The Coronavirus Disease (COVID-19)

The Coronavirus Disease (COVID-19)

Who Bears the Risk?

As the impact of COVID-19 spreads, industries across the nation feel its effect.  Global supply chains are stalled. State and local governments are warning against and prohibiting public gatherings.  More and more companies are imposing travel restrictions and implementing social distancing policies. As businesses seek to navigate the uncertainty of COVID-19 they are increasingly looking to “force majeure” clauses and other important contractual provisions as a means of understanding and mitigating risk.

Construction Contracts

Whether your company is in the middle of a construction project, or negotiating a new contract, it is important to consider who bears the risks associated with COVID-19.

Force Majeure

The AIA A201 standard form General Conditions has the following Force Majeure clause:

        8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner; or Separate Contractor; (2) by changes ordered in the Work; or (3) by labor disputes, fire,  unusual delay in deliveries, unavoidable casualties or, adverse weather conditions documented in accordance with Section, or other causes beyond the Contractor’s control; or (4) by delay authorized by the Owner pending mediation and arbitration; or binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines may, justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine. (Emphasis added).

        Under this provision, disruptions from the virus would likely be deemed beyond the contractor’s control. But these provisions are frequently modified. Therefore, it is essential to understand what your contract says and, when entering new agreements, ensure that the negotiated force majeure language fits the realities of the current and ever-changing landscape. Likewise, even if the contract allows for an extension of time, it may have a “no damages for delay provision,” limiting or eliminating the contractor’s compensation for delays. What delays are compensable and how compensable is defined is another important consideration.

Price Escalation Clauses

Similarly, contractors should consider negotiating prices escalation clauses to clarify who bears the risk of significant price increases in material because of events beyond the contractor’s control. As a strategy to limit delay, contractors may look to substitute materials and equipment manufactured in the United States for products usually procured from China. Under the standard A201, substitutions require the Owner’s consent. But, even with such consent, these items are likely to come at an increased cost. Although a contractor may seek compensation for increased costs, additional compensation is at the Owner’s discretion absent a price escalation provision.

Notice Provisions & Other Considerations

When determining how to deal with the impact of the virus, contractors should examine other contract provisions, such as: notice, governing law, and clauses regarding the contractor’s duty to provide reasonable protection to prevent damages and injury to employees and other persons affected by the Work.

Also, if a contract does not contain a force majeure provision, there may still be avenues of nonperformance under the doctrines of impossibility, impracticability or frustration of purpose.

Garcia & Milas attorneys stand ready to assist you and your business with questions regarding your contractual obligation and best practices as you navigate the impacts of COVID-19.

This publication is for general information purposes only and is not and is not intended to constitute legal advice.  The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.