September 4, 2020
There has been a lot of discussion on contractor/owner responsibilities under the terms of their contract during the COVID-19 pandemic. Contracts with a force majeure clause could give both parties a way out. A force majeure clause is a contractual provision that excuses performance by a party—either temporarily or permanently—when that “superior force” prevents such party from performing under a contract. The “superior forces” commonly listed in contracts include “acts of God,” “terrorism,” and “natural disasters”—all occurrences that are generally thought to be unexpected and beyond the control of the parties at the time that the contract is made. The pandemic certainly qualifies as a triggering event.
Now that we are into the crisis for close to six months, lawyers are advising owners and contractors to include new language in their construction contracts specifically addressing their rights and responsibilities concerning COVID-19. Doing so is a better option than wondering how standard clauses might apply to the pandemic. Here is a summary of an article by David A. Blake entitled COVID-19 Language for New Construction Contracts which was published on GlobalSt.com:
Start with key definitions on which the parties’ rights and responsibilities will be built. Four terms to define upfront are COVID-19, COVID-19 Proclamations, COVID-19 Condition, and Unknown COVID-19 Condition.
Pick a term, such as COVID-19 Proclamations, to capture the orders, directives, and guidance concerning COVID-19 that have been issued, and which may be issued, by public bodies with jurisdiction over the project. Those orders, directives, and guidance may require the project to shut down or otherwise increase the contractor’s cost or time of performance by calling for things such as social distancing and the use of personal protective equipment. Having a term for that collection of orders, directives, and guidance is helpful when allocating the parties’ rights and responsibilities pertaining to them.
Define a set of related terms, COVID-19 Condition and Unknown COVID-19 Condition. Define a COVID-19 Condition as something attributable to COVID-19 not caused by the contractor and beyond its control. The definition should list specific items, such as COVID-19 Proclamations and supply chain disruptions due to COVID-19. Also include a catchall, such as, “other circumstances concerning COVID-19 not caused by the contractor and which are beyond its control.”
Add a time component to an Unknown COVID-19 Condition. Define it as a COVID-19 Condition the contractor did not know about, and reasonably should not have known about, as of a certain time, such as when the contract or a guaranteed maximum price amendment (GMP) is signed. Consider stating COVID-19 Proclamations issued at least X days before a contract or GMP amendment is signed are not an Unknown COVID-19 Condition. In other words, the contractor will be deemed to have knowledge of those COVID-19 Proclamations.
The nesting of the definitions, culminating in an Unknown COVID-19 Condition, is important according to Blake. To be entitled to any relief, the contractor must demonstrate an issue constitutes an Unknown COVID-19 Condition. This is based on the principle that if the contractor knew, or reasonably should have known, about the issue when it signed the contract or GMP amendment, then it should have accounted for it in the price and schedule. Tying into that principle, if a COVID-19 Condition arises after the contractor submits its bid or proposal, it should be allowed to revise the same due to that condition up until the time it signs the contract or GMP amendment. Language to that effect should be included in the contract and procurement documents, as appropriate.
Delay
In many construction contracts, one of the criteria for an excusable delay is it must be unforeseeable. Contractors may be concerned that in new contracts all delays related to COVID-19 will be deemed to be foreseeable because the parties were aware of the COVID-19 pandemic when they signed the contract. This is the type of uncertainty that can arise if standard clauses are not clarified. An equitable approach is to focus on the specific COVID-19 issue that caused the delay, rather than the pandemic. In that regard, clarifying language should be added to the contract stating, with respect to a COVID-19 Condition, only an Unknown COVID-19 Condition is deemed to be unforeseeable. That strikes a fair balance. If the contractor did not know about, and reasonably should not have known about, the COVID-19 Condition when it signed the contract or GMP amendment, it will be deemed to be unforeseeable and something for which the contractor can pursue a time extension. The owner is also protected because the contractor will not be able to seek a time extension based on a COVID-19 Condition it knew about, or reasonably should have known about, when it signed the contract or GMP amendment.
If the contractor is entitled to a time extension for an Unknown COVID-19 Condition, the next issue to address in the contract is whether that time extension is compensable. One approach is to treat this type of delay the same way the contract treats force majeure delay.
Owner Directed Suspension
The owner may want to suspend work at the project site due to COVID-19 health concerns even though the contractor can proceed with the work based on COVID-19 Proclamations. This may be more likely for sites partially occupied by the owner during construction. If the contract provides the owner the right to suspend the work for its convenience, then one approach is to add language that describes this type of a suspension and states it will be deemed to be a suspension for the owner’s convenience with the contractor having the corresponding remedies stated in the contract for such a suspension. If the contract does not allow the owner to suspend the work for reasons other than the contractor’s breach, then consider adding a new section specifically addressing the owner’s right to suspend work due to COVID-19 health concerns and the relief to which the contractor is entitled for that suspension.
Compliance with COVID-19 Proclamations
Include a section that states the contractor is required to comply with COVID-19 Proclamations in the performance of the work. This is true irrespective of when the COVID-19 Proclamations are issued. The timing of their issuance (before or after the contract or GMP amendment is signed) will affect whether the contractor is entitled to an equitable adjustment for such compliance, but not whether compliance is required.
Another issue to address in this section is whether, and to what extent, the contractor should be responsible for its subcontractors and suppliers complying with COVID-19 Proclamations.
Compensation for COVID-19 Costs
The last significant issue to address is the contractor’s right to be paid for COVID-19 costs, including, but not necessarily limited to, price escalation due to COVID-19 supply disruptions and the cost of complying with COVID-19 Proclamations. This critical language should strike a fair balance to achieve the twin goals of dissuading contractors from including excessive COVID-19 contingencies in their lump sum bids and GMP proposals and encouraging lenders and owners to commit their funds to new projects.
First, identify the criteria for compensation. Second, state the owner will reimburse the contractor for costs attributable to COVID-19, and which are not included in the schedule of values, only if the cost is an Unknown COVID-19 Cost. Third, if your contract is based on a GMP that includes a construction contingency, you might address whether that contingency will be the first source of funds for an Unknown COVID-19 Cost, with a change order to follow only if there is a shortfall.
Organization of New Language
You have two options concerning how you organize the new COVID-19 language. You can disperse it throughout the contract on a topical basis. For example, you can include the COVID-19 delay language in the delay section of the contract. Alternatively, you can add a new article to the contract for COVID-19 and include all the new language there. The second option is preferred.
I encourage you to read the full article to learn more about COVID-19 related language that should be included in future contracts.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. You can contact me at [email protected] and Marty at [email protected]. As always, we are happy to help.
Stay safe,
Rich Higgins, CPA
Managing Principal - New Jersey Office
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
