By Taylor Stemler
Editor’s note: This essay was the first-place winner in the MSBA Construction Law Section’s 2020 writing competition.
Implied in contract law is the assumption that the world will remain the way the contracting parties imagined at the time of formation. This principle originated from an early English case, where a venue owner was excused from renting out a music hall unexpectedly destroyed by fire.1 The covid-19 pandemic has sparked many “fires” of its own—not only for parties left unable to fulfill contractual obligations, but also for lawyers attempting to determine their client’s exposure under these agreements. The cumulative effects of the pandemic are especially problematic in the construction industry, as supply chain and workforce issues slow operations to a halt.2
Fortunately, contract attorneys have learned from situations like the burned down music hall and have developed contractual devices to assign unforeseen risks to parties. These force majeure clauses are now common and variants have even made their way into the American Institute of Architects industry standard contract form.3 Whether covid-19 is covered under these clauses depends largely on their terminology and the yet-to-be-understood effects of the pandemic.4
The AIA termination and suspension clauses
Under the AIA General Conditions form, contractor delays due to unusual delays in deliveries, unavoidable casualties, or other causes beyond the contractor’s control may provide a basis for contractor time extensions.5 Due to the deaths, supply chain issues, and stay-at-home orders caused by the covid-19 pandemic, it seems likely that related contractor delays would be excused under the AIA form. The AIA form also allows a contractor to terminate the contract if the work is stopped for 30 consecutive days due to “an act of government, such as a declaration of national emergency, that requires all work to be stopped.”6 Should this occur, the contractor may terminate the contract and recover compensation for work executed, termination costs, and a reasonable overhead and profit on work yet to be performed.7 Although so far Minnesota’s shelter-in-place orders have generally exempted the construction industry,8 if this should cease to be the case, the clause might also allow contractors to terminate their contracts and recover compensation.
Conversely, project owners may terminate or suspend the contract for convenience. Thus, there is no requirement that the pandemic have any adverse effect on the project. However, should an owner decide to terminate or suspend, they are responsible for compensating the contractor.9 Additionally, the amount of time the owner is permitted to suspend the contract may be limited by the contractor’s ability to terminate, which arises after the owner’s suspensions for convenience exceed a predetermined number of days.10 Again, in this case, the contractor is permitted to collect payment from the owner for work done as well as profits and expenses on the work yet to be completed.11
Likely outcomes and available recovery
So far, where long-term stay-at-home orders have exempted the construction industry, widespread terminations of construction contracts are unlikely. This is due to the relatively limited ability of contractors to terminate their contracts (absent a government mandated shutdown), and the lack of motivation for project owners to do so.12
The more probable scenario will be for contractors to suspend performance of the contract due to material and personnel shortages. Under the AIA form, it is the contractor’s responsibility to provide adequate materials and personnel to ensure timely completion of the project. If contractors are unable to fulfill this responsibility, they will be forced to suspend performance or face potential uncompensated termination by project owners.13 Although the contractor is technically excused for these pandemic-induced delays, under the AIA form, the owner need not compensate the contractor for additional expenses incurred by these delays.14 These expenses may be substantial and include terminating existing subcontracts as well as performing preventative maintenance on previously completed work.15 Despite the covid-19 emergency, it is unlikely that courts will permit recovery of damages incurred by contractors where the contract provides only for time extensions—and not additional compensation.16
Contractors may still be able to recover for pandemic-related delays under business interruption clauses embedded within their insurance policies. Unfortunately, however, these policies often require physical loss or damage to initiate coverage. Alternatively, contractors may collect government aid provided under the federal CARES Act or Disaster Loan Program.
TAYLOR STEMLER is a 3L at Mitchell Hamline School of Law and is planning to start as an attorney at Merchant & Gould, P.C. in the fall of 2021, representing clients in intellectual property matters.
Notes
1 Taylor v. Caldwell, 122 Eng. Rep. 309 (1863).
2 James P. Chivilo et al., “A Look at COVID-19 Impacts on the Construction Industry,” Holland & Knight, https://www.hklaw.com/en/insights/publications/2020/05/a-look-at-covid19-impacts-on-the-construction-industry (last visited 11/21/2020).
3 Am. Inst. Architects, A201-2017 General Conditions of the Contract for Construction §8.3 [hereinafter A201].
AIA contracts are the most widely used standard form contracts in commercial construction. Contract Documents, AIA N.Y., https://www.aiany.org/resources/contract-documents/ (last visited 11/21/2020).
The A201-2017 contract sets for the obligations between the owner and contractor. Although the termination and suspension clauses are not labeled as force majeure clauses, they have a similar effect of assigning risk to parties due to unforeseen contingencies.
4 Dealing With The Construction Impacts Of COVID-19, supra note 3.
5 A201 §8.3.1.
6 A201 §14.1.1.2.
7 A201 §14.1.1.3.
8 See e.g., Minn. Exec. Dept., Executive Order No. 20-20 § 6.x.
9 A201 §14.3-4.
10 A201 §14.1.2.
11 A201 §14.1.3.
12 See e.g., A201 §14.4.3. (mandating owners to pay costs to contractors for owner-initiated terminations).
13 A201 §14.2.1.1.
14 A201 §8.3.1. Although section 8.3 does not preclude damages for delay, available damages do not include those caused by COVID-19. Tony Flesor, “COVID-19 and the AIA A201 – 2017: Anatomy of a Delay Analysis,” L. Week Colo., https://lawweekcolorado.com/2020/04/covid-19-and-the-aia-a201-2017-anatomy-of-a-delay-analysis/ (last visited 11/21/2020).
15 Chivilo, supra note 2.
16 See e.g., S&B/BIBB Hines PB3 Joint Venture v. Progress Energy Fla., Inc., 365 F. App’x 202 (11th Cir. 2010) (dismissing suit for damages due to increased construction costs due to hurricanes where the contract unambiguously precludes additional damages).