Friday, July 10, 2020

Why Every Lawyer in the Construction Industry Should Pay Attention to Level 10 Construction v Sea World LLC

“We will not process outstanding payments to contractors or subcontractors until the pandemic restrictions are lifted.”

Since the pandemic began, I have wondered what courts across the country would do when businesses started breaking contractual obligations and blaming, or using, pandemic restrictions as their defense. Most lawyers would agree that a force majeure clause would likely be the deciding factor in these types of breach of contract claims. However, the United States has never experienced the pandemic restrictions we have faced over these last few months and many companies recognize that their force majeure clause might not be as reliable as they might have once hoped. Now, we have the unique ability to witness what a California federal court will rule regarding this exact argument.

On June 8, 2020, California contractor Level 10 Construction, LP (“Level 10”) filed a Complaint in the United States District Court for the Southern District of California alleging Sea World declined to pay for construction of a 2020 theme park attraction until Sea World reopens. Specifically, Level 10 alleges that the payment for work, originally over $11 million, “was not conditioned upon Sea World San Diego’s theme park being open for business to the public,” that Sea World San Diego repudiated the contract by stating “Sea World San Diego would not process any outstanding payments until the parks open,” and that “Sea World San Diego understands they are in breach of contract.” As a result, Level 10 is claiming damages in the principal amount of not less than $3,278,471.30 plus interest.

The fact that Sea World has recognized that they are in breach of contract means that they may be relying on their force majeure clause or the doctrine of impossibility to justify their delayed payments to Level 10. Typically, the party relying on their force majeure clause may be granted relief from performing their contractual obligations if certain events render performance untenable or impossible.

As a refresher, the legal definition of force majeure, or “act of God,” describes any event that is unexpected by all parties, not caused by any party, and affects the relationship between them. A force majeure clause indicates that a party owes no liability to the other in the event force majeure makes performance impossible. A force majeure clause includes not only natural events but also acts by a human agency that are usually not within the scope of “acts of God.”

The pivotal moment in Level 10 Construction v Sea World LLC might be whether the pandemic restrictions make Sea World’s contractual obligations “impossible.” Performance of a duty is excused when a change of circumstance renders it impossible. Impossibility of performance of a duty under a contract is a defense for a claim of breach for non-performance of that duty when the performance of the duty becomes impossible due to unforeseen but changed circumstances.  Simply stated, impossibility is a condition in which an event cannot physically or lawfully take place.  Sure, the pandemic could easily be argued as an unforeseen event, but is the contractual obligation impossible?

SeaWorld Entertainment, Incorporated owns Sea World San Diego, and, according to their most recent Securities and Exchange Commission Form 10-Q filing (quarterly period ending March 31, 2020), they have roughly $192,760,000 in cash and cash equivalents. Sea World San Diego will likely need to show how meeting their contractual obligation is impossible due to the COVID-19 pandemic restrictions, when they seem to have enough cash on hand to pay Level 10. While this seemingly simple breach of contract case might depend on Sea World’s force majeure clause or the doctrine of impossibility, the effects of this case are potentially deafening.

Assume for a minute that Sea World San Diego argues that they are, for all intents and purposes, bankrupt due to COVID-19. An argument which is not so absurd because it was reported that SeaWorld Entertainment recently raised $227.5 million through a private offering that it could use to help pay its bills after projecting a revenue decease of roughly 32%. The court might be put in a position to determine just how far they are willing to stretch the definition of impossibility. Having to raise money in order to make ends meet might be enough to make courts agree with Sea World’s defense.

Every industry, especially the construction industry, should be paying attention to Level 10 Construction v Sea World LLC. If Sea World is successful, then businesses that have requested a Paycheck Protection Program loan might have an argument that the doctrine of impossibility applies in their contractual obligations. This could lead to thousands of businesses refusing to honor their contractual agreements and significantly increase the number of cases in an already inundated court system.

Author Christopher M. Wise is an attorney and the Managing Member of Wise Law, LLC in Louisville, Kentucky. He focuses on contractor-subcontractor litigation and family law litigation.

Tuesday, July 7, 2020

SCOTUS Allows Atlantic Coast Pipeline to Cross Appalachian Trail

The two energy companies constructing the Atlantic Coast Pipeline have abandoned their six-year bid to build it.  Despite the recent U.S. Supreme Court win discussed below, the companies cite high costs and regulatory uncertainty behind their decision to discontinue the project.

The Atlantic Coast Pipeline is a planned $8 billion, 600-mile natural gas pipeline from West Virginia to North Carolina. Petitioner Atlantic Coast Pipeline, LLC seeks to build the pipeline, which would traverse 21 miles of national forests and require crossing of 57 rivers, streams and waterways in those forests.

At issue before the Supreme Court, in a major environmental case of this term, were two consolidated cases decided by the Fourth Circuit. The cases involved a 2017 permit granted by the United States Forest Service (“Forest Service”) to allow the Atlantic Coast Pipeline to cross the George Washington National Forest in Virginia. The permit also authorized construction of a tunnel consisting of a 0.1-mile segment of pipe 600 feet beneath the Appalachian Trail within forest limits. The Fourth Circuit vacated that permit, holding that the entire 2,100-mile Appalachian Trail is part of the National Park System and, therefore, under the Mineral Leasing Act, no pipeline rights-of-way may be built on the trail.

On June 15, 2020, the Supreme Court reversed the Fourth Circuit and ruled 7-2 that the Forest Service had authority to issue the permit over the trail.

The National Park Service (“Park Service”) administers the Appalachian Trail, even where the trail runs through national forests. The trail has been an official “unit” of the Park Service for fifty years, but that status alone, now, does not prohibit construction of natural gas pipelines under the Mineral Leasing Act, which prohibits federal agencies from authorizing a pipeline right-of-way through “lands” in the National Park System. The question before the Supreme Court was whether the entire Appalachian Trail is such a “land” as defined by the Mineral Leasing Act.

The Court ruled that the Park Service had an easement under the 1968 National Trails System Act (“1968 Act”) to run a footpath over the trail, but the trail itself remained fully under the jurisdiction of the Forest Service. After providing a thorough primer on the common law of easements, the Court found that the trail is not a “land” in the National Park System but is simply a right-of-way, subject to the administrative supervision of the Park Service. But because the trail remains under the jurisdiction of the Forest Service, the Forest Service had authority to approve the crossing under the trail by way of a tunnel 600 feet beneath the trail.

The majority reasoned that Congress never transferred jurisdiction over the trail from one agency to another in the 1968 Act, but rather described the trail as a “right-of-way” through land under the jurisdiction of other agencies. The 1968 Act gave administrative authority over the trail to the Secretary of the Interior, not to the Park Service. The Secretary of the Interior then delegated the authority over the trail to the Park Service in 1969. But the Court said, “We will not presume that the act of delegation, rather than clear congressional command, worked this vast expansion of the Park Service’s jurisdiction and significant curtailment of the Forest Service’s express authority to grant pipeline rights-of-way.”

Justice Sonia Sotomayor and Justice Elena Kagan argued in dissent that the majority’s private-law easement analogies were unconvincing and inapposite. Easements are rights of limited access granted by a landowner to another, but the federal government owns all the land at issue in this case. So, federal statutory commands, not private-law analogies, should govern. The dissenting Justices argued that the majority improperly separated the trail from the land it occupies. The Park Service administers the trail, and therefore, it must also administer the land upon which the trail sits. The Secretary of the Interior had already delegated responsibility for trail administration to the Park Service when Congress passed a 1970 statute making all lands administered by the Park Service part of the National Park System. In the dissent’s view, the majority did not construe the relevant statutes in a way that effectuated what Congress intended.

Notwithstanding administrative delegation of authority over the trail to the Park Service, and the statute characterizing all lands administered by the Park Service as part of the National Park System, the Court held that the trail is not “land” in the National Park System. Rather, the trail is a right-of-way, subject to administrative supervision by the Park Service but subject to the jurisdiction of the Forest Service.

