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.

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