Reviewing Construction Contracts in the Time of COVID-19

As several industries adjust to their altered operations due to COVID-19, some are looking ahead to assess their options financially, specifically how to keep business afloat until work ramps up again. Almost everything with a schedule is either delayed or canceled altogether, including movie theater releases, sports events and even construction projects. The latter was discussed in a webinar from American Institute of Architects' (AIA) Contract Documents and Risk Management Director and Counsel Michael Kroger and Manager and Counsel James Germano, both of whom highlighted the importance of construction contracts during these uncertain times.

In an interview with Construction Dive, Kroger and Germano's No. 1 takeaway for construction professionals who were impacted by the pandemic was "defining force majeure clauses." Chris Ring, of NACM's Secured Transaction Services, said force majeure clauses are generally written into contracts and free a party from a scheduled obligation of the contract based on an unforeseeable event or circumstance (act of God). If an owner suffers a loss because a construction contract cannot be completed on time and/or on budget, the owner may sue the general contractor for delay if there was no force majeure clause.

"During this time of a pandemic, the general contractor will most likely try to use the force majeure rights as a defense for why the contract could not be completed on time and/or on budget," Ring said. "A subcontract agreement between a general contractor and a subcontractor typically has force majeure provisions as well. And, purchase orders between subcontractors and material suppliers may also contain force majeure provisions."

All parties will be attempting to use their force majeure rights to defend against delay claims, he added, as parties upstream try to mitigate their losses.

Exposure to delay damages resulting from COVID-19 depends, to a large extent, on the wording of existing contracts, said James Fullerton, Esq., of Fullerton & Knowles, P.C. Do you have a good force majeure clause? Do you have an unconditional definite completion date or, even worse, a unilateral amendment clause? What are the notice requirements in your contract and did you provide notice of the delay, within the time and in the manner required by the contract?

Notice to the general contractor and owner are important mitigation tools. It is also important to alert suppliers and subcontractors about anticipated delays or other problems. Contractors, subcontractors and material suppliers should promptly inquire as to the status of pending orders and ability of substitute suppliers to fill orders. Consider substitution or alternate suppliers if supply delivery delays are expected. Problems with labor availability may be even more likely. Prepare to use temporary labor sources, if necessary. Give the general contractor and owner these options. Keep careful records of all these notices and inquiries.

NACM's 2020 Credit Congress and Expo approaches its online debut in June with numerous educational webinar sessions, including the "Supplier's Guide to Navigating Force Majeure Issues" (Session #29098) from construction expert and attorney Christopher Ng. In this session, attendees will learn about the various types of force majeure provisions that exist in contracts and in state statutes and how these provisions are interpreted by the court. They will hear about how these contract and statutory defenses may impact their business and how to favorably update the terms and conditions of sale and contracts to ensure that force majeure provisions work in their favor in the future.

—Andrew Michaels, editorial associate