This decision removes major obstacles to constructing the Atlantic Coast Pipeline. If the Fourth Circuit decision had been upheld, the pipeline likely would have had to be rerouted, resulting in tremendous expense and delay. Other obstacles to the pipeline remain, however, as the Fourth Circuit has vacated several other permits required for the project.

United States Forest Serv. v. Cowpasture River Pres. Ass'n, No. 18-1584, 2020 WL 3146692, at *3 (U.S. June 15, 2020)


Author Megan B. Burnett is an attorney in the Baltimore office of Miles & Stockbridge P.C., with offices in Maryland, Washington, D.C., and Virginia. She practices in the areas of commercial and business litigation, with a focus on construction law and commercial real estate disputes.

Disclaimer: This is for general information and is not intended to be and should not be taken as legal advice for any particular matter. It is not intended to and does not create any attorney-client relationship. The opinions expressed and any legal positions asserted in the article are those of the author and do not necessarily reflect the opinions or positions of Miles & Stockbridge, its other lawyers or the American Bar Association Construction Law Forum.

Wednesday, July 1, 2020

Courts to Decide COVID-19 Business Interruption Claims

The COVID-19 pandemic and resulting government orders helped grind construction projects to a halt. States varied significantly regarding the level of restrictions enacted. Some states allowed construction to progress relatively unimpeded while others permitted only “essential” projects to continue. Some jurisdictions enacted waiver programs where businesses could apply for exemptions. Several cities, including Boston and San Francisco, went beyond their state’s restrictions to stop all construction projects.

Although many of these restrictions are gradually being lifted, the resumption of construction activity remains subject to important limitations regarding social distancing and other public health measures.

Will Business Interruption Insurance Cover Losses from COVID-19?

The COVID-19 pandemic is creating profound, ongoing interruptions to businesses operations across the country. “Non-essential businesses” closed by state government orders have lost income and furloughed employees. Millions of customers were ordered to shelter in place for months, depriving the economy of much-needed demand. Insurance industry experts estimate total business losses arising from the pandemic may soar above $200 billion.

Many businessowners pay for business interruption insurance. To their disappointment, their claims continue to be denied by insurers. The resulting wave of litigation has yielded several important trends. While it remains unclear how courts will rule in these cases, seldom-used policy exclusions are suddenly at the center of the debate. With billions of dollars on the line, the legal and economic stakes are both extraordinarily high. Although many of these high-profile claims involve restaurants, the same arguments apply to the construction industry. 

Business interruption insurance is separate form of first-party coverage which seeks to compensate policyholders for losses due to a suspension of operations.  Typical policy language states coverage will be triggered only by a “physical loss” or “physical damage.” 

Many business interruption policies also offer Civil Authority coverage. This provision has been cited widely in many of the pending business interruption lawsuits pending across the country. Civil Authority coverage is designed to protect policyholders from situations where a government authority prevents access to their place of business. Insurers argue this is not applicable to most COVID-19-related claims because many policies require a nexus of physical damage involving the insured premises.

What is a Physical Loss, Anyway?

Whether policyholders will prevail on their COVID-19 business interruption claims turns largely on the definition of a “physical loss.” In certain instances, courts have sometimes extended the definition of “physical loss.” In some examples, courts have held a large presence of ammonia or asbestos rendered a structure unusable.  

Arguably, the same logic could apply to certain COVID-19 claims, especially where the virus was present at the insured premises. Insurers argue this extension would not only be erroneous but lead to the widespread insolvency of carriers who did not price such coverage into premiums.

It’s important to remember that insurance remains in large part a creature of state law. Although many contract law principles will apply generally, many state courts have carved out important distinctions particular to their jurisdictions. This not only makes a generalized analysis difficult, it undermines the argument that business interruption cases warrant multi-district litigation.

What About Exclusions?

Virus exclusions are a relatively new limitation on coverage. In only the past 15 years they’ve become common in most business interruption policies. As coverage litigation proliferates in the wake of the COVID-19 pandemic, virus exclusions are poised to take center stage alongside traditional insurance law concepts like “physical loss” and “reasonable expectations.”

Insurers will likely argue a virus exclusion isn’t required to deny coverage because COVID-19 does not produce a physical loss sufficient to trigger coverage. However, this argument will lead to a predictable response by policyholders: If a virus exclusion isn’t needed to limit coverage, then why has the exclusion become standard on so many policies in the first place?

Other policy exclusions may address bacteria or fungi. These do not appear relevant to COVID-19. However, a surprising number of commercial liability policies don’t contain a virus exclusion at all. Several recent complaints filed by policyholders underscore the potential exposure of insurers to business interruption claims arising from COVID-19 in the absence of this exclusion.

Possible Legislation Could Require Coverage

Congress and several states have drafted legislation which could require insurers provide business interruption coverage under certain situations.  These proposals vary and thus far none seem to be gaining momentum.

Some of the most notable variables include, but are not limited to; whether coverage would be retroactive to cover losses arising from COVID-19 or only apply to future pandemic claims, whether the coverage will only apply to “small” businesses, and whether insurers will be eligible for reimbursement for coverage.

Conclusion

Policyholders should review their policies to determine whether it contains a virus exclusion. If a policyholder believes their losses are covered, filing a claim quickly is critical. Policyholders should file an accurate and complete proof of loss statement and be prepared to cooperate with their insurer during the claims-investigation process. If a virus exclusion was added during the renewal of a pre-existing policy, state law may limit its applicability if the insurer failed to disclose the new limitation. Finally, it’s important to note that impacted policyholders have a limited window of opportunity to enforce their existing contractual rights.

Regardless of the outcome of the hundreds of business interruption cases now before the courts, virus exclusions appear likely to become even more common in the wake of COVID-19.

Author Patrick McKnight is an associate in the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania. Patrick also serves on the Klehr Harrison Coronavirus Task Force. He can be reached at pmcknight@klehr.com.

Wednesday, June 24, 2020

Plot Twist: Construction Industry Groups Applaud Court's Decision to Defer to OSHA

Construction industry association groups applaud the June 11, 2020 U.S. Court of Appeals for the District of Columbia’s decision, which denied the AFL-CIO’s (American Federation of Labor and Congress of Industrial Organizations) emergency petition for a writ of mandamus against OSHA (Occupational Safety and Health Administration).1 In what some may call a surprising turn of events, the construction industry is celebrating deference to OSHA.

The administrative petition, filed on May 18, 2020 by the AFL-CIO, together with 23 national unions, was intended to compel OSHA to issue an emergency temporary standard ("ETS") to protect U.S. workers against COVID-19. OSHA is authorized to issue an ETS upon its determination that an ETS is "necessary" because "employees are exposed to grave danger" in the workplace. 29 U.S.C. §655(c); see In re AFL-CIO, USCA Case #20-1158, (D.C. Cir. 2020). The court stated that OSHA is owed "considerable deference," especially in these unprecedented times, and found that it acted reasonably when it determined not to issue an ETS at this time. In re AFL-CIO, USCA Case #20-1158, (D.C. Cir. 2020).

Construction industry association groups, such as the Associated Builders and Contractors and National Association of Home Builders, are happy with the decision because they considered an ETS to be an inappropriate measure in such turbulent times. Following the decision, OSHA will continue to develop guidance documents. Not only does this approach allow the agency to swiftly adapt to new COVID-19 information released by other government officials and scientists, it also allows OSHA to continue to rely on the Centers for Disease Control and Prevention.

The problem with this approach, as alleged by AFL-CIO, is that these guidance documents are not mandatory. As follows, AFL-CIO and its supporters are disappointed with the decision, claiming that OSHA’s guidelines are too flexible in that they do not pose a threat of OSHA action for an employer’s noncompliance. Given that OSHA in-person checks of construction sites have fallen to about 16% of pre-COVID-19 inspection levels, the concern may not be unfounded.2 Construction workers, perhaps to a layperson’s surprise, were among the most universally essential workers during the pandemic. This fact can be concerning since, as mentioned by Gaetano Piccirilli and Patrick McKnight in an earlier Dispute Resolver blogpost, construction workers had one of the highest mortality rates during the 1918 Flu pandemic. The combination of higher risk and less frequent OSHA visits may be a reason complaints have increased nearly tenfold.3 In fact, the AFL-CIO’s petition set forth that thousands of workers have been infected on the job.

