3 Keys To Avoiding Pandemic-Related Construction Suits

By Colby Balkenbush and Ryan Gormley
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Law360 (October 7, 2020, 2:21 PM EDT) --
Colby Balkenbush
Colby Balkenbush
Ryan Gormley
Ryan Gormley
In the construction industry, the COVID-19 pandemic has impacted projects and project participants in an untold number of ways. While work stoppages or potential stoppages may be behind us, supply chain disruptions and material cost increases are becoming the norm, resulting in delays and increased costs. These circumstances and others like them often lead to one place: litigation.

When these circumstances arise and litigation looms, it is critical to identify the key issues and consider how they will ultimately present to a judge, jury or arbitrator. A dispute often turns into litigation because at least one party to the dispute fails to identify a key issue or to perform a rigorous evaluation of the issues.  

To assist in this issue identification and evaluation process, below are three areas to carefully consider in any COVID-19-related dispute: (1) contractual compliance; (2) contemporaneous documentation; and (3) fair dealing. Consideration of these areas can help you avoid litigation, or if unavoidable, position you to prevail.

1. Contractual Compliance

In construction disputes, the contract is usually king. Establishing contractual compliance can help deter litigation at the outset and is imperative for avoiding an unfavorable result later. Below is a brief discussion of five contractual clauses likely implicated by a COVID-19-related dispute concerning delay or product substitution and key questions to consider for each.  

Force Majeure

A force majeure clause generally excuses a participant's nonperformance or delayed performance under a contract when an extraordinary event, otherwise known as a force majeure event, prevents a participant from satisfying its contractual obligations.

The clause lists specific events that qualify as a force majeure event, including war, natural disasters, acts of God and others.

Certain construction agreements, such as the American Institute of Architects standard form A201-2017 General Conditions, do not contain a force majeure clause per se, but have the same intent reflected in an excusable delay clause. Typically, force majeure clauses only allow for additional time, not additional money.

In evaluating the applicability of a force majeure clause to a COVID-19-related dispute, it is important to consider at least four issues.

First, does the COVID-19 event qualify as a force majeure event? Force majeure clauses are generally construed narrowly. Where the clause does not specifically include "pandemic" or "disease," do not assume a COVID-19-related issue is covered.

Second, did the force majeure event actually cause the nonperformance or delayed performance? At first glance, the answer to this question might seem obvious — of course the COVID-19-related work restrictions in a certain locality caused the supply shortage — but upon further investigation, this might be difficult to show.

Third, were sufficient efforts taken to mitigate the risk? Again, this can be more difficult to demonstrate than at first glance.

Fourth and finally, is performance impossible or, in some jurisdictions, impracticable? On this issue, it is important to note that generally, economic inadvisability does not excuse performance, even when the economic conditions are the product of a force majeure event.

Change in the Law

A change in the law clause is both narrower and broader than a force majeure clause. Narrower because the clause only concerns a change in the law that causes a participant's nonperformance or delayed performance under a contract. Broader because the clause typically allows for both additional time and money. The issues presented under such a clause are similar to those presented by a force majeure clause.  

Time Extensions

Contracts generally contain clauses that set forth a procedure for obtaining an extension of time to complete the project, which generally include a notice requirement and the submittal of a change order.

Whether additional time and compensation can be obtained usually depends on whether the delay is caused by the participant seeking the additional time and compensation (inexcusable — no time or money), by a third party or force majeure event (excusable — time but no money), or by the owner or an event or circumstance for which the owner has assumed liability under the contract (compensable — time and money).

Whenever a delay arises, it is important to follow the correct procedures because failure to do so may not only preclude additional time or money in the near term, but it may also preclude a contractor from later being able to assert a concurrent delay defense to the imposition of liquidated damages — even where timely performance was impossible under the circumstances.

No Damages for Delay

The name of this clause describes its purpose; it generally provides that a lower-tiered participant cannot receive any compensation for damages because of any delay in the work, whether avoidable or unavoidable. The key issues are the scope of the clause and its enforceability. Although these clauses are generally enforceable, many jurisdictions have limited such clauses either statutorily or through the common law.

