When traumatic, disruptive things happen, like the current COVID-19 pandemic, they create many obvious and foreseeable impacts; but they also create many not-so-obvious or foreseeable impacts. When these events occur, they not only cause financial issues but also a host of related legal issues.
During this pandemic, many contractors have experienced disruptions to their supply chains with their traditional go-to suppliers. Since the onset of the pandemic, contractors have been notified by suppliers that either their materials will not be available as planned, and/or those materials will cost the contractor substantially more than the contractor initially priced the materials at when they submitted their bid or offer.
When faced with these issues, some contractors may think that a contract provision commonly known as a Force Majeure provision may provide them with safe harbor and an opportunity to be excused from performance, potentially even providing them with an increase in their contract sum commensurate with the increased cost of materials. Such a provision, whether it is titled “Force Majeure” or not, may not be the contractor’s ‘get out of jail free’ card. Note that certain form documents, such as the AIA-A201 General Conditions document for example, do not contain a “Force Majeure” provision per se. It does however contain other provisions at section 8.3.1 titled “Delays and Extensions of Time” and section 18.104.22.168 titled “Termination or Suspension of the Contract” which may provide relief for the contractor.
Depending on the specific language of the Force Majeure provision, when invoked by the contractor it may provide the contractor with contractual relief for a delay in performance in the event that the contractor cannot secure the required materials for the project or cannot secure them in a timely manner. This provision, however, will likely not provide the contractor with a right to recover delay damages or an increase in its contract amount due to an increase in material costs created by the pandemic.
The courts tell us that the essence of a Force Majeure provision is an event that is both “unavoidable” and “unforeseen” by the parties. The parties are free, at least in a private project context, to list in their contracts events such as acts of God, strikes, and natural disasters, which would qualify as Force Majeure events, and which accordingly, would provide an excuse for non-performance. While up until last March, the onset of the impacts of Covid-19 and various government shut downs, contractors could make the argument that the COVID-19 pandemic was unforeseeable, certainly moving forward courts will be less accepting of this excuse for delay or nonperformance if we are faced with future pandemics. Contractors should make sure to add pandemics and governmental shutdowns and stoppages to the list of events qualifying as force majeure events in their future contracts. Also, for private projects where terms are negotiable, contractors should also consider negotiating and including in their contracts material price escalation clauses which will protect against unanticipated profit killing price increases.
In addition, all contractors, like all litigants, are bound by the duty to mitigate their damages. What this means to contractors moving into the future is that contractors must now foresee and prepare for debilitating material supply disruptions and look to make contingency plans and identify alternative sources of not only manpower but also material supply and equipment sources. With many court decisions yet to come which may provide more clarity, for now, contractors are on notice that they need to develop contingency plans in order to alleviate future disruptions, or at least minimize them.
As always, even though full absolution for untimely performance and recovery of increased costs may not ultimately be awarded, it is imperative that all contractors facing negative impacts of such events provide all required timely notices of the impacts to their contracting partners so as not to waive any potential extensions of contract time or monetary recovery.
Tom Williams, a shareholder in Reager & Adler, is the longest-tenured attorney in the firm after Dave Reager and Ted Adler. Tom began his career with Reager & Adler in 1993 in the Litigation and Construction Law practice areas. He is the lead attorney in the Debt Recovery practice area. Prior to embarking on his legal career with Reager & Adler, Tom served in the United States Army performing with the “President’s Own” Old Guard Fife and Drum Corps. Tom travels extensively and is an avid gardener and photographer.
If you would like to submit an “Ask an Attorney” or “Ask an Accountant” article for a future Merit Shop Spokesman, please contact: firstname.lastname@example.org
Posted March 29, 2021