COVID-19 Impacts on Domestic Construction and Commercial Contracts: Force Majeure

COVID-19 continues to make significant impacts on our economic climate, leaving many businesses seeking clarity on their rights, obligations, and relief that might be available. With the current situation, a force majeure clause may provide relief under construction and commercial contracts. Simply stated, “Force Majeure” provisions can excuse a party’s inability to meet contractual obligations due to circumstances that are outside the reasonable control of the non-performing party.  Common circumstances include: (a)        an act of God, landslide, tornado, earthquake or similar occurrence, fire, explosion or other casualty or flood; (b)       an act of the public enemy, terrorist act, war, blockade, insurrection, riot, general arrest or restraint of government and people, civil disturbance or similar occurrence or sabotage; and (c)        labor strikes, lockouts, work stoppages, boycotts, and walkouts. The burden of demonstrating a contractual force majeure event typically rests with the party seeking to avoid its contractual obligations.  Importantly, the scope and application of force majeure provisions varies by state, so each provision must be carefully evaluated.  Some states will narrowly interpret force majeure provisions and only permit the application if it is specifically listed. Other states enforce broader interpretations and enforce general catch-all categories. An important factor to consider when invoking a force majeure clause is that the party wishing to invoke must prove that the force majeure event caused the party to be unable to fulfil its obligations under the contract. A force majeure clause also generally requires the party invoking the clause to use reasonable endeavors to avoid the effects of force majeure to the extent possible, and that there are no reasonable alternative means for performing under the contract.  Many provisions only grant equitable schedule adjustments and do not provide relief for cost adjustments. Each force majeure clause is different and must be carefully reviewed by counsel.  However, a force majeure clause may provide relief for COVID-19 if the clause includes events such as:

• diseases, pandemics, epidemics, or other national health emergency
• the unavailability of labor and/or materials as a result of any health emergency
• any governmental restrictions in respect of labor or materials in connection with any health emergency
• any declaration of a state of emergency
• compliance with a law or governmental order, rule, regulation or direction;
• any action taken by government or public authority, including imposing embargo, export restriction, or other restriction or prohibition;
• delays by suppliers or materials shortages;
• difficulty or increased costs in obtaining workers, goods, or transport; or
• other circumstances affecting the supply of good or services.

The timing of implementation of the original contract is important with respect the application of a force majeure event.  To that end, most force majeure clauses will require that the event was unforeseeable at the time the contract was executed. If the contract in question was entered into after the outbreak of COVID-19, it may be foreseeable that the virus would have an impact on the contract performance and thus the parties may not be entitled to relief. While every situation is different, there are several best practices that you should consider in connection with the current COVID-19 situation and in determining its impact on your projects and contracts:

• Review the applicable force majeure provisions to determine what situation is covered.
• Confirm the notice requirements under the contract. This is critical, as most force majeure provisions have time limitations on reporting the force majeure event after it occurs and contain waiver provisions if notice is not timely provided.
• When providing notice of a claim, provide as much information about the impact of COVID-19 on the project. Include all schedule and cost impacts, and when the force majeure event is expected to conclude. If complete information is not available, your notice should state that additional information becomes available.
• Be careful that any notice does not trigger a default, anticipatory breach or right to suspend or terminate by the other party. Carefully review the remedy provisions for force majeure events.
• Document all schedule and cost impacts, including creating separate job-cost codes for COVID-19 impacts.
• Request that all downstream suppliers and vendors provide assurances that they will not be impacted by COVID-19, and consider whether and when an alternate subcontractor, vendor or supplier should be retained.
• Develop contingency plans for labor and material shortages.
• If you have received a force majeure notice from one of your subcontractors, vendors or suppliers, consider whether that notice triggers a force majeure event for upstream report purposes.

If your contract does not include a force majeure provision, one will not typically be inferred; therefore, contact legal counsel to determine your rights, as other common law defenses may apply to the COVID-19 situation, including impossibility, impracticability, and frustration of purpose.  These are highly fact dependent and will depend on the law of the jurisdiction at issues.   Berg Hill Greenleaf Ruscitti LLP is advising clients on legal issues relating to COVID-19, including the implementation and enforceability of force majeure clauses. Please contact Giovanni Ruscitti at gmr@bhgrlaw.com if you have any questions. Authors: Giovanni M. Ruscitti, Grace M. Osberg, Ashley D. Cawthorn