Product Substitution

Contracts generally contain clauses that set forth a procedure for product substitution.

When substitution is warranted, the parties should closely examine the relevant contract documents, including the plans and specifications, the process for clarifying the plans and specifications, if necessary, and the process for submitting substitute products for review.

In looking at the specifications, it is important to determine whether they are prescriptive, meaning they delineate the exact product to be used; prescriptive with an "or equal" clause, meaning they delineate the exact product to be used and permit any equivalent product; or performance, meaning they set forth standards to be satisfied, and any product that meets these standards may be used.

2. Contemporaneous Documentation

After considering contractual compliance, it is important to evaluate the contemporaneous records. If a dispute arises and it is backward-facing, consider if you have adequate documentation to prevail, and if not, whether there are any steps you can take to remedy the deficiency.

If a dispute is forward-facing, keep meticulous records so that when the issue is presented to the finder of fact years later, the records reflect what actually occurred in sufficient detail. Remember, thorough contemporaneous documents may convince the other side to avoid litigation at the onset, or they may become your most valuable trial exhibits. Treat them accordingly.  

For many projects, thorough contemporaneous documentation means supplying adequate detail in daily reports, inspection reports, schedule updates, requests for information, submittals, change orders, meeting minutes, payment records, correspondence, and photos and videos.

What constitutes an adequate description is fact dependent. But generally, a good rule of thumb is to question whether a layperson would understand the who, what, where, when, why and how of any decision or work based on the description.

In the context of COVID-19-related disputes, which will often relate to delays and product substitutions, adequate descriptions are all the more important.

In any delay dispute, the key issues — including whether the delay impacted the critical path, is excusable or nonexcusable, is compensable or noncompensable, or can be attributed to concurrent delay — will turn on contemporaneous documentation, particularly the daily reports, schedule updates, meeting minutes and correspondence.

When it comes to product substitutions, the parties should closely document the substitution, going above and beyond the contractual requirements if necessary. The participant seeking the substitution should be careful to note any deviations from the plans and specifications and to obtain approval of the same.

In submitting the substitute product for review, the participant should provide detailed information so that the approval or "no exception taken" designation is well informed. And to the extent any aspect of the specification is unclear, the participant should clarify the discrepancy through the formal process, whether through a request for information or otherwise.

3. Fair Dealing

Finally, even if the contract and contemporaneous documentation favor your position, it is important to view the dispute with a fair and equitable mindset for several reasons.

First, consider how a finder of fact will view your position in the future. Given the widespread impact of the COVID-19 pandemic, the finder of fact will likely sympathize with COVID-19-related hardships. To the extent that a project participant tries to gain a windfall from or strong-arm a participant suffering from such a hardship, the finder of fact will likely be disinclined to reward such behavior.

Second, if your position is inequitable, consider that a common law doctrine may have developed to defeat it. For instance, the doctrine of impossibility excuses a participant's performance of a contract when an unanticipated event destroys the subject matter of the contract or the means of performance makes performance objectively impossible.

Likewise, the doctrine of impracticability excuses a participant's performance where continued performance is not commercially practicable based on the occurrence of an event; the nonoccurrence of which was a basic assumption of the contract, and not agreed to be performed in spite of the impracticability.

Further, courts have entertained arguments that "no damages for delay clauses" are not enforceable because the length of the delay exceeded the parties' expectations, or the participants effectively abandoned the contract through their actions.

Third, taking a more fair and equitable position from the onset of a dispute will more likely lead to an earlier resolution. Litigation is often used as a tool to move a party to a dispute from an unreasonable to a reasonable position. When both parties start with reasonable and realistic positions and assessments, the likelihood of protracted litigation is substantially lessened.



Colby L. Balkenbush is a member and Ryan T. Gormley is an associate at Weinberg Wheeler Hudgins Gunn & Dial LLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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