Nonetheless, construction sites are certainly not going unwatched. Instead, the decrease of OSHA visits is most likely replaced with an increase of state and local inspections. States like Massachusetts, for example, have implemented their own Mandatory Workplace Safety Standards and sector-specific workplace protocols, including Safety Standards for Construction. And although nobody knows exactly how to proceed during COVID-19, after the U.S. Court of Appeal’s decision, at least some construction industry groups are comfortable leaving it up to the "experts."

Learn more about the scope of OSHA, the extent it preempts (and does not preempt) state and local government action, and what state and local governments are doing to ensure the safety of workers within their jurisdictions at an upcoming ABA webinar on June 29 at 1 pm ET. More details here: https://www.americanbar.org/events-cle/mtg/web/401521567/.



1 Court Rejects Bid for OSHA COVID-19 Emergency Standard, CONSTRUCTION DIVE (June 12, 2020).
2 OSHA Construction Safety Inspections Plunge 84% in Pandemic, BLOOMBERG LAW (May 14, 2020).
3 Id.

Author Lexie R. Pereira is an incoming third year J.D./M.B.A. student at Boston College Law School and Carroll School of Management, studying to become a litigator, with a specialty in construction law. Currently, she works as a legal intern at Consigli Construction Co., Inc., serves on the Editorial Team of the ABA’s Forum on Construction Law’s Dispute Resolver blog, and acts as the new 2020 Student Liaison of the ABA's Forum on Construction Law. This summer, she was invited to rejoin Hinckley Allen as a Summer Associate with a focus in the Construction and Public Contracts group. At school, Lexie is the President of the Real Estate Law Society and the President of the Eagle-to-Eagle Mentoring Program. Lexie earned her B.A. and a varsity letter from Boston College in 2017. Contact Information: pereirle@bc.edu; https://www.linkedin.com/in/lexie-pereira/

Friday, June 19, 2020

Division 1 Opportunities Galore! Join Us!

Hi, my name is Tom Dunn.  I am a construction lawyer at Pierce Atwood LLP.  I represent owners, contractors, subcontractors, suppliers, and other participants in the construction industry in state and federal trials and ADR.  I am an arbitrator panelist with the American Bar Association's Construction. I am the Partner-In-Charge of our Providence office, but I practice and office in both of my firm's Providence and Boston offices. 
COVID-19 Time Capsule Photo.
Note the Forum branded vest. Buff for face
coverings.  And, of course, the long hair with a hat!

For the past nine years, the ABA Forum on Construction Law's Division 1 (Litigation & Dispute Resolution) has been an active, fun, and rewarding part of my career.  

First, I attended D1's breakfasts/lunches.  I tested out 2-3 Divisions at the time to see which one fit the best.  

Next, I attended a D1 Planning Retreat as a guest and started to communicate with the D1 Chair (Buzz Tarlow) about involvement. He asked that I draft the Division meeting minutes, join the publications subcommittee, and serve as D1 liaison to the Forum's Membership Committee.   

Tony Lehman (former D1 Chair and incoming Governing Committee Member) and I, with the assistance of others (oddly mostly named Anthony or Tony), started The Dispute Resolver blog under Buzz' guidance.  We did it in PDF / paper format for a number of years before transitioning it to this blog. Working as one of the editors of this The Dispute Resolver blog led me to becoming the Editor of the Forum's publication, Under Construction, in 2015.  I also serve as an at-large member of the Membership Committee doing various things for the Forum. None of those leadership opportunities would have been available without Division 1!

Following the incredible leadership of Buzz, Luis Prats, Nick Holmes, Tony Lehman, and Cassidy Rosenthal, it is now my time to serve as the Division 1 Chair. I am SO EXCITED to work with you all!  I view my role as D1 Chair to be a matchmaker / facilitator for our members. You tell me what you are thinking and I do my best to give you an opportunity:
If you have an idea, I want to hear it.  
If you want to volunteer, but don't know how, contact me and I will find a place for you.
If you don't know why it makes sense to get involved with the Forum or Division 1, reach out to any of Division 1's Steering Committee members.  You will find out that each of them have stories similar to mine. 
If you are a trial attorney, arbitrator, mediator in the construction industry, we want to hear from you on The Dispute Resolver, we want you to speak at one of our programs, we want you to help plan our events, and/or we want your input.   
While Division 1 is one of the larger Divisions of the Forum, we have a strong steering committee and dedicated volunteers. So, you have the benefit of a larger platform while being able to form strong contacts within Division 1.  

One of my goals was to work to improve our blog that Tony and I started many years ago. I am jazzed about the planning Catherine Delorey, TDR's Editor-in-Chief, has done to improve this blog.  She scheduled numerous meetings with interested participants and has finally formed an impressive editorial team of contributors: 

  • Megan Burnett
  • Patrick McKnight
  • Lexie Pereira (a law student!)
  • Christopher Wise
I can't wait to see the great articles this team publishes in the coming months!  Thank you for your efforts!

In addition to this blog, remember to join Division 1's ABA Connect Page and set your notifications to current notifications (as opposed to digests).  This will ensure you get our posts as soon as they are made.  

I know the past 3+ months have been a challenge for us all in dealing with COVID-19. The numerous zoom calls I have had with Forum members over the past months have made it a lot better for me.  Whether a zoom happy hour, webinars, or business meetings, this technology has enabled Forum members to stay connected throughout the country. Division 1's monthly calls (second Monday at 3PM) will be on the zoom platform and I welcome each of you at attend: 
Click here to join
Meeting ID: 669-178-3882Password: ForumCL2020!

Before our next call (July 14th), send me your ideas or express your interest in joining Division 1 in a more active manner.  I will add you to our "Friends of D1" email list and work with you on getting a D1 job!  

Looking forward to collaborating with all of Division 1's Members -- new and old!  If you have questions, reach out. Stay safe and be well.  

Tom Dunn, Division 1 Chair
Pierce Atwood LLP
508-838-9779 (m)
#TheDisputeResolver #FCL_D1 

Friday, June 12, 2020

Emerging from COVID-19: Impacts to Consider

The relaxation of COVID-19 stay-at-home orders and reopening of the economy is a prominent news headline. As the return to everyday activity progresses it is important to prepare in advance for this “return to normalcy”, which will almost certainly come in stages, especially as it relates to construction activity. As it happens, there will be numerous considerations depending on the stage of your project in the construction lifecycle, the status of the project stakeholders, and the implementation of revised or new safety requirements. Consideration should be given to productivity, schedule, and supply chain impacts.

Productivity Impacts


Projects that have been allowed to continue operations during COVID-19 restrictions should not expect normal work activity to be achieved as the stay-at-home restrictions are relaxed. Current social distancing and personal hygiene requirements will likely remain in place and continue to impact site access and worker productivity until a vaccine is developed or the severity of the virus wanes. There are numerous considerations for assessing realistic productivity when planning for work in the post-stay-at-home world:
  • How will the flow and assignment of workers be coordinated and monitored to ensure required distances are maintained?
  • What about coffee and lunch breaks?
  • Are adequate cleaning stations and disinfectant supplies available per applicable regulations worker hygiene and tool and equipment cleaning?
Careful consideration of social distancing and personal hygiene requirements should be applied to projects resuming operations following a shutdown as well as those starting from day one. The construction industry’s emergence from COVID-19 will be a slow, methodical process that will result in reduced productivity levels. Losses in productive time will come in many forms:
  • Vertical transportation (hoist / elevator) limitations
  • Site workflow constraints
  • Getting workforce to project site
  • Work area changes / restrictions
  • Field health checks
  • More regular cleaning requirements
  • Additional tools to minimize sharing
  • Longer/more workdays to stagger shifts
  • Added supervision
  • Limitations on labor on site
For projects that were suspended or restricted, a reforecasting of costs will be in order as many contractual Notice provisions require an estimated cost of the anticipated impacts to be provided to Owners. For new project starts, the same steps will be needed to justify changes in bid price.

