August 03, 2020 Article

COVID-19 As Government Action Under AIA Contracts

Nelson A. F. Mixon

The current COVID-19 pandemic has produced a wave of government orders that either prohibit the operation of businesses or limit businesses’ ability to operate normally. To date, there has been no national order halting construction. And in most jurisdictions, the construction industry has been deemed essential, allowing at least some operations to continue.  Nevertheless, construction activities have been shut down or severely limited in some jurisdictions, such as New York, Washington, Michigan. 

This article discusses the rights and remedies available for this situation from the lens of “government action” under major American Institute of Architects (AIA) contracts, which are the most widely used standardized contracts in the commercial construction industry. Perhaps the two most important AIA documents to discuss are the AIA A201-2017, General Conditions of the Contract for Construction, the AIA A401-2017 – Standard Form of Agreement Between Contractor and Subcontractor, and the AIA B101-2017 Standard Form Agreement Between Owner and Architect.

AIA A201-2017 - General Conditions of the Contract for Construction

The A201-2017 is a widely used general conditions form, and often paired with various AIA contract forms. It contains several provisions relevant to the current COVID-19 pandemic from the perspective of government orders. While the AIA-2017 is the most current version from the AIA, the provisions discussed below are all the same or substantially the same as those found in the A201-2007, which is still in common use.

First, the A201-2017 requires the contractor to comply with all laws and government orders:

§ 3.7.2 The Contractor shall comply with and give notices required by applicable laws, statutes, ordinances, codes, rules and regulations, and lawful orders of public authorities applicable to performance of the Work.

No doubt, this provision will be cited by owners to support rejection of a contractor’s claim. However, other provisions of the A201-2017 make clear that some government action does in fact give rise to claims for additional time or compensation by the contractor.

For instance, the A201-2017 entitles a contactor to an extension of time for various reasons. Relevant to the current COVID-19 situation, time extensions are allowed for causes beyond the contractor’s control, or causes determined by the architect to justify delay:

§ 8.3 Delays and Extensions of Time
§ 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act of 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.

Government orders issued in response to the COVID-19 situation are very likely “causes beyond the Contractor’s control” and may indeed “justify delay.” E.g., Citrus Soap Co. v. Peet Bros. Mfg. Co., 194 P. 715 (Cal. 1920) (contractor entitled to reasonable extension of time to deliver goods delayed due to inability to manufacture during government-ordered quarantine during 1918 Spanish Influenza); Bush v. Protravel Int’l, Inc., 746 N.Y.S.2d 790 (N.Y. S. Ct. 2002) (government-ordered lockdown in New York City after September 11 attacks entitled contracting party to “a reasonable suspension of her contractual obligation to timely cancel, if not outright excuse of her untimely cancellation”); but see Crane v. Sch. Dist. No. 14, 188 P. 712 (Or. 1920) (school’s decision to voluntarily close in response to influenza, but without being ordered to close by relevant government authorities, did not excuse school from performing under contract with busing company)

Although stated in § 8.3.1, it is worth highlighting that the relief available under § 8.3.1 is an extension of time, not additional compensation.  However, other contract documents may entitle the contractor to additional compensation for time extensions, particularly under cost-plus contracts like the A102-2017, Standard Form of Agreement Between Owner and Contractor Where the Basis of Payment is the Cost of the Work Plus a Fee With a Guaranteed Maximum Price, or the A103-2017, Standard Form of Agreement Between Owner and Contractor Where the Basis of Payment is the Cost of the Work Plus a Fee Without a Guaranteed Maximum Price.

Further, the A201-2017 allows the contractor to terminate a contract if work is stopped for 30 consecutive days as a result of a government act or order that requires all work to be stopped:

§ 14.1 Termination by the Contractor
§ 14.1.1 The Contractor may terminate the Contract if the Work is stopped for a period of 30 consecutive days through no act or fault of the Contractor, a Subcontractor, a Sub-subcontractor, their agents or employees, or any other persons or entities performing portions of the Work, for any of the following reasons.
.1  Issuance of an order of a court or other public authority having jurisdiction that requires all Work to be stopped;
.2 An act of government, such as a declaration of national emergency, that requires all Work to be stopped;
.3  Because the Architect has not issued a Certificate for Payment and has not notified the Contractor of the reason for withholding certification as provided in Section 9.4.1, or because the Owner has not made payment on a Certificate for payment within the time stated in the Contract Documents; or
.4  The Owner has failed to furnish to the Contractor reasonable evidence as required by Section 2.2.

In the event of such a termination, the contractor is permitted to be paid for work performed, reasonable overhead and profit on work not performed, and costs incurred by reason of the termination:

§ 14.1.3 If one of the reasons defined in Section 14.1.1 or 14.1.2 exists, the Contractor may, upon seven days’ notice to the Owner and Architect, terminate the Contract and recover from the Owner payment for Work executed, as well as reasonable overhead and profit on Work not executed, and costs incurred by reason of such termination.

