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As the COVID-19 pandemic drags on, it is more and more likely that disputes will arise between parties to real estate and construction contracts. Although currently most states with shelter-in-place orders have defined at least some facets of construction (from health care construction to all residential and commercial construction) to be “essential infrastructure” business, some construction projects are deemed not to be essential. Further, labor and even material shortages due to COVID-19 are likely to affect the progress of construction projects that are proceeding. Are contractors responsible for the resulting delays?
The pandemic is also substantially affecting owners and lessors of businesses closed by shelter-in-place orders issued by the states and municipalities, including lessees of restaurant properties and owners currently engaged in construction or renovation of restaurants. Can a restaurant operator cease making lease payments? Can an owner of a restaurant construction project stop work, temporarily or permanently?
The answer to all these questions lies in the applicable contract documents, with guidance from case law addressing past pandemics and the interpretation of force majeure and other contractual provisions and defenses.
Force Majeure Definitions
Force majeure clauses potentially provide the most applicable defense to claims relating to the stoppage of construction work, delays, and lease obligations, though there may be other defenses available, such as frustration of purpose and impossibility. There are many variations of force majeure clauses, some of which expressly address pandemics and some of which may be argued to address pandemics. The following are examples of force majeure clauses defining events of force majeure:
- Delays or failure of performance caused by “any act, event, or condition that has a material adverse effect on the ability of a party to this Agreement to perform its obligations hereunder if such act, event, or condition is beyond the reasonable control of such party and is not the result of such party’s willful or negligent action or inaction and shall include, without limitation, (i) acts of God, war, public disorders, insurrection, rebellion, floods, hurricanes, earthquakes, lightning, or other natural calamities; (ii) acts or inaction of governmental or regulatory agencies or judicial bodies or changes in laws; (iii) explosions or fires; (iv) strikes or labor disturbances; (v) delays in obtaining goods or services from any subcontractor, materialman, or supplier by reason of any occurrence of any of the foregoing causes; or (v) any unforeseeable act or omission of any third party.” Solid Waste Auth. of Cent. Ohio v. FirmGreen Fuels of Ohio, L.L.C., 2010 Ohio Misc. LEXIS 20220 (2010).
- “[A]cts of God; acts of the Government or the public enemy; natural disasters; fire; flood; epidemics; quarantine restrictions; strikes; freight embargoes; war; acts of terrorism; [or] equipment breakage.” Kyocera Corp. v. Hemlock Semiconductor, LLC, 313 Mich. App. 437, 448, 886 N.W.2d 445, 452 (2015).
- The American Institute of Architects’ (AIA’s) standard form A201 General Conditions of the Contract of Construction do not contain a force majeure clause but do address delays in the contractor’s performance caused by the owner or caused “by any other circumstances beyond its control, including, but not limited to, adverse weather, flood, fires, acts of god, war, unavoidable casualties or other causes beyond the Contractor’s control. . . .” AIA A201 (2007). The 2017 AIA A201 is essentially identical.
- The ConsensusDocs 200 Standard Agreement and General Conditions Between Owner and Constructor expressly includes epidemics and adverse governmental actions as causes of delays beyond the control of the constructor.
“To determine whether a certain event excuses performance, a court should look to the language that the parties specifically bargained for in the contract to determine the parties’ intent, rather than resorting to any traditional definition of the term.” R & B Falcon Drilling Co. v. Am. Expl. Co., 154 F. Supp. 2d 969, 973 (S.D. Tex. 2001).
If, however, epidemics and governmental actions are not expressly listed as events of force majeure, can a party affected by the pandemic rely on “catchall” or “Act of God” terms in the force majeure provision? State law varies on this issue, but the answer frequently depends on the extent of foreseeability of the event. Texas, for example, requires a showing of unforeseeability for a “catchall” provision to apply. TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 184 (Tex. App. 2018). “[G]enerally, an event must be both outside of the control of the parties and unforeseeable.” In re Flying Cow Ranch HC, LLC, 2018 Bankr. LEXIS 4147, at *6, 27 Fla. L. Wkly. Fed. B 323; Phibro Energy, Inc. v. Empresa de Polimeros de Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989); but see Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248 (5th Cir. 1990) (“Because the clause labelled ‘force majeure’ in the Lease does not mandate that the force majeure event be unforeseeable or beyond the control of Perlman before performance is excused, the district court erred when it supplied those terms as a rule of law.”); Drummond Coal Sales, Inc. v. Kinder Morgan Operating LP “C”, No. 2:16-cv-00345-SGC (N.D. Ala. July 25, 2017).
