July 17, 2020 Articles

What to Do When COVID-19 Disrupts Contractual Performance

A look at the remedies available under force majeure and similar doctrines in construction disputes.

By Julie Negovan

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The force majeure clause in a construction contract may be the little-known salvation to companies facing overwhelming challenges on projects affected by COVID-19. The virus prompted the World Health Organization to declare a pandemic. In the United States, President Trump declared a national emergency and invoked the National Defense Act. State and local governments have issued orders that have shuttered many businesses. These and other measures in response to the virus have disrupted business activities and affected the ability of many contractors, owners, developers, and lenders to meet their contractual obligations.

There have been few cases involving disease outbreaks, but a review of those cases illuminates important issues

There have been few cases involving disease outbreaks, but a review of those cases illuminates important issues

Credit: Juanmonino | iStockphoto via Getty Imgaes

This article focuses on force majeure clauses and a sampling of cases that have applied them, to provide a better understanding of when and to what extent such clauses may protect contracting parties from nonperformance or late performance due to disruption caused by COVID-19.

Typical Force Majeure Clauses

In evaluating the legal implications of COVID-19 on parties’ contractual obligations, there is no one-size-fits-all answer. Each contract must be evaluated independently based on its own terms. The governing law that applies to the contract, as well as the risk allocation provisions and other contract terms, will ultimately determine whether any contracting party can properly invoke force majeure or another applicable doctrine to obtain an extension of time, excuse its performance, or even obtain damages.

The American Institute of Architects (AIA) has established standard forms of contract used within the construction industry. AIA standard form A201-2017 General Conditions of the Contract of Construction, section 8.3, Delays and Extensions of Time, subsection 1, provides that

[i]f the Contractor is delayed at any time in the commencement or progress of 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 . . . or (5) by other causes 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.

Section 8.3.3. goes on to say, “This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.”

Similarly, ConsensusDocs A200 Standard Agreement and General Conditions Between Owner and Constructor (rev. May 2017) includes a nonexclusive list of 13 force majeure events in section 6.3.1, Delays and Extensions of Time. Among the events are “epidemics” in addition to a more general reference to “transportation delays not reasonably foreseeable.” Section 6.3.1 provides generally, “If the Constructor is delayed at any time in the commencement or progress of the Work by any cause beyond the control of the Constructor, Constructor shall be entitled to an equitable extension of the Contract Time. . . .” Importantly, while section 6.3.2 provides for an equitable adjustment in the contract price due to some of the items listed in section 6.3.1, “epidemic” or “transportation delays” are not among those.

Examples from the Case Law

In many instances, the question will be whether a particular disease outbreak—i.e., COVID-19—constitutes a force majeure event allowing for extensions of time for the contractor to complete the work or additional compensation for increased costs. There have been few cases involving disease outbreaks, but a review of those cases illuminates important issues.

As in other contexts, courts have focused on the precise language of the parties’ contract in cases concerning disease outbreaks. For example, in Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc., No. C15-4248-LTS, (N.D. Iowa Sep. 7, 2017), aff’d, No.18-1808 (8th Cir. 2019), Rembrandt entered into a contract to buy equipment from Dahmes in connection with a planned expansion of its egg production facilities. Before delivery of the equipment, the avian flu epidemic infected poultry in Iowa and Minnesota, and Rembrandt cut its production, halted construction of its expanded facilities, and canceled the equipment contract. Litigation ensued, and Rembrandt argued that the cancellation was appropriate because the contract’s purpose had been frustrated due to the lack of demand for eggs. Dahmes argued that the contract’s express force majeure provision was Rembrandt’s sole avenue for relief due to the effects of the avian flu and that Rembrandt had waived those rights by failing to invoke them properly.

Focusing on the terms of the force majeure clause, the court rejected Dahmes’s exclusivity argument, holding that the language of the force majeure provision limited itself to Dahmes’s provision of equipment, not to Rembrandt’s payment obligations. The court held further that, under Minnesota law, the existence of an express force majeure clause does not preclude the assertion of other common-law doctrines such as frustration of purpose. The court focused on the exact language of the contract and the limited circumstances outlined in the force majeure provision to conclude that it pertained solely to Dahmes’s performance and did not preclude Rembrandt’s assertion of the common-law doctrine of frustration of purpose.

Similarly, in SNB Farms, Inc. v. Swift & Co., No. C01-2077 (N.D. Iowa 2003), the supply contract at issue contained a force majeure clause with specific notice provisions. The court, applying Colorado law, noted that an outbreak of porcine reproductive and respiratory syndrome (PRRS), which affected hog production, constituted a force majeure event. However, questions of fact remained as to whether the allegedly breaching parties provided adequate notice of the event to excuse performance. As to those parties that did not raise PRRS in their notices, the court held they were precluded from asserting the contractual force majeure defense. As to the one party that did raise PRRS in its notice, the factual question of whether the notice was sufficient under the contract was a question of material fact to be decided by the jury.

In the construction context, published cases involving construction delays caused by outside forces typically have arisen more from weather and other events than from disease outbreaks. For example, in F.J. Busse, Inc. v. Department of General Services, 408 A.2d 578 (Pa. Commw. Ct. 1979), the plaintiff company claimed that it was entitled to damages arising from hurricane effects at a construction site. When grading and excavation work required for construction of a fountain was nearly completed, hurricane-related storms deposited dirt and silt on the construction site, which the plaintiff had to remove to complete construction. When the plaintiff submitted a change order for the cost of the additional work, the defendant granted it an extension of time to perform instead. The court ultimately agreed with the defendant, concluding that under the parties’ contract, the risk of loss fell on the plaintiff contractor. Id. (holding that risk of loss due to a hurricane fell on the contractor). The contractor, therefore, was not entitled to additional compensation for the work required to mitigate the hurricane damage.

Similar outcomes are seen in other cases in which contractors have sought additional compensation (not necessarily just more time) because of weather-related events. In S&B/BIBB Hines PB3 Joint Venture v. Progress Energy Florida, Inc., 365 F. App’x 202 (11th Cir. 2010), the contractor entered into two multimillion-dollar fixed-price contracts to build electricity generating plants in Florida. During the course of the project, four hurricanes struck the site and three hurricanes hit the Gulf Coast of Florida, resulting in a shortage of labor and materials and a corresponding increase in the cost of construction. Global economic forces also contributed to an unanticipated increase in the contractor’s material costs. The contractor filed suit in federal court to recover some $40 million in additional compensation over and above the contract’s fixed price. The court dismissed the contractor’s damages claims, finding the force majeure clause in the parties’ contract unambiguously prohibited additional compensation. The clause provided:

Should contractor be delayed in the commencement, performance or completion of the Work due to any of the conditions provided for under Section 37B, Force Majeure, Contractor shall be entitled to an extension of time only, provided however that in no event shall Contractor be entitled to any increased costs, additional compensation, or damages of any type resulting from such Force Majeure delays.

Id.

These cases illustrate the fact-intensive nature of force majeure defenses, which depend heavily on the specific contractual language and the circumstances present in any particular case. Setting up the claims and documenting them according to the contract language, and ultimately prevailing in any dispute, will require careful analysis and coordination between the company and its counsel.

Julie Negovan is of counsel at Griesing Law LLC in Philadelphia, Pennsylvania.


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