Construction Interrupted: COVID-19's Legal Impacts and Considerations for the Construction Industry  

           The COVID-19 pandemic has drastically disrupted the day-to-day operations of countless industries, and construction is no exception. Quarantines and “stay at home” orders have interrupted the supply chain, leading to unanticipated delays. Some cites have halted all construction projects within its borders, and cities elsewhere have considered doing the same.[1] Yet, even with no direct halts to construction, the effects of the pandemic are global. Many products used in the construction industry are imported from China, which has decreased manufacturing output during its handling of the pandemic.[2] While demand for projects to respond to the crisis (e.g., healthcare facilities) may increase, other “non-essential” construction projects (e.g., entertainment, sports facilities, new restaurants) may be delayed or cancelled entirely. In COVID-19’s wake, several legal issues have arisen for construction attorneys, as well as possible liabilities for their clients. Of particular note are delays, delay pentalties, and whether such penalties will be covered by insurance

1.         Force Majeure, Liquidated Damages, and “Time for Completion” Clauses

            All major construction, including the industry-standard American Institute of Architects (AIA) forms, have “time for completion” clauses that obligate the general contractor to complete the project by a specific time or risk being assessed liquidated damages for inexcusable delays. Given the effects that COVID-19 has on the supply chain, as well as labor shortages due to illness and the possibility of preventing workers from working, performing inspections, and other necessary work, meeting the time for completion deadline may be no longer possible. Interruptions to the supply chain can also arise in surprising areas; for example, workers being unable to continue safely working due to a lack of PPE, including N95 masks that are essential to the construction industry. Missing the deadline by even a week can incur tens of thousands of dollars in liquidated damages, so many construction clients are looking to for any basis available to move deadlines without cost.

            The first stop for any inquiry into relief for contract terms is the contract itself. Typically, construction contracts do not have specific force majeure clauses, but they frequently do include related relief in excusable delay and compensation adjustment provisions for force majeure events. Whether COVID-19 will constitute an act of God or force majeure will depend both on the actual language in the contract and how COVID-19 specifically affected the project.

            The standard AIA A201-2017 General Conditions of the Contract for Construction form agreement does not explicitly mention force majeure; however, Section 8.3 (“Delays and Extensions of Time”) does include provisions for force majeure:

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, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions . . . or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.

Section 8.3 could provide a basis for several COVID-19 related interruptions, but contractors should be cautious that these terms only allow for an extension of time—not abandonment of the project. This section does not allow for open-ended extensions, and any extension negotiated between the contractor and architect will also need to consider whether and when it may be appropriate to terminate the agreement.

            Other form documents in the construction industry or the specific terms of a particular project’s contract vary and may be more or less specific. For example, contractors for the federal government that are using the Federal Acquisition Regulation forms may find relief from “delays beyond the control and without the fault of the contractor.” The FAR specifically lists examples of those causes, which include epidemics and quarantine restrictions. 48 C.F.R. 52.249-10. However, this level of specificity is not the norm, and contractors looking to move their deadlines will need to look to the specific terms of their contracts.

            Though certain delay provisions may appear to the contractor to grant relief, there is no certainty that the architect or a future judge or arbitrator will agree. Construction attorneys will likely see an uptick in litigation for delay claims after the pandemic risk has passed. But clients can start laying some ground work now to prepare for potential suits. If they have not yet done so, construction companies can send initial notice of the potential for delays to the general contractors, architects, owner, or any other party that is a designated recipient for notice. Should a delay be anticipated, contractors should closely follow the notice requirements of the contract and be clear in the basis for that delay in notifications sent. Contractors are frequently required to mitigate damages to the extent they are able, so contractors can also assess whether other suppliers, laborers, materialmen, or tradesmen may be available to supplement current suppliers and workforce. All efforts to mitigate and otherwise comply with the contract should be clearly documented.

2.         Insurance for COVID-19 Losses

            In addition to the construction contracts, a company’s insurance policy can also guide response for delays and losses from COVID-19. Much like the contract, the terms of the particular policy will control coverage. Three types of insurance coverage common in the construction industry could apply—Builder’s Risk, Pollution Liability, and Commercial General Liability (CGL) policies.

            Builder’s Risk and CGL policies both typically contain business-interruption costs as part of the general property damage coverage. However, a key consideration will be whether a COVID-19 claim is considered a “physical loss.” While there is case law suggesting that the presence of a virus or bacterial constitutes “property damage”, many policies incorporate endorsements to exclude those claims. Indeed, many CGL policies began specifically excluding losses caused by “virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness or disease” after the SARS outbreak in 2003.[3] Even with that exclusion, a review of the specific policy itself is still worth the time, as endorsements can change and specific facts could open doors to coverage. Further, depending on the definitions and inclusions, Pollution Liability policies may also provide business interruption coverage or cover the cost of decontamination at a project site. If the company does not have a copy of the entire text of their policies, it should reach out to their broker now to request copies. A review of the policy with coverage counsel may provide insights on coverage opportunities.

3.         Conclusion and Practical Considerations

            The opportunity for legal debate and wordsmithing will abound in COVID-19 construction disputes, but ultimately commercial considerations may prevail over strict interpretations. When parties have had good working relationships in the past and want to continue to work together in the future, collaboration and cooperation may drive the dispute instead of contract terms. Such an approach could help resolve disputes before arbitration or litigation starts; alternatively, such informalities could add further confusion and uncertainty in an already unstable time.

            The COVID-19 situation continues to evolve each day, and the contents of this article are a best interpretation of where things currently stand. As new guidance emergence from federal, state and local governments, the construction community can continue to observe and examine how these changes will affect the continuation of construction projects.