Projects that have been shut down or slowed will need to account for demobilization and remobilization impacts. The pre-shutdown conditions and worker productivity must be thoroughly documented and communicated to all project stakeholders. This baseline condition will be critical to establishing the additional effort expended to remobilize and resume operations on site.

Schedule Impacts

On projects that have been shuttered, scheduling impacts will need to be addressed before work can resume and some of those steps may be significant.
  • What will be the impact of the timing for restarting a project?
  • What is the availability of labor, particularly in union markets?
  • Will multiple work shifts or resequencing of work be needed?
  • Are contractual actions required to document and address schedule impacts?
Validation of your project schedule will be necessary regardless of what stage your project was in when it was shuttered or otherwise impacted by COVID-19 restrictions. Some projects will require a recovery schedule to make up for delays and account for changes resulting from COVID-19. This schedule should memorialize the schedule scenario that was in effect before the project was impacted by the virus and it should clearly show what changes were made to recover from any resultant delays.

There will be many projects looking to restart at the same time and that could put constraints on resource availability including materials, equipment, and labor. The work force will be restricted and will be driving the schedule not the other way around.  Based on the work force and expected productivity, adjustments to the schedule will be needed to reflect reality. Only then can the labor force, to the extent possible, be effectively coordinated and a schedule implemented.

Notice of COVID-19 impacts submitted earlier should be amended to reflect current conditions, and the amended notices should accompany submissions of recovery schedules in order to: (1) strengthen contractors’ arguments for relief, and (2) allow the owner to evaluate the financial implications of following the recovery schedule. Regardless of whether a recovery schedule is submitted and/or accepted, regular monthly schedule updates should be prepared and submitted in order to document progress as well as any additional COVID-19 related impacts that may arise.

Supply Chain Impacts

Procurement is another serious consideration because, although construction may be allowed to resume in your area, there may be supply chain impacts.
  • Are subcontractors and suppliers located in states that remain under stay-at-home orders?
  • Are subcontractors and suppliers able to pick up where they left off before a shutdown?
  • Were lead times interrupted on orders placed before shutdowns came into effect?
All vendors should be contacted to confirm material delivery dates. These arrangements need to be made in advance of remobilization and resuming job site operations, especially if alternate options need to be pursued because of restrictions on the use of international or bankrupt suppliers.

Contractors should consult with their subcontractors and suppliers when they resume work. Overlooking these parties can give rise to unnecessary delays and claims. Clear communication on changes to the project and collaboration on recovery actions are some steps that can be taken to involve subcontractors and suppliers.

We will emerge from COVID-19, but it will take a concerted effort by all of us. It will be no different for the construction industry. Taking time now to consider and address impacts will set the stage for successful recovery that will benefit all stakeholders.
Author Information

Charles F. Boland, PE, is principal and chairman at GREYHAWK in Mt. Laurel, New Jersey. He has over 40 years of experience in engineering, construction, project management, and in cost/schedule analysis in the preparation and evaluation of contract claims on construction and industrial projects.

Barrett L. Richards, CCC, CEP, PSP, is a senior managing consultant at GREYHAWK in Melville, New York. He has over 20 years of experience in project management oversight; claims and litigation support; project planning and scheduling; as well as preconstruction and construction cost estimating.

Thursday, May 28, 2020

The “New Normal” In Litigation Might Not Be That “New”

The COVID-19 pandemic has nearly every industry reconsidering what “normal” actually means. And, as the pandemic continues, attorneys must adapt to the circumstances. While many courts have begun utilizing technology, none have held a virtual trial until now. In Collin County District Court, lawyers picked a jury to hear a case by videoconference.1 This case could set the stage for courts throughout the nation to consider following in Texas’ footsteps. Even the U.S. Supreme Court has begun to hear oral arguments by teleconference. However, it is important to note the differences in these cases versus that of a typical jury trial. Still, “normal” for litigators will soon, if it hasn’t already, include setting up home or office studios in order to hold videoconferences and teleconferences for their clients.

According to the National Center for State Courts, five of the most common efforts state courts are taking to combat the coronavirus include restricting or ending jury trials, generally suspending in-person proceedings, restricting entrance into courthouses, granting extensions for court deadlines, and encouraging or requiring teleconferences and videoconferences in lieu of hearings.2 However, as the country begins to reopen, implementing procedures for jury trials has varied depending on the state.

Most of the courthouses across the country have suspended jury trials. However, each state is dealing with the pandemic differently. In Arizona, in-person proceedings may begin June 1st, but local judges may determine how in-person proceedings should be phased in. Meanwhile, Texas is encouraging the use of videoconferencing to keep cases moving forward. On April 9th, Chief Justice Nathan Hecht of the Supreme Court of Texas held an interview with Thomas Reuters discussing the changes that Texas has implemented.

One of those changes includes utilizing Zoom to conduct jury trials. When asked about how Chief Justice Hecht envisioned a post-pandemic world, Chief Justice Hecht described what many others in the legal profession have expressed:
After the pandemic, lots of hearing will be held remotely. It’s easy to do, you’d get a specific time, if you do have to wait, you could put everything on mute and go on about your business. Trips to the courthouse are definitely going to be affected. We’ll then have to reexamine why we need courthouses. We’ll have to think about that because some things are more intensely in-person than other things, like jury trials, but some things are not. We’ll have to look at working at home…I’m getting memos, draft opinions, draft dissents from my colleagues, from the law clerks, every hour. People are actually working very hard. If they can do that, why shouldn’t they? … I think there’ll be a lot of changes.3
Chief Justice Hecht is not the only one considering practical changes to litigation. On May 14th, New Jersey announced the creation of a new virtual grand jury pilot program.4 The pilot program will be used to determine whether the New Jersey Judiciary expands remote grand juries to additional counties and state grand jury proceedings. The technology will be similar to the formats the New Jersey Judiciary currently uses for virtual hearings but will employ additional security measures to safeguard the rights and privacy of defendants, witnesses, victims, and jurors. As of May, the New Jersey Judiciary has conducted more than 23,000 virtual proceedings involving more than 189,000 participants.5 While states are leading the charge, federal courts are not far behind.

For the first time in U.S. history, the United States Supreme Court allowed the public to listen to oral arguments remotely.6 Historically, the US Supreme Court does not allow cameras or simultaneous audio broadcasts in the courtroom. However, earlier this May, the U.S. Supreme Court heard arguments regarding a trademark dispute case by teleconference. Justices asked questions in order of seniority and only a few technical issues were experienced.7 While the U.S. Supreme Court didn’t go as far as providing live video, as the Texas Supreme Court did earlier this month, it’s difficult to justify not continuing to hold oral arguments through teleconference.

The Second Circuit and the Seventh Circuit courts announced in late March that they would hold all oral arguments by teleconference. And, now that the U.S. Supreme Court has held oral arguments by teleconference, the opportunity to expand this practice to all courts has never been so strong. Still, district courts have been reluctant to hold jury trials through videoconference or teleconference. However, the Collin County District Court case proved that holding video conference jury trials is possible.

The takeaways from the Collin County District Court were as expected.8 First, like all trials, there is a chance for a few hiccups. Here, one of the prospective jurors wandered off-screen and could be heard talking on the phone. Second, walking jurors through how to set up their audio and video correctly was not as difficult of a task as some may have thought. Third, approaching the bench by way of a “breakout room” was mostly a success - minus the wandering prospective juror. And, fourth, and arguably most notable is that this case was a one-day summary jury trial. Yet, the question remains, will video conference trials become future practice beyond the pandemic?

Many law firms are already preparing for post pandemic hearings to remain virtual. As Chief Justice Hecht of the Texas Supreme Court explained, if hearings can be successfully held through video conference or teleconference, then why shouldn’t they? However, video conference jury trials present multiple legal concerns. Some of these difficulties include whether virtual trials would deprive defendants of their constitutional right to confront witnesses, an impartial jury, due process of law, and effective counsel. Moreover, ensuring high-speed internet so defendants and witnesses could appear would be problematic. These issues are difficult to overcome, especially in the face of a pandemic.

