3-31-20 Client Alert: COVID-19 and Construction Contracts

The COVID-19 pandemic has impacted the construction workforce significantly, and actions taken by State and local governments in response to COVID-19 will affect the rights of parties to construction contracts. New York State, for example, recently issued new guidance with respect to Governor Cuomo’s Executive Order requiring the workforce in non-essential businesses to work from home. Previously, the New York construction industry was considered “essential” under a general exemption. But the new guidance limited the types of construction projects that are deemed “essential”, and requires all non-essential construction to shut down except emergency construction.

For additional information about the new guidance, see our previous Client Alert “New York Designates Many Construction Projects Non-Essential” available at https://www.woodsoviattgilman.com/news-insights/2020/3-27-20-client-alert-new-york-designates-many-construction-projects-non-essential.

Construction contracts are often highly-negotiated, multi-document agreements with clauses tailored to a particular project. Therefore, the impact of COVID-19 on a particular construction contract will depend on the express provisions of that contract. Nonetheless, several customary clauses that often appear in construction contracts may be implicated by COVID-19 and the government actions taken in response to COVID-19, affecting a construction project’s schedule, contract price, and workplace protocols.

Are COVID-19 Delays Excusable Force Majeure Delays?

Construction contracts often include provisions addressing delays resulting from events and circumstances outside the control of the parties. These provisions are referred to as “force majeure” clauses, but the term force majeure is not always used. For example, the title of this clause in two of the most commonly-used construction industry forms – AIA A201 “General Conditions of the Contract for Construction” and ConsensusDocs 200 “Standard Agreement and General Conditions between Owner and Contractor (Where the Contract Price is a Lump Sum)” – is “Delays and Extensions of Time.” In general, if a delay is covered by the force majeure clause, that delay is considered “excusable” and the Contractor is entitled to additional time to complete the project. ConsensusDocs 200 expressly includes “epidemics” as an event permitting an extension of time,[1] but AIA A201 does not. AIA 201 includes a “catch-all” delay clause[2] that might encompass the effects of COVID-19, but catch-all provisions in construction contracts are construed narrowly under New York law.[3]

Price Adjustments for Excusable COVID-19 Delay

If the force majeure clause in a construction contract excuses a delay caused by COVID-19, the question remains whether the Contractor would be entitled to a corresponding adjustment to the contract price. In general, construction contracts rarely provide for delay damages to the Contractor unless the delay was caused by the Owner. AIA A201 does not preclude damages caused by delay, if the contract documents otherwise contain an applicable damages provision.[4] On the other hand, ConsensusDocs 200 expressly provides for additional compensation for a subset of force majeure delays, but epidemics and adverse governmental actions do not fall within the category of delays for which a contractor would be entitled to additional compensation.[5]

Ultimately, the express language of the construction contract will determine the effects of any delay caused by COVID-19 or a government response to COVID-19. The provisions of AIA A201 and ConsensusDocs 200 relating to excusable delays and the corresponding contract price adjustments illustrate the need to perform a detailed review of a construction contract’s force majeure clause to determine if a COVID-19 delay is excusable and whether the Contractor is entitled to an adjustment to the contract price.

Construction contracts may also contain other clauses, such as No-Damages-for-Delay, Liquidated Damages, or Waivers of Consequential Damages that affect the scope and effect of a force majeure clause. Conversely, construction contracts may not contain a force majeure clause at all.

For additional information about force majeure clauses and equitable remedies that may apply in the absence of a force majeure event, see our previous Client Alert “How Does COVID-19 Affect My Contracts?” available at https://www.woodsoviattgilman.com/news-insights/2020/3-23-20-client-alert-how-does-covid-19-affect-my-contracts.

Suspension and Termination Rights Resulting from COVID-19

Owner’s Rights. Construction contracts may provide the Owner with the right to suspend or terminate a project for cause or for convenience. Often, the Owner has the right to terminate the project and construction contract if a suspension exceeds a pre-determined duration.[6]

Contractor’s Rights. AIA A201, for example, gives the Contractor the right to terminate the construction contract if the work is stopped for 30 days for reasons that include, among others, the “issuance of an order of a court or other public authority having jurisdiction that requires all Work to be stopped” and “an act of Government, such as a declaration of national emergency” that requires a work stoppage.[7] If the Contractor terminates the construction contract for these reasons, AIA A201 provides that the Contractor may recover from the Owner payment for Work executed, including reasonable overhead and profit, costs incurred by reason of such termination, and damages.[8] ConsensusDocs 200 includes a similar clause, which includes demobilization costs in the damages.[9]

As with excusable delays, the suspension and termination clauses of a construction contract must be reviewed carefully to determine if a COVID-19 delay constitutes the basis for suspension or termination, and whether such suspension or termination gives rise to damages. The express provisions of a construction contract may differ significantly from AIA A201 and ConsensusDocs 200, and may limit or eliminate recovery of damages for a suspension or termination that is based on COVID-19.

