COVID-19 and Impacts on Construction
Thu Mar 5, 2020
While it has been a month since the Department of Health and Human Services declared a public health emergency due to the continued spread of the Coronavirus (COVID-19), concern in Seattle has spread exponentially in the past week and the Seattle construction scene is already starting to see the impacts. Factors such as worker unavailability and supply chain interruptions could potentially impact project operations, contractual obligations, and your bottom line.
General contractors, subcontractors, and owners have related, but ultimately unique, concerns in the face of COVID-19. During this very fluid time, this article lays out practical advice for navigating the uncertainty.
The “Force Majeure” Clause
First, a word on force majeure clauses. Your contract likely has one, and this clause should be the first point of analysis in determining your rights and obligations in the face of COVID-19.
Although force majeure clauses vary by contract, they typically provide a “safety valve” if an unforeseen or unavoidable event (think 9/11 or the nationalization of oil companies) materially impacts performance. These safety valves usually come in the form of a modification to the contract, suspension of party obligations, or even the right to terminate the contract altogether.
Although force majeure clauses are typically synonymous with events labeled “acts of God,” the actual application of the clause may have a wide or narrow scope, depending on your contract’s specific wording. If an event does trigger a force majeure clause, parties may get relief from strict contractual performance, but other requirements such as notice provisions and mitigation of losses may also be triggered.
In Washington, there is no one-size-fits all definition of “force majeure.” Instead, courts typically defer to how a particular contract defines a force majeure event. However, at least one court (in Citoli v. City of Seattle) spoke permissively of a force majeure clause inclusive of “epidemic[s],” and a Washington regulation defines force majeure as “… acts of war or civil unrest when an emergency has been declared by appropriate governmental officials; acts of civil or military authority; embargoes; epidemics; terrorist acts; riots; insurrections; explosions; and nuclear incidents” (emphasis added). These definitions, coupled with the World Health Organization’s designation of the Coronavirus as a “public health emergency of international concern,” Governor Inslee’s state of emergency proclamation, and Seattle Mayor Jenny Durkan’s civil emergency proclamation, may tip the scales in finding that COVID-19 qualifies as a force majeure if your contract is otherwise silent on whether something like the Coronavirus is a triggering event.
Even if your contract does not contain a force majeure clause, the “frustration” doctrine may potentially provide relief. Under this doctrine, an event that renders the principal purpose of the contract “frustrated” can potentially discharge a party’s duty to perform if that event was reasonably unforeseeable. Parties beware, however, that doctrine is only available in limited circumstances, and may not apply in every case where COVID-19 impacts your project.
Concerns and Practical Implications for General Contractors, Subcontractors, and Owners
General contractors, subcontractors, and owners have unique concerns where COVID-19 is involved. Everyone is impacted if a project is delayed or halted due to COVID-19, but each player has different considerations in such a scenario. General contractors, for example, are most exposed if they’re overseeing an idle construction site because their subcontractors cannot muster enough workers, and materials, supplies and equipment are delayed in getting to the jobsite. In this scenario, the general contractor not only has to cover its own extended general conditions and related costs, but may also be liable for liquidated damages or other delay / performance penalties written into contract documents, or otherwise applicable under relevant law. At the end of the day, time is money, and if a general contractor isn’t working, it’s not billing, but may still be incurring costs.
Both general contractors and subcontractors face the tough question of where to draw the line. Do they risk keeping potentially infected individuals on-site, risking the rest of the workforce, but maintaining the schedule? Or do they halt the work to test potentially sick employees at the risk of being liable for liquidated damages or being terminated, but potentially preventing a longer-term project shut down later down the road?
Subcontractors also have unique concerns. For example, many subcontracts contained detailed indemnity provisions that require subcontractors to defend and indemnify the general contractor for damages “resulting from or related to” the work of the subcontractor. If a subcontractor doesn’t halt work until after a substantial number of its workers have been infected by COVID-19, might it be required to indemnify the general contractor for delays resulting from that decision? And under what circumstances could halting the work over safety concerns become a “negligent act” for which the subcontractor may be liable? The parameters of such a determination could be highly subjective and difficult for subcontractors to evaluate in real-time.
Owners face the greatest risk when it comes to project costs and financing. While the Federal Reserve recently announced interest rate cuts to battle the economic impact of the Coronavirus, other potential financial implications for owners are emerging, including the increased costs of construction materials and extreme market volatility. Other financial concerns include a loss of revenue as a result of project incompletion, as well as an impact to insurance coverage (including business interruption). Such coverage is typically provided if a direct physical loss occurs from certain enumerated factors. In the case of COVID-19, such loss may not be readily apparent. All these factors could force an owner into certain financial perils not originally accounted for.
At the end of the day, your legal and financial exposure in the face of COVID-19 comes down to the language in your construction and insurance contracts. It’s best to consult with counsel on any difficult or uncertain circumstances.
This document is intended to provide you with general information regarding the impact of a potential or actual coronavirus pandemic. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact your regular Oles Morrison Rinker & Baker LLP attorney.