While hearings might shift towards video conferences and teleconferences, jury trials still have a long way to go. Although Texas proved that a one-day video conference summary trial was possible, there is little reason to believe that a jury trial that takes place over a week, or longer, would see the same level of success. Moreover, the issues on appeal would pave the way for the U.S. Supreme Court to make the final decision on whether constitutional rights could be upheld through video conference jury trials. Therefore, the “new normal” for litigators might not be that “new” after all. While attorneys might need to begin setting up home or office studios in order to hold videoconferences and teleconferences for their clients, virtual jury trials have many hurdles to overcome before litigators should expect any major changes.


1 Nate Raymond, Texas Tries a Pandemic First: A Jury Trial by Zoom, Thomas Reuters Technology News (May 18, 2020), https://www.reuters.com/article/us-health-coronavirus-courts-texas/texas-tries-a-pandemic-first-a-jury-trial-by-zoom-idUSKBN22U1FE.
2 National Center for State Courts, https://www.ncsc.org/newsroom/public-health-emergency.
3 Meera Gajjar, 'The American Justice System Will Never Be The Same': Texas Supreme Court Chief Justice Nathan Hecht, Thomas Reuters COVID-19 (April 24, 2020), https://blogs.thomsonreuters.com/answerson/the-american-justice-system-will-never-be-the-same-texas-supreme-court-chief-justice-nathan-hecht/
4 Peter McAleer & Maryann Spoto, Judiciary Launches Virtual Grand Jury Pilot Program, Richard J. Hughes Justice Complex (May 14, 2020), https://njcourts.gov/pressrel/2020/pr051420a.pdf.
5 Id.
6 Robert Barnes, Supreme Court Takes Modest But Historic Step With Teleconference Hearings, The Washington Post Courts & Law (May 4, 2020), https://www.washingtonpost.com/politics/courts_law/supreme-court-teleconference-hearings-bookingcom/2020/05/03/f5902bd6-8d76-11ea-a9c0-73b93422d691_story.html
7 Id.
8 Angela Morris, Hold Please? Juror Takes Phone Call as Texas Tests First Jury Trial Via Zoom, Legaltech News (May 18, 2020), https://www.law.com/legaltechnews/2020/05/18/juror-walks-off-to-take-phone-call-as-texas-tests-first-jury-trial-via-zoom-397-34291/

Author Christopher M. Wise is an attorney and the Managing Member of Wise Law, LLC in Louisville, Kentucky. He focuses on contractor-subcontractor litigation and property law.

Wednesday, May 20, 2020

Maybe Relief for Public Contractors Should Come from Thoughtful Legislation

With loss, comes suffering; and, when it comes to the coronavirus, loss exists in many forms. Attorneys across the country – particularly those representing contractors on public projects – are asking themselves, generally, “how can my client suffer less?” Or, more pointedly, “is there an argument to support my client’s right to entitlement to compensation for COVID-19-related costs?”

On public projects, the short answer is maybe not until the government steps in. Construction lawyers are faced with the unfortunate reality that public sector contracts appear to preclude contractors from seeking adjustments to the contract price because these contracts commonly include (1) a clear “no-damages-for-delay” provision, (2) time as the sole remedy for “force majeure” delays, and (3) a “compliance with laws” provision that is silent as to which party bears the risk of a change in laws. These provisions help public owners properly protect the interests of the citizens by appropriately allocating their tax dollars to a construction project that follows a carefully thought-out contract. However, as a result of these well-intentioned owner-friendly provisions, public contracts can make it difficult for contractors to receive compensation for COVID-19-related costs.

One can draw a parallel between public contracts and some of the insurance industry’s business interruption coverage policies. Of course, every insurance policy is different and must be analyzed on a case-by-case basis; however, the business interruption policies at issue often (1) have a clear “virus” exclusion, (2) require “property damage” to trigger coverage, and (3) are silent as to the application of the “civil authority” exclusion when it comes to partially mandated shutdowns (i.e. when the case is that construction offices, but not jobsites, may have been required to shut down). As a result, policyholders’ business interruption claims arising from COVID-19 are facing blanket denials from insurance carriers.

However, the denials of claims in both the insurance and construction industries alike can have potentially crippling effects. With respect to insurance, the consensus is becoming somewhat clear: the federal and/or state governments may need to step in. In response, several states (including Massachusetts, Rhode Island, New York, and New Jersey) have sponsored bills to provide long-term reimbursement relief to insurance companies and even to create exceptions to the policies’ strict exclusions, like the “virus” exclusion. As follows, attorneys are advising policyholders to follow the old adage “a claim never made is a claim never paid.” Therefore, attorneys who want to help their clients suffer less should encourage strict compliance with the “prompt” notification mechanisms to preserve claims under their insurance policies.

Similarly, attorneys are encouraging contractors to comply with the claim procedures in their public contracts, despite the currently-present contractual roadblocks. This advice is perhaps motivated with the hope that relief will be provided, whether it comes from the owner or as a part of a government-sponsored relief scheme similar to that of the insurance industry. The good news is: over one-hundred and thirty-five members of Congress agree with this approach, at least when it comes to supporting State Departments of Transportation (DOTs). On May 11, 2020, Representatives Conor Lamb and Bob Gibbs led the House in calling on Speaker Pelosi and Leader McCarthy to support approximately $49.95 billion in federal funding for State DOTs in the next COVID-19 response package.1 The request explained how support of State DOTs can help ensure planned transportation projects proceed as planned, which in turn supports the economy by protecting the jobs of State DOT employees and construction workers. Comparably, the Under Secretary of Defense released a memorandum on March 30, 2020, with the subject “Managing Defense Contracts Impacts of the Novel Coronavirus,” stating that “Where the contracting officer directs changes in the terms of contract performance, which may include recognition of COVID-19 impacts on performance under that contract, the contractor may also be entitled to an equitable adjustment to contract price using the standard FAR changes clauses (e.g., FAR 52.243-1 or FAR 52.243-2).”2 This memorandum suggests that contracting officers may have the authority to treat COVID-19 impacts as compensable delays under the FAR Changes clause.

As a matter of public policy, government intervention in line with the above makes sense. Despite the general rules that deny contractor recovery in the face of (1) a clear “no damages for delay” provision,3 (2) time as the sole remedy,4 and (3) a silent compliance with law provision,5 these rules are unfair (and perhaps unlikely to be upheld) considering the ongoing global pandemic. For example, on lump sum and GMP projects in particular, it would be inequitable for a public owner to completely deny claims for additional costs – like those of COVID-19-required demobilization and remobilization – on the basis of (1) a clear “no damages for delay” provision, (2) time as the sole remedy, and (3) a silent compliance with law provision. What’s more, public contracts are often procured via competitive bidding, which naturally means that contractors cut as many costs as safely as possible, not pricing out a ‘just in case a global pandemic shuts down this project for a couple weeks’ cushion. In fact, because public owners want to ensure that workplaces, including construction jobsites, are operating safely and in full compliance with new COVID-19 safety measures, they have a competing interest when it comes to compensating COVID-19-related costs. Since their competing interest brings with it some additional costs that were in no way contemplated by contractors when they priced their jobs, they ought to have some skin in the efforts for recovery as it would be unfair for public owners to ask contractors to simply absorb COVID-19-related costs.

Indeed, the ramifications of allowing owners (and insurers) to benefit from such harsh claim denials could have detrimental effects on the entire construction industry. Consider the alarming fact that if contractors continue to be denied compensation for COVID-19-related costs, then numerous contractors, subcontractors, and suppliers will inevitably goes out of business, thereby crumbling the industry and, likewise, the economy. While public owners and insurance companies may suffer in the short-term in light of legislation that requires exceptions to their contracts, they are in a much more stable position to weather this storm over the long-term. In other words, at present, they are not the string that will make the sweater unravel. After all, the greater suffering ought to be borne by the owner anyway, even if it is the state. One can reason that even though neither the owner nor the contractor could have ever predicted COVID-19, it is the owner – not the contractor – who remains the ultimate beneficiary of the project. As follows, maybe relief for public contractors should come from thoughtful legislation, like that already pending for the benefit of the insurance industry.




