How contracts can reduce risk in the face of COVID-19 related delays

May 13, 2020

This column published as "Can I Get Some Relief?" in May/June 2020 issue

Uncertainty and risk are not new or novel to contractors.

Indeed, we have contracts to reduce uncertainty and share risk. COVID-19 may have contributed to—but it has not single-handedly created—uncertainty and risk. Your contract toolbox may already be equipped to handle labor shortages, supply-chain disruptions, and restrictive government action.

Nearly every public contract has some type of clause providing relief for unlikely delays to a project. Such clauses may be labeled: Force Majeure, Acts of God, Acts of Government, or more generically, Delays and Extensions of Time. In federal contracting, standard FAR provisions excuse delays outside the contractor’s control or provide equitable relief for directed or constructive changes. In state contracting, nearly every DOT’s standardized contract provides relief for the same types of events.

Private, uniform contracts already include certain relief provisions. Under the AIA’s A-201 (2017), Section 8.3.1, the contractor is entitled to additional time for “unusual delay in deliveries” or “other causes beyond the Contractor’s control.” Under ConsensusDocs 200 (Rev. May 2017), Section 6.3.1, additional time may be afforded for delays “by any cause beyond the control of the Constructor ... [including] epidemics.”

Whether public or private, contractors must effectively be doing three things: Notice, Mitigate, and Prove. First, give timely and proper written notice under the contract terms. If notice must be written, send it to the proper person (e.g., Contracting Officer) using the proper means (e.g., regular mail may be required although e-mail is ubiquitous). Timely notice is probably required within a certain number of days of the event(s) giving rise to the claim condition. Repeated notice may be necessary for sub-events that, though related to the greatest event (i.e., COVID-19), may be construed as unique events requiring unique notice. Do not assume that later-occurring events will automatically be covered by an earlier, blanket notice.

Second, reasonably mitigate the delays and damages arising from the event(s). Contractors will not be excused if they could have overcome difficulties posed by COVID-19 and completed work on time by reasonable alternatives. For example, if the supply chain is cut off or delayed, diligently try to find another supply chain and seek suitable substitutes that can be timely and economically acquired. Even if the contracting parties disagree over the cause, extent, or price of a change or delay, contractors must continue performance pending resolution of the change.

Third, prove the delays and damages were caused by the claimed event(s). The mere existence of a pandemic or quarantine, even one with worldwide effects, does not automatically excuse contractors from delay or default. Contractors must still prove the default was actually caused by the claimed event(s). Proof is a concurrent, not successive, activity to notice and mitigation. Start now, if you haven’t already, by maintaining adequate documentation. There is no later substitute for failing to document now. Sufficient documentation should include enough detail that uninvolved decision-makers can objectively understand and agree with your situation and find your actions were reasonable in light of all the circumstances, without additional explanation.

Do not assume that because an event occurred during or on the heels of COVID-19 that it is automatically covered. For example, the dramatic decrease in consumer demand for eggs during the avian flu outbreak was not a force majeure event because economic consumer demand is a foreseeable part of doing business and unforeseeability was a necessary element of the applicable force majeure clause. (Rexing Quality Eggs v. Rembrandt Enterprises, 360 F. Supp. 3d 817, 841-42 (S.D. Ind. 2018)). The case law on the effects of epidemics/pandemics is not vast. But, among those relatively few cases, courts have focused on the unforeseeability of the event(s).

What if the contract does not have a force majeure or other relief clause? First, consider the language of any applicable changes clause. Second, review any governmental emergency relief acts that could help. Third, the common law doctrine of frustration may be available, under which an obligation may be excused or discharged when a fundamental assumption of the contract is not true or something later occurs rendering performance physically impossible or commercially impracticable. However, a radical price increase alone is likely insufficient.

Finally, when creating new contracts during COVID-19, do not rely solely upon force majeure clauses. Because unforeseeability is an element of most clauses, parties contracting during an event will find it very difficult to argue they could not contemplate the potential impact of the event. Consider including or adapting a price acceleration provision to prescribe or liquidate relief.

About The Author: Straw is a partner with Kraftson Caudle, PLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Straw can be contacted via e-mail at [email protected].

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