Now is the time to seek assistance from a professional insurance counselor to discuss coverage already in place and additional policies and coverage that might be available.
TALK TO THE LENDER
No one likes to approach their banker with a current or expected payment problem—especially on construction projects. But lenders prefer working through issues as they arise to find solutions that will protect their loans and prevent their borrowers from defaulting. Rather than letting things go until it is too late, be proactive. Work with your lender to determine a best course of action, which has the added benefits of providing notice and protecting the lender’s rights in the contracts and the projects. This adds up to further protection for you from committing an inadvertent default.
Pay attention to your local, state, and federal agencies for up-to-date information and resources to help your company be resilient.
About the author:
Diana Parks is a partner at the international law firm Dorsey & Whitney LLP (www.dorsey.com) and one of the foremost experts in the country on infrastructure projects. Parks advises public and private clients in complex public-private partnerships and infrastructure projects.
Modern Contractor Solutions, March 2020
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