Notice; Reserving Rights under Construction Contracts

Construction contracts often contain notice provisions with strict form, timing, and delivery requirements. For example, AIA A201 requires all notices under the contractor to be written and provided solely by in-person delivery, registered or certified mail, or courier service providing proof of delivery (not via email).[10] Notices that relate to delay or damages claims may also have form and delivery requirements that exceed those applicable to standard notices.

Notices will generally explain how an event such as COVID-19 or the related government response is covered by the terms of the construction contract, and describe the related impacts, including any information expressly required by the construction contract to reserve rights to additional time or adjustments to the contract price. Notices should be delivered in strict accordance with the form, timing, and delivery requirements of the construction contract. Failure to deliver an effective notice under the construction contract could unnecessarily put at risk an otherwise legitimate claim for damages, especially in New York, where courts require strict compliance.[11]

Worker Safety

COVID-19 presents new challenges to contractors seeking to fulfill their requirements under employee health and safety laws, such as those established by OSHA, as well as requirements imposed by state and jobsite safety plans. Construction contracts generally place the responsibility for the means and methods of construction on the contractor, including jobsite safety, which may extend to not only a contractor’s employees but other persons who may be affected by the work.[12]

For additional information about updating workplace protocols for COVID-19, see OSHA’s Guidance on Preparing Workplaces for COVID-19 available at https://www.osha.gov/Publications/OSHA3990.pdf.

What Should Parties to Construction Contracts do in the Near Term?

Find the clauses in the construction contract affected by COVID-19. These clauses may include delay, suspension, or termination clauses similar to those highlighted in this Alert, but the clauses will vary from contract to contract. While AIA A201 and ConsensusDocs 200 are widely-used, they are rarely implemented in their unmodified forms. And construction contract are often prepared in-house by the Owner or Contractor, without any reference to a standard industry form at all.

Provide written notice, if required. Pay special attention to the form, delivery and timing aspects of the notice clause in the construction contract, conformity with which are important to reserve rights. Also, provide prompt responses to any notices received in accordance with the construction contract (and under subcontracts and supply agreements too).

Continue to maintain project records. To the extent possible, refer specifically to delays and other effects of COVID-19 in project schedules and any daily/weekly reports.

Update Worksite Protocols. If a project is essential or work must continue during the COVID-19 pandemic, update worksite protocols for worker safety.

Please contact your Woods Oviatt attorney or the attorneys listed below with COVID-19 related issues.

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[1] ConsensusDocs 200 “Standard Agreement and General Conditions between Owner and Contractor (Where the Contract Price is a Lump Sum)” Section 6.3.

[2] AIA A201 “General Conditions of the Contract for Construction” §8.3.

[3] Reade v. Stoneybrook Realty, LLC, 882 N.Y.S.2d 8 (2009) (“Interpretation of force majeure clauses is to be narrowly construed and only if the force majeure clause specifically includes the event that actually prevents a party’s performance will be covered.”)

[4] AIA A201, §8.3.3.

[5] ConsensusDocs 200, Section 6.3.2.

[6] See, e.g., AIA A201, Article 14.

[7] AIA A201, §14.1.1.

[8] AIA A201, §14.1.3.

[9] ConsensusDocs 200, Section 11.5.

[10] AIA A201, §13.3.

[11] Schindler Elevator Corp. v. Tully Constr. Co., 30 N.Y.S.3d 707 (2d Dep't 2016) (“letters and emails … did not strictly comply with the contractual notice requirement, since they did not contain verified statements of the amount of delay damages allegedly sustained by the plaintiff and were unsupported by documentary evidence. Contrary to the plaintiff's contention, the defendant's actual knowledge of the delay and the claims did not relieve the plaintiff of its obligation to serve a proper notice of claim, and the defendant's alleged breach of the subcontract did not excuse the plaintiff from complying with the notice requirements.”)

[12] See, e.g., AIA A201, §10.2.

For more information regarding Coronovirus (COVID-19) or to access all of our client alerts go to:

https://www.woodsoviattgilman.com/covid19

COVID-19 Multidisciplinary Crisis Group Co-Leaders