Construction Impacts During the Coronavirus Crisis: Force Majeure and Other Tools in Your Contract
The novel coronavirus disease, alternatively referred to as COVID-19, recently attained pandemic status as it sweeps across the globe. Markets everywhere are being disrupted and, while the extent of its impact is still uncertain, it is clear that there will be a significant fallout for the world economy.
Coronavirus originated in China at the end of 2019 and quickly resulted in dramatic countermeasures by the country’s government. Chinese government containment efforts and quarantines have slowed or shut down factories in dozens of the country’s cities and provinces, leading to forecasts of a sharp falloff in the production of everything from cars to smartphones. The construction industry has not been spared these effects: even by conservative estimates, some American construction firms rely on China for up to 80% of their materials. As a result, many U.S. firms are seeing material delays, price increases, and logistics breakdowns, leading to project delays and higher-than-expected costs. Even worse, contractors will experience labor shortages as more states order region-specific quarantines and shutdowns of business activities. These effects will be deeply felt by the industry now, and, in all likelihood, contractors will continue to face serious challenges going forward.
Contractors should prepare for these dramatic disruptions by reassessing their supply chains and sources of labor, and ensuring that their current contracts adequately protect them from the ongoing shocks to the industry.
Force Majeure Clauses
In the wake of coronavirus, a great deal of legal commentary has focused on the “force majeure” clause in contracts. While the clause can be useful, contractors should be wary of overly relying on it, as its application can be limited. A force majeure clause is a contractual provision that expressly spells out when an unanticipated event would excuse the performance of one or more parties to a contract. Traditionally, the clause covers catastrophic or otherwise unexpected events considered to be so-called “Acts of God,” such as extreme weather, wars, strikes, and even changes in the law that would make contractual performance impossible. Importantly, it requires a causal link between the force majeure event and the failure to perform.
However, such clauses must be carefully drafted to protect a contractor. Courts are reluctant to treat force majeure provisions as a get-out-of-jail-free card and accordingly will interpret such provisions narrowly. A force majeure clause will not be interpreted to excuse non-performance for normal, expected risks. For example, a key employee becoming ill, even from a pandemic disease like coronavirus, likely would not trigger the clause.
A recent case involving supply chain disruptions, Kyocera Corp. v. Hemlock Semiconductor, LLC, became a bitter lesson for one company on the limits of the force majeure clause. Kyocera, a solar panel producer, was impacted by unforeseen tariffs levied by the U.S. on Chinese-manufactured solar panel components in retaliation for illegal Chinese subsidies. The tariffs meant that Kyocera was forced to pay Hemlock well above the newly suppressed market price for the polysilicon components in the panels, making the contract no longer commercially viable for Kyocera. In an attempt to escape the contract, Kyocera filed suit and invoked its force majeure clause to excuse its obligation under the contract to purchase the components. Even though the clause specified that it applied to “delays or failures in performance of its obligations… that arise out of or result from causes beyond such party’s control, including… acts of the Government,” the court dismissed the suit, holding that Kyocera was still able to perform, albeit under circumstances not to its liking.
Because of the narrow latitude given to such clauses, it is crucial that they are drafted to anticipate and specify force majeure events. Take the current coronavirus crisis—the World Health Organization declared that it had grown from an epidemic (a widespread occurrence of an infectious disease in a community at a particular time) to a pandemic (a worldwide spread of a new disease) on March 11, 2020. A force majeure clause specifying that it may be invoked in the event of a “pandemic” may not have been properly invoked prior to March 11 when the disease was still considered only an epidemic. The use of the word “epidemic” versus “pandemic” in the clause could be critical to determining whether the clause applies.
A properly drafted clause should specify the unanticipated event(s), state which party is allowed to invoke the clause to suspend its performance, and specify the agreed-upon outcome if the clause is properly invoked. Parties may decide to limit the outcome to excusing the performance of one party, or the provision may provide for other remedies, such as a suspension of work until the unanticipated event is no longer present or a termination for convenience by the owner. Force majeure clauses will often include notice provisions that provide a time limit for the party invoking the clause to inform the other party.
Given the current coronavirus pandemic, contractors are advised to consult their existing contracts to determine whether the clause can be invoked to alleviate any material cost increases, labor shortages, or other issues affecting their performance.
Other Legal Tools
While it can be helpful if properly drafted, force majeure may not be the best tool in a contractor’s legal toolkit. Another option is a material price escalation clause, which allows for a price adjustment to be made in the event of a change based on an agreed-upon metric. The metric could be the difference between the price quoted at bid time and the price of the material when delivered.
If the pandemic is creating delays, a contractor also may find it worthwhile to invoke the delays clause in a contract, a common feature in most construction agreements. The AIA form A201-2017, for example, allows a contractor to recover for delays “in the commencement or progress of the Work by . . . unusual delays in deliveries” or “by other causes that the Contractor asserts, and the Architect determines, justify delay.”
The coronavirus crisis is just beginning to impact the construction industry in ways that will continue to reverberate for many months, if not longer. To help navigate these treacherous waters, contractors should conduct a thorough review of their existing contracts, as well as the forms that they typically use with their subcontractors, to ensure that they are well prepared to ride out the storm. If you have any concerns about the impact of the coronavirus pandemic on your business, please contact the Cohen Seglias attorney with whom you work.