1 https://www.agc.org/sites/default/files/State%20DOT%20House%20Support%20Letter_Signed.pdf

2 https://federalconstruction.phslegal.com/2020/04/articles/contractor-information-sources/delays-resulting-from-coronavirus-may-be-both-excusable-and-compensable/; https://www.nationaldefensemagazine.org/articles/2020/3/16/industry-may-find-relief-for-coronavirus-delays; https://www.jdsupra.com/legalnews/delays-resulting-from-coronavirus-may-58448/

3 Although a contract has a clear “no damages for delay” clause, the contractor is not necessarily foreclosed from recovery if there exist other avenues for recovery within the contract. In fact, in many jurisdictions, “no damages for delay” clauses are not enforced where the delay for which recovery is sought was not reasonably contemplated by both parties at the time of contracting. JWP/Hyre Elec. Co. v. Mentor Village Sch. Dist., 968 F. Supp. 356, 360 (N.D. Ohio 1996); see Corinno Civetta Const. Corp. v. City of New York, 493 N.E.2d 905, 910 (N.Y. 1986). That is not necessarily the case in Massachusetts; however, there exist other ways a contractor can avoid the harsh effects of a “no damage for delay” clause. Joel Lewin & Eric Eisenberg, Delays, Suspensions and interruptions—No damage for delay clauses—Exceptions, Massachusetts Practice Series on Construction Law § 6:22 (2018). For example, a contractor may point to other contract provisions that provide relief. Id. (citing Stone/Congress v. Town of Andover, 6 Mass. L. Rptr. 330, 1997 WL 11737 (Mass. Super. Ct. 1997) (denying a summary judgment motion in favor of a contractor that argued that its damages were not for delays, but rather for changes in the work for which it was entitled to compensation under the changes clauses in the general contract). A closer look into the specific contract language is necessary in order to determine whether there exist other avenues for recovery.

4 Despite the fact that the sole remedy is time, there may still be room for a claim for additional compensation if contractor has a separate delay claim. “Force majeure” events, like abnormally bad weather and presumably the COVID-19-related costs at issue here, normally entitle the contractor to time, but not money. However, similar to the idea above that a contractor can avoid the harsh effects of a “no damage for delay” clause by pointing to other contract provisions, a contractor may recover for “force majeure” events when they are coupled with other compensable delay events. See id.; Philip J. Bruner & Patrick J. O’Connor, Jr., §3.7.2—Contractor’s Compliance with Law, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update). For example, in Appeals of Bechtel Environmental, Inc., a contractor was adversely affected by weather when a government-caused design delay pushed toxic waste landfill remediation activities into the hotter summer months, resulting in lower efficiency. Philip J. Bruner & Patrick J. O’Connor, Jr., §15.1.6.2—Weather delays, Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing Appeals of Bechtel Environmental, Inc., E.N.G.B.C.A. No. 6137, E.N.G.B.C.A. No. 6166, 97-1 B.C.A. (CCH) ¶ 28640, 1996 WL 686423 (Corps Eng'rs B.C.A. 1996)). Perhaps the express language in the AIA A201-2017’s § 8.3.3 provides the support for this: “This Section 8.3 does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.”

5 As a general rule, if the contractor agrees to perform the work for a stipulated sum and further agrees to comply with all laws and regulations governing the performance of the work, then, in the absence of any contractual provision permitting relief, it bears the risk. Philip J. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 5:80 (Jan. 2020 Update) (citing DiCara v. Jomatt Const. Corp., 52 Misc. 2d 543, 276 N.Y.S.2d 11 (Dist. Ct. 1966) (contractor who agreed to sell a house at a specified price bore a responsibility for increased costs due to a 2% sales tax made applicable to the sale after the parties had reached agreement); Edwards v. United States, 19 Cl. Ct. 663 (1990) (government contract's “permits and responsibilities” clause obligated the contractor to comply with all local laws and regulations regardless of whether they became effective before or during the term of the contract and applied to zoning changes affecting the work)).


Author Lexie R. Pereira is a J.D./M.B.A. student at Boston College Law School, studying to become a litigator, with a specialty in construction law. At school, Lexie is the President of the Real Estate Law Society and the President of the Eagle-to-Eagle Mentoring Program. Outside of school, she is a legal intern at Consigli Construction Co., Inc. and is on the Editorial Team of the ABA’s Forum on Construction Law’s Dispute Resolver blog. This summer, she was invited to rejoin Hinckley Allen as a Summer Associate with a focus in the Construction and Public Contracts group. Lexie earned her B.A. and a varsity letter from Boston College in 2017.

Contact Information: pereirle@bc.edu ; https://www.linkedin.com/in/lexie-pereira/

Tuesday, May 19, 2020

Force Majeure Provisions in Construction Contracts and Supply Chain Disruption During the COVID-19 Pandemic

The COVID-19 pandemic is having drastic effects on the construction industry across the United States. Various states have deemed residential and commercial construction work “essential,” and permitted to carry on amidst various business closures and stay-at-home orders. But construction law practitioners are expecting an uptick in various types of claims, and whether force majeure provisions will apply to events related to COVID-19 is a pressing question for clients and counsel.

The ABA Forum on Construction Law held the sixth session in the Leadership Roundtable Series on the impacts of COVID-19 on the construction industry on May 12, 2020, with panelists from different practice areas to discuss force majeure clauses and their application to construction industry clients. The panel was moderated by Chris Beirise, of the Kenrich Group, LLC, in Las Vegas, NV. The panelists included Kristen Sherwin, of Winstead P.C. in Dallas, TX, who represents owners and developers; Tracy Steedman, of Adelberg Rudow Dorf & Handler, LLC in Baltimore, MD, who represents subcontractors and general contractors; Rhonda Caviedes, senior corporate counsel with Jacobs Engineering Group, Inc. in Dallas, TX, and Anthony Gonzales, Managing Principal of Spire Consulting Group in Austin, TX.

A “force majeure” clause is a provision in a contract that excuses a party’s performance under the contract if a failure to perform is due to unforeseen or extreme circumstances outside the party’s control. These clauses are often used in all kinds of commercial contracts to allocate risk. Ms. Caviedes noted that many clients prefer to use custom contracts that they created themselves, but counsel should consider using form contract documents that are well-established in the industry instead. Form documents such as the AIA contracts or ConsensusDOCS can provide uniformity and certainty to clients, without counsel needing to interpret and revise clients’ custom contracts numerous times.
 
Force majeure provisions vary by contract. Often in construction contracts, a force majeure provision will be included in a delay provision. Some contracts include force majeure provisions, and some do not. Some have incredibly specific force majeure provisions, and some have very broad provisions. Some contracts have provisions that are functional equivalents of force majeure provisions but do not mention the phrase “force majeure.” Some examples of force majeure events are “acts of God,” economic conditions or financial hardship, pandemics or epidemics, floods, hurricanes and other weather-related events, labor strikes and performance delays, and government action.

Force majeure provisions are generally enforceable in all states and typically are narrowly construed. Not all states interpret force majeure provisions the same way, however. In Texas, as Ms. Sherwin noted, a force majeure event must have been unforeseen. The time of contract making is highly relevant to foreseeability. For instance, if a contract was formed in late March 2020, then events related to COVID-19 were almost certainly foreseeable at that time. Under Texas law, only an objective impossibility – that is, a complete inability to perform – will excuse a breach of contract. Ms. Sherwin cautions attorneys to pay close attention to choice of law provisions in contracts, and evaluate the chosen state’s treatment of frustration of purpose, impossibility, and foreseeability.

Ms. Caviedes noted that force majeure provisions are often heavily negotiated, and careful drafting is very important. Often, a force majeure provisions will include a “catch-all” provision, and the placement of the catch-all language is key to the force majeure provision’s interpretation. Courts typically interpret a catch-all provision at the end of the list as being one that relates back to the items that have been identified in the immediately preceding text. Courts find that if a general meaning had been intended, then specific listed events would not have been included. “[W]here the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure" (Belgium v. Mateo Prods., Inc., 29 N.Y.S.3d 312, 315 (1st Dep't 2016) (quoting Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 931 N.Y.S.2d 436, 438 (3d Dep't 2011)). Again, numerous jurisdictions have interpreted catch-all language following specific lists, so it is critical to evaluate the chosen state’s case law on this point when drafting contracts and consulting clients during construction and at the claims phase.

