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.
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.