In determining whether an event falls within a catchall provision, courts frequently apply the doctrine of ejusdem generis. Under this doctrine, a catchall provision is narrowly construed, and only enumerated events and “events or things of the same general nature or class as those specifically enumerated” will be events of force majeure. Great Lakes Gas Transmission Ltd. P’ship v. Essar Steel Minn., LLC, 871 F. Supp. 2d 843, 854 (D. Minn. 2012) Seitz v. Mark-O-Lite Sign Contractors, Inc., 210 N.J. Super. 646, 510 A.2d 319, 321 (N.J. Super. Ct. Law Div. 1986); see also, Drummond Coal Sales, Inc., No. 2:16-cv-00345-SGC; Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942–43, 839 N.Y.S.2d 242, 246 (N.Y. App. Div. June 7, 2007).
The event must also render performance impossible, not just difficult or a hardship. Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319–20 (S.D.N.Y. 1985); W. Drug Supply & Specialty Co. v. Bd. of Admin., 106 Kan. 256, 261–62, 187 P.701, 703 (1920). And a party claiming force majeure may have a duty to attempt to use other possible means of performance. Perlman, 918 F.2d at 1249.
Notice of Event of Force Majeure
Immediate review of applicable contractual provisions should be undertaken, as force majeure provisions often require that express notice be given to the other party within a narrow time frame. Although the AIA A201 General Conditions address delays and not force majeure specifically, those conditions provide that “Contractor shall, within forty-eight (48) hours after beginning to incur such delay, give notice thereof in writing to Owner.” ConsensusDocs requires “prompt written notice to Owner of the cause of such delays after Constructor first recognizes the delay.”
Failing to provide the notice required under a force majeure clause may prove fatal to a defense of force majeure. Advanced Seismic Tech., Inc. v. M/V Fortitude, 326 F. Supp. 3d 330, 336–37 (S.D. Tex. July 3, 2018) (force majeure defense not available for failure to give immediate notice). This is consistent with many states’ laws regarding contractors’ duty to give written notice of delays. Winco Foods, LLC v. Crossland Constr. Co., No. Civ.-18-175-HE (W.D. Okla. Nov. 21, 2019); State Sur. Co. v. Lamb Constr. Co., 625 P.2d 184, 191–92 (Wyo. 1981); Quin Blair Enters. v. Julien Constr. Co., 597 P.2d 945, 951–52 (Wyo. 1979); Flour Mills of Am., Inc. v. Am. Steel Bldg. Co., Inc., 1968 OK 15, 449 P.2d 861, 874 (Okla. 1969).
Some states will allow late notice, if the language of the clause does not expressly make strict compliance with notice a condition precedent for the application of force majeure. United States v. Sunoco, Inc. (R&M), 2007 U.S. Dist. LEXIS 41435, at *12–13, 2007 WL 1652266 (substantial compliance would have allowed the defense) (2007); Toyomenka Pac. Petroleum, Inc. v. Hess Oil Virgin Islands Corp., 771 F. Supp. 63, 67–68 (S.D.N.Y. 1991) (clause did “not expressly make a force majeure defense conditional upon giving notice within forty-eight hours”).
Even when the other party has actual notice of the events that may constitute force majeure, written notice by the affected party may still be required. Aquila, Inc. v. C.W. Mining, 545 F.3d 1258, 1266–67 (10th Cir. 2008) (noting that written notice of force majeure event may be required under Missouri law even if party has actual knowledge of circumstances). Knowledge of an event does not constitute knowledge that the affected party considers the event to be a force majeure event. Id. A party whose performance is affected by COVID-19 events should therefore not rely on the widespread knowledge of the pandemic to satisfy notice requirements.
Nature of Relief Afforded by Force Majeure Clauses
If the pandemic constitutes a contractual force majeure event and any required notice is given, what is the impact and duration of the pandemic on the contractual obligations of the parties? This too depends on the contract language. As discussed in Pt Kaltim Prima Coal v. AES Barbers Point, Inc., 180 F. Supp. 2d 475, 482 (S.D.N.Y. 2001), a traditional force majeure clause has the effect of relieving both parties of further performance. But “[p]arties may agree, however, that a force majeure event will have a different result, such as broadening or narrowing excuses of performance and attaching conditions to the exercise and effects of a force majeure clause.” Id. Frequently, however, payment obligations are excluded from force majeure clauses. Solid Waste Auth. of Cent. Ohio v. FirmGreen Fuels of Ohio, L.L.C., 2010 Ohio Misc. LEXIS 20220 (2010) (“[T]he obligations of the party hereunder affected thereby, other than the obligation to pay money then due or accrued under the terms hereof shall be suspended for so long as and to the extent that such event continues.”)
We all hope that the current crisis resolves as quickly as possible, but owners, contractors, and businesses should make sure to review their contracts immediately so that they can determine the rights of the parties with respect to impacts of the pandemic.
Douglas V. Bartman is a construction litigator at Berns, Ockner & Greenberger in Beachwood, Ohio.
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