On the immediate effects of COVID-19 on clients, the panelists shared their experiences, which offer useful advice to practitioners. Ms. Steedman explained that subcontractors are sending notices to general contractors and submitting requests for change orders, both related to supply chain disruptions. Suppliers are not delivering materials on time. Subcontractors need to acquire more vehicles to comply with social distancing guidelines and to rearrange schedules to ensure that various trades are not working too much at the same time.

Ms. Sherwin offered an owner’s perspective, stating that subcontractor notices should be as specific as possible. Owners pass these notices along to investors or lenders, but owners prefer not a vague notice that a supply chain disruption has occurred or is imminent. Instead, owners desire to know what the actual supply chain impact is, as soon as it is known, so that a large claim for an extreme increase in cost is not a surprise down the road. Owners are also looking for general contractors to work with suppliers directly to find alternatives to obtaining similar supplies. The circumstances related to COVID-19 are sure to cause delays and cost increases, so it is even more important that all parties on projects work together to share relevant information on a timely basis.

Another component of force majeure provisions is mitigation of damages. Mr. Gonzales noted that contractors should itemize all damages related to COVID-19 in notices of claims. Additionally, it is important to analyze whether a duty to mitigate applies, and what mitigation measures should be taken and when. Given the complexity and sophistication of the global supply chain, even under the strain of COVID-19, there are often options to obtain labor, raw materials, or other supplies from alternative sources, as well as other solutions, to avoid time and money impacts.

As always, but especially in the time of COVID-19, it is critical for clients and counsel to understand their construction contracts, to comply strictly with all notice requirements to other parties, lenders, and insurers, and to evaluate whether a force majeure provision might be used offensively or defensively.

Author Megan B. Burnett is an attorney in the Baltimore office of Miles & Stockbridge P.C., with offices in Maryland, Washington, D.C., and Virginia. She practices in the areas of commercial and business litigation, with a focus on construction law and commercial real estate disputes.

Thursday, May 7, 2020

Join The Covid-19 Leadership Roundtable Discussion on Force Majeure, Supply Chain Disruption, Delays and Claims - May 12 at 4 pm EDT


A SPECIAL FORUM CRISIS SERIES

In order to serve and provide resources to our Forum members, the greater ABA, and the general public, the ABA Forum on Construction Law and strategic partners have developed a multi-part webinar series exploring how the COVID-19 pandemic is impacting construction and design and identifying options for response and risk management/mitigation. In these free, non-CLE webinars, industry leaders and attendees will have the opportunity to exchange information, learn from one another, raise questions, and offer options for addressing the deepening effects of the crisis. If you are a company leader or legal counsel, we invite you to join our conversation. 

Developed to help construction stakeholders
manage and prepare for the impact of COVID-19

PROGRAM DETAILS:

Format: Webinar, Expert Round Table Panel Discussion

Moderator: Chris Beirise, HKA

Panelists:

Anthony Gonzales, Spire Consulting Group

Kristen Sherwin, Winstead PC

Rhonda Caviedes, Jacobs

Tracy Steedman, Adelburg Rudow


Our panel will address the immediate impacts of the crisis such as, supply chain disruption, excusable delays, suspension, force majeure and adjustments to the project budget and schedule. This session will cover the range of contract and legal remedies and claims that are certain to be features of the construction landscape for the foreseeable future. Join this discussion about how owners and contractors are addressing these impacts.

FREE 90 Minute PROGRAM.
This program is for information sharing only, and not submitted for CLE.


May 12, 2020 | 4:00 to 5:30 P.M.ET

Multi-part Webinar Series Schedule

• 5/12: Force Majeure, Supply Chain Disruption, Delays And Claims
• 5/19: Post-Crisis Industry Impact – Expediting Use Of Technology; Virtual Depositions, Mediation/Arbitration; and Replacing In-Person Collaboration

Contact LaShaunda.Williams@americanbar.org or Tamara.Harrington@americanbar.org for more information.

Register Now

Tuesday, April 28, 2020

"Pay-When-Paid": Is there a "Reasonable Time" for Subcontractors to Wait for Payment Once Contractor-Owner Litigation Ensues?

Obviously, subcontractors prefer to be paid within a reasonable time, but the issue of what constitutes a “reasonable time” has been a conundrum many states have tackled over the years. From “pay-if-paid” to “pay-when-paid” provisions, states have either adopted one, both, or neither of these commonly controversial, heavily negotiated provisions. Recently, the California Court of Appeals has ruled on a “pay-when-paid” provision that might set the groundwork for subcontractors in other states arguing that “paid-when-paid” provisions should be against public policy.

Distinguishing Between Provisions

Both “pay-if-paid” to “pay-when-paid” provisions ultimately determine who will bear the financial risk of a construction contract. A “pay-if-paid” provision makes “payment by the owner to the general contractor a condition precedent to the general contractor’s obligation to pay the subcontractor for the work the subcontractor has performed.”1 Under a “pay-if-paid” provision, the risk of non-payment falls on the subcontractor if the owner refuses to pay the general contractor. Many states, including California, have concluded that “pay-if-paid” provisions are unenforceable because they indirectly waive or forfeit the subcontractor’s mechanic’s lien rights in the event of nonpayment by the owner.2

Under a “pay-when-paid” provision, the general contractor agrees to pay the subcontractor within a period of time after the general contractor is paid by the owner.3 Thus, under a “pay-when-paid” provision, the risk of non-payment falls on the general contractor. While a “pay-when-paid” provision is not a condition precedent, there is an implied understanding that the subcontractor has an unconditional right to payment within a reasonable time. While many states depart as to whether “pay-when-paid” provisions are enforceable, the underlining issue for a “pay-when-paid” provision is what constitutes a “reasonable time.”

Crosno Construction, Inc. v. Travelers Casualty & Surety Co. of America

On April 17, 2020, the California Fourth Appellate District Court of Appeals ruled against enforcing a “pay-when-paid” provision that would postpone the plaintiff’s right to recover under a payment bond for an indefinite time period. The underlining issue was whether a surety may defend a public works payment bond action by invoking an expansive “pay-when-paid” provision in a construction subcontract that defers payment for an indefinite period of time.4

North Edwards Water District (District) selected Clark Bros., Inc. (Clark) as its general contractor on a public works project to build an arsenic removal water treatment plant. Clark hired subcontractor Crosno Construction (Crosno) to build and coat two steel reservoir tanks.5 The subcontract contained a “pay-when-paid” provision that stated:

“If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. ‘Reasonable time’ shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies.”6

A dispute arose between Clark and District halting the project. Crosno sought to recover payment owned under the public works payment bond that Clark had obtained for the project.

The Court focused on whether postponing Crosno’s right to recover under the payment bond until Clark’s litigation against the District concluded would result in an unreasonable impairment of Crosno’s statutory payment bond remedy. Crosno never executed a waiver and release required to validly “waive, affect, or impair” its payment bond rights. Applying precedent, the court reiterated that postponing payments:

“. . . earned by a subcontractor, itself without fault, until a dispute between the contractor and the owner is resolved, perhaps months or even years later … gives no reasonable assurance that such a dispute would ever be resolved. If the contractor lost the dispute, the contractor would be required to pay his subcontractor creditor from other funds. If the contractor won the dispute, the contractor would be required to apply all or a substantial part of the money he receives toward his subcontract obligations. . . the contractor’s interest would seem more likely to benefit from avoidance of any settlement with the owner.”7

A “reasonable time,” in this case, would include an indefinite timeframe. In fact, the litigation between Clark and District had already reached the two-year mark prior to this ruling. For many subcontractors, managing business in the wake of the COVID-19 crisis is difficult enough. If subcontractors were to be forced to wait until contractor-owner litigation were resolved prior to receiving payment, most subcontractors would fail to survive.