§ 14.1.3 is only likely to be relevant only to contractors in those jurisdictions where construction work has been shut down. For those contractors, however, a termination under § 14.1.1.2 may not only be an option, but an attractive option because of the contractor’s right to payment of reasonable overhead and profit.

Interestingly, there is no comparable provision in the A201-2017 that allows the owner to terminate for government action. In this regard, the  A201-2017 clearly shifts the risk of government-ordered work stoppages to the owner.

Finally, the A201-2017 includes an emergencies provision that gives the contractor broad power to prevent damage, injury or loss in emergency situations.

§ 10.4 Emergencies
In an emergency affecting safety of persons or property, the Contractor shall act, at the Contractor’s discretion, to prevent threatened damage, injury, or loss.  Additional compensation or extension of time claimed by the Contractor on account of an emergency shall be determined as provided in Article 15 and Article 7
 

Although this provision does not expressly reference government action, it is implicated in light of the President’s declaration of COVID-19 as a national emergency, and similar declarations by many (if not most or all) states and local jurisdictions. Based on the language of this provision, it seems more likely to provide compensation for additional costs incurred as a result of social distancing measures taken in response to government mandates or recommendations (i.e., labor inefficiencies, additional shifts, health screening costs, additional cleaning costs, etc.), than for outright work shortages. Nevertheless, this provision provides not only for an extension of time, but additional compensation (unlike § 8.3.1).

B.  AIA A401-2017 – Standard Form of Agreement Between Contractor and Subcontractor.

The A401-2017 is a commonly used subcontract form. Unlike the A201-2017, there are no provisions expressly dealing with government acts or events beyond the contractor’s or subcontractor’s control. However, the A201-2017 is listed as a contract document under § 1.3 of the A401-2017, and so the provisions discussed above would create similar rights as between the contractor and subcontractor.

Additionally, the suspension for convenience clause of the A401-2017 seems relevant in light of government action. Under that provision, a contractor’s suspension, delay, or interruption of the subcontractor’s work entitles the subcontractor to an equitable adjustment of time and compensation:

§ 7.3 Suspension by the Contractor for Convenience
§ 7.3.1 The Contractor may, without case, order the Subcontractor in writing to suspend, delay, or interrupt the Work of this Subcontract in whole or in part for such period of time as the Contractor may determine. In the event of suspension ordered by the Contractor, the Subcontractor shall be entitled to an equitable adjustment of the Subcontract Time and Subcontract Sum.
§ 7.3.2 The Subcontract Time and Subcontract Sum shall be adjusted for increase in the cost and time caused by suspension, delay or interruption as described in Section 7.3.1. Adjustment of the Subcontract Sum shall include profit on the increased cost of performance caused by suspension, delay, or interruption. No adjustment shall be made to the extent that.
.1 performance is, was or would have been so suspended, delayed, or interrupted by another cause for which the Subcontractor is responsible; or
.2 an equitable adjustment is made or denied under another provision of this Subcontract.

Subcontracts impacted by government-ordered work stoppages or social distancing measures may rely on this provision to claim that the suspension was directed by the contractor (albeit in response to government orders), and thus an equitable adjustment is owed (rather than merely an extension of time under the flow-down provisions of § 8.3.1 of the A201-2017). Whether this provision applies to such suspensions is likely to be a hotly disputed issue.

AIA B101-2017 – Standard Form Agreement Between Owner and Architect.

The AIA B101-2017 Standard Form of Agreement Between Owner and Architect does not contain any explicit provisions addressing government action. However, § 3.1.3 contemplates extensions of time will be given to the architect “for reasonable cause,” a broader standard than that allowed for contractors under the A201-2017. It is likely that compliance with government orders—especially those closing offices or requiring work-from-home arrangements—constitutes reasonable cause for an extension.

No provision of the AIA B101-2017 expressly entitles the architect to additional compensation for government action or other causes “beyond the architect’s control.”

Another possible impact of government orders is to the architect’s standard of care. Under § 2.2, the architect is required to use “the professional skill and care ordinarily provided by architects practicing in the same or similar locality under the same or similar circumstances.” To the extent workplace shutdowns and social distancing requirements impact an architect’s ability to conduct on-site inspections and observations, § 2.2 would seem to allow an architect to adopt alternative methods and schedules for inspections.

Conclusions

Government-ordered suspensions or interruptions of work may give rights to extensions of time or additional compensation under AIA form contracts. Because AIA-form contracts are frequently modified, project participants should carefully review their contracts, paying particular attention to contract language regarding government actions or orders, or authorizing extensions of time, additional compensation, or equitable adjustment—all of which may apply to government action in the present time. Nevertheless, the major AIA-form contracts do contemplate at least some relief being available for work stoppages, delays, or interruptions caused by government orders in response to the COVID-19 situation.

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Nelson A. F. Mixon

Holden Willits PLC, Phoenix, AZ