Construction Alert: Does a force majeure provision excuse COVID-19 related performance issues in construction contracts?
By Teresa G. Santin on March 19, 2020
It is anticipated that the spread of COVID-19 will cause work force, supply chain, and lending complications for construction projects. These hurdles will cause increased costs and delays. Contracting parties want to know now how to tackle these concerns. The first step is to analyze the contract provisions.
Will COVID-19 trigger a force majeure provision?
Force majeure provisions are common in construction contracts. These provisions dictate conditions under which a party may be excused from or can delay performance. Generally, force majeure provisions only apply to dramatic or catastrophic unforeseen events beyond the control of the contracting parties. Examples of triggering events are dictated by the language in each individual contract, but could include fire, war, strikes, severe weather, acts of God, and epidemics depending on the language of your contract. Examples of instances likely not constituting a force majeure include unfavorable economic conditions and inaccurate estimates of project expenses, but will likely also depend on the contractual language at issue.
Responses to COVID-19 would trigger a well-crafted force majeure provision. Such a term can be written to include “incidence of disease or other illness that reaches outbreak, epidemic or pandemic proportions” as an event triggering the force majeure provision. Of note, the language could specifically require that a party wishing to delay or postpone its contractual obligations due to a force majeure must provide written notice of the same within five days, or otherwise waives that right. This form could permit a party to postpone its obligations on a day-by-day basis, rather than excuse performance entirely.
Will force majeure principles still apply absent a provision?
In the absence of contractual terms dictating otherwise, certain legal principles may apply to excuse performance in the wake of COVID-19. One example is the doctrine of impossibility. Impossibility of performance arises where an unforeseen event occurs after parties enter into a contract, which renders a contracting party’s performance impossible. Under this doctrine, performance will not be excused if the unforeseen event renders performance merely economically burdensome, dangerous, or difficult.
Governmental activity may likewise excuse a party’s performance under certain conditions. Put another way, if governmental action renders a party’s performance impossible, impracticable, or illegal, it may be excused from performing its contractual obligations. Courts will not enforce a contractual provision—written or oral—requiring the performance of an illegal act. The government at federal, state, and local levels has imposed, and will likely to continue to impose, strict and specific requirements to attempt to limit the spread of COVID-19. These requirements could operate to excuse a party’s performance in a construction setting.
Should COVID-19 impact the way future construction contracts are crafted?
Yes. Contracting parties should consider adding provisions to limit their risk as much as possible. For example, an owner might include a termination for convenience provision, allowing it to terminate for reasons other than the contractor’s default. A termination for convenience provision could be triggered, for example, if the owner is unable to secure financing. Such a provision could also provide the owner with an option to narrow the original scope of work. A contractor might consider adding a price acceleration provision to account for future cost increases to supply or labor. Such clauses may also include termination for convenience language, permitting a contractor to terminate the contract if, for example, material prices drastically increase or materials become impossible to buy. Subcontractors might consider buying all of their materials at the beginning of the project to avoid this issue altogether, and would be wise to negotiate a deposit for materials at the outset of the project.