Conclusion

Crosno reminds lawyers representing subcontractors that the purpose behind a public works payment bond is to provide subcontractors a sufficient means of payment. This distinct remedy to public works subcontractors is in addition to the protection payment bonds provide in the event of a defaulting contractor. Moreover, Crosno provides a subtle reminder of the importance of drafting specific waiver and releases. Generally, a waiver and release of payment bond rights can be enforceable to the detriment of the subcontractor. While many states differ on their enforcement of “pay-if-paid” and “pay-when-paid” provisions, arguing the element of reasonableness to protect otherwise disadvantaged subcontractors caught in-between contractor-owner litigation might be your best option.



1 Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882, 885 (1997).
2 Id. at 886.
3 Chapman Excavating Co. v. Fortney & Weygandt, Inc., 2004-Ohio-3867, ¶ 22 (Ct. App.).
4 Crosno Constr., Inc. v. Travelers Cas. & Sur. Co. of Am., Nos. D075561, D075562, 2020 Cal. App.at *8-9 (Ct. App. Apr. 17, 2020).
5 Id. at 1-2.
6 Id. at 4-5.
7 Id. at 17-18 (citing Yamanishi v. Bleily & Collishaw, Inc., 29 Cal. App. 3d 457, 463 (1972).

Author Christopher M. Wise is an attorney and the Managing Member of Wise Law, LLC in Louisville, Kentucky. He focuses on contractor-subcontractor litigation and property law.

Thursday, April 23, 2020

What the 1918 Flu Can Teach Us About COVID-19

The COVID-19 pandemic shows no signs of sparing the construction industry. Nearly every jurisdiction has implemented some level of restriction on business activity, i.e. “essential” versus “non-essential,” and as a whole construction has been caught in the grey zone. Some jurisdictions have found that construction is “essential,” thereby allowing work to proceed. Others, including New York, Pennsylvania, New Jersey, and Vermont, have halted nearly all construction projects not serving an emergency or essential purpose.

State Restrictions on Construction Activity Vary

Some states have enacted significant limitations on construction projects. One of the most stringent is Pennsylvania, which on March 19, 2020, issued an executive order forcing the closure of any business not deemed “life-sustaining,” including a state-wide prohibition on construction activity. Days later, the executive order was amended to deem the construction of medical facilities and emergency repairs as “life sustaining.” On March 27, 2020, except for the construction of medical facilities and emergency repair, nearly all construction work state-wide was closed. On a case-by-case basis, the Pennsylvania Department of Community and Economic Development has granted some waivers/exemptions.

While Pennsylvania closed nearly all construction projects, both New York and New Jersey initially considered construction an “essential” business. However, as the fight against COVID-19 intensified, these states restricted their definitions of essential to be project-specific, e.g. medical facilities, infrastructure, and affordable housing. Now, New York is threatening fines of up to $10,000 against teams found working on non-essential or non-emergency construction projects. While New York has a robust and responsive waiver process, New Jersey has not instituted a formal waiver process. In some jurisdictions, municipalities responding to the COVID-19 with their own rules. Presently, there are several major metropolitan areas with significant restrictions on construction activities, including Boston and San Francisco.

On the other hand, many states including Texas and Florida have relied on federal guidance from the U.S Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA). CISA deems nearly all construction projects as essential, e.g. residential construction is essential “to combat the nation’s existing housing supply shortage.” California has also permitted most construction projects to continue.

In either case, COVID-19 has likely impacted the workforce and supply of readily available labor to work on any given construction project.

Lessons from the 1918 Flu

As clients continue to struggle with the full implications of the ongoing emergency, some experts suggest analyzing a similar pandemic from 100 years ago. As soldiers returned home from the battlefields of World War One, a global pandemic of influenza cast a pale over victory celebrations. The so-called “Spanish Flu” took over 50 million lives, about twice as many as the Great War itself. In the United States, it is estimated a staggering 29 million people contracted the 1918 Flu. Approximately 675,000 Americans lost their lives.

The 1918 Flu pandemic shares some parallels with COVID-19, but there are also a few important differences. Whereas COVID-19 seems particularly dangerous for older demographics, the 1918 Flu seems to have attacked younger people between the ages of 20 and 40.1 As a result, historians believe a greater proportion of construction workers likely fell ill. In fact, one study from Toronto indicated construction workers had one of the highest mortality rates.2

The government response to the 1918 Flu was also less consistent. While some state and local governments acted aggressively to help fight the spread of the virus, there seems to have been less of a response at the federal level. Many of the local government responses were similar to today, such as mandating the use of masks in public, banning public gatherings, and encouraging social distancing. Many local businesses were ordered to close. On the other hand, mandatory shelter in place orders were uncommon 1918. Although some of the data is anecdotal, there is general agreement the 1918 pandemic caused a sharp, but short economic contraction.3 Labor shortages caused delays, shortages, and rising wages.4 Unlike the COVID-19 pandemic, which to date has included significant and ongoing economic stimulus, the 1918 pandemic did not result in any significant government stimulus. Thus, even before accounting for “work from home” or “remote work” capabilities, a direct economic comparison may prove difficult.

Available case law indicates courts reached inconsistent conclusions regarding delays and interruptions arising from the 1918 Flu. Courts seem to have generally upheld the power of local governments to enact quarantines. Soap Co. v. Peet Bros. Mfg. Co., 50 Cal. App. 246, 194 P. 715 (Cal. Ct. App. 1920). Additionally, the “contingency or delay in performance” provision in a contract was triggered by an enforcement of a local quarantine order and excused the supplier’s delayed performance. Id.

Other courts facing contract issues arising from the 1918 Flu pandemic reached the opposite conclusion. Napier v. Trace Fork Mining Co., 193 Ky. 291, 235 S.W. 766 (1921). The plaintiff entered into an agreement to complete grading as part of a railroad sidetrack construction project. Due to the 1918 Flu pandemic, the plaintiff was unable to find enough labor needed to qualify for an early completion bonus. The court refused to apply an unforeseen circumstances analysis because, “defendant accepted the work as soon as it was completed and offered to pay plaintiff therefor in exact accordance with the plain and unambiguous terms of the contract.” Id. at 767. The court found plaintiff merely showed timely completion was more difficult and expensive, not that it was impossible.

The lesson from history is that these cases are fact-sensitive even during times of pandemic. In that regard, best practices include well-tailored requests for time or additional money, supporting documents and materials to demonstrate entitlement at the claim level, and prompt notice. Much like the contractor in Napier, parties cannot risk overplaying or overstating the impact of COVID-19 on contractual performance. It appears the divergence of judicial analysis resulting from the 1918 Flu may be on the verge of repetition 100 years later.

Conclusion

The current patchwork of government restrictions on construction activity has generated a plethora of legal issues. Some of these include force majeure clauses, excusable delay, change orders, cash flow problems, employment and supply chain issues, and business interruption coverage. Although the 1918 Flu may be an imperfect comparison, it suggests COVID-19 will likely have a significant, although hopefully transitory, economic impact on the construction industry.



1 “1918 Pandemic (H1N1 Virus),” Centers for Disease Control and Prevention, https://www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html (last visited April 22, 2020).
2 Peter Kenter, ‘”Unsung Heroes”: Toronto Construction Workers and The Spanish Flu Epidemic,” Daily Commercial News, https://canada.constructconnect.com/dcn/news/labour/2020/03/unsung-heroes-toronto-construction-workers-and-the-spanish-flu-epidemic (last visited April 22, 2020).
3 Thomas A. Garrett, “Economic Effects of the 1918 Influenza Pandemic: Implications for a Modern-day Pandemic,” at 9, (Federal Reserve Band of St. Louis) https://www.stlouisfed.org/~/media/files/pdfs/community-development/research-reports/pandemic_flu_report.pdf (last visited April 22, 2020).
4 Id. at 21.

Co-authors Gaetano Piccirilli, partner and Patrick McKnight, associate, are members of the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania and serve on the Klehr Harrison Coronavirus Task Force.