In Construction, Timing Is Everything
When “time is of the essence” is included in a contract, delayed performance of any contract term will likely result in a material breach of the contract. This essentially allows the non-breaching party to terminate the contract. In a subcontract, the general contractor will specify a completion date and often include a “time is of the essence” provision. If the subcontractor does not complete its work on or before that date, the general contractor may choose to terminate the subcontract, hire another subcontractor to complete the job, and sue the original subcontractor for breach of contract.
Interestingly, if a contract does not include such a “time is of the essence” provision, a delay will not be considered a material breach so long as performance is effectuated within a reasonable time. For example, a “time is of the essence” provision can be waived if the parties continue their dealings regardless of late performance.
To preserve a “time is of the essence” provision, it is advisable that extensions be in writing and note that the defaulting party is still in breach of the contract. In this way, if delays continue, one can still choose to terminate the contract.
So be mindful of “time is of the essence” provisions – they’re not just some generic contract provision but an important tool to enforce specific performance by a date certain.
How to Overcome a No Damage For Delay Clause
Almost as prevalent as those pesky pay-if-paid provisions are those no damage for delay clauses. Found in most every construction contract, these clauses seek to bar the prospect of any delay damages and to limit the remedy for delay to just a simple extension of time. Not especially equitable, right?
But there are ways to deflect these clauses. Many jurisdictions hold that a no damage for delay provision can be avoided if the delay was actually caused by another’s interference or someone’s wrongful conduct. Enforcement can also be resisted if the delay is unreasonable or not one contemplated by the parties.
That was the case when a paving contractor discovered the road on which it was working was erroneously designed by the engineer. This prevented the contractor from proceeding with a major portion of its work as originally scheduled. The work progressed slowly and out of sequence, and the contractor requested payment for these unauthorized delays. The owner resisted relying on the no damage for delay clause in the paving contractor’s contract.
In the suit that followed, the court found the engineer had reason to know of its design flaws and the likely impact such errors could have on the timely performance of the pavement contractor’s work. Such bad faith and active interference by the engineer nullified the no damage for delay clause.
While this was a good result for the contractor, it should not be presumed that all courts would rule the same way. A better course of action would be to minimize the adverse risks of such clauses through effective contract negotiation – in advance.
Acts of God and Force Majeure
There are terms in every construction contract that folks read but do not fully understand. Acts of God and force majeure are two of those. You may think they are two ways of saying the same thing. But you would be wrong.
Acts of god are physical environmental events outside of anyone’s control such as floods, earthquakes, tornadoes or other natural disasters. Force majeure, on the other hand, is a human caused event, such as an act of war, a terrorist act, a labor dispute or an electrical system failure, but it does not include a party’s death. Both are ways of describing those unforeseeable circumstances preventing a party from fulfilling an agreement. They are included in construction contracts to excuse one from liability for a lack of timely performance.
These terms should be in every construction contract as they will protect a party from any event that is unforeseen, unforeseeable and out of anyone’s actual control.
Whether you are the contractor with a project to complete, a material supplier with products to deliver, or a subcontractor with a schedule to meet, having both clauses in your contract is a good decision.
How to Deal with Weather Delays
With hurricane season upon us, contractors, especially those in South Florida, need to be attentive to the limitations within any contract they sign relative to weather delays. Is the delay excusable (not in the control of the contractor) versus inexcusable (caused by events within the control of contractor).
The threshold question in making this determination is foreseeability. And clearly, one working on a project in Miami during the months of August and September can anticipate there is a fair likelihood of some sort of weather event impacting the work. With this in mind, consider the addition of the following:
If the worksite becomes unworkable for longer than – continuous work days or – cumulative work days during contractor’s planned work schedule at the project, for any reason beyond contractor’s control, including but not limited to acts of God, pandemics, extreme weather and hurricanes, contractor’s contract time shall be extended without penalty in an amount equal to the time lost due to such delay.
While certain amount of time is expected to be lost on any project due to inclement weather, it should not lead to a contractor’s ruin. Plan accordingly, adjusting the amount of days to suit the conditions, time of year and geographic area of the work.
Delays, Force Majeure Clauses and the COVID19 Pandemic
It seems to be everywhere and spreading further, this super contagious virus which originated in China earlier this year. And because it is already having an impact on the ability to timely obtain supplies and in some cases labor forces, it may be a good time to review that one relevant but not often analyzed construction contract provision – force majeure.
Many contracts have a time is of the essence requirement, generally combined with a costly liquidated damage assessment. Unless a delay is excusable, contractors are held to a specific time frame for completion, and if they miss that deadline, they’ll pay the price, a hefty price.
But one place contractors often find some relief in this regard is the force majeure clause – that contract provision which would allow one to explain away, and maybe excuse, any delay in performance based on the occurrence of circumstances beyond one’s control.
A contractor might therefore think that as long as he has some version of a force majeure clause in his contracts, then he is safe. Not really. Without more, such clauses may not be sufficient to forgive the lack of timely performance as many courts have generally interpreted them quite narrowly. And because the coronavirus is having different impacts depending on both where someone is and when someone is claiming the relief, that standard force majeure clause may not automatically generate the relief someone is seeking. This is because this virus and its effects are ever evolving.
A more careful look at the force majeure provisions in your existing contracts is surely in order – now more than ever. Start with defining the actual events that fall into this category – do they include acts, circumstances and developments that are and are not foreseeable and do they include all manner of medical crisis, catastrophe or epidemic? Do they require health emergencies of a certain nature and duration and does there have to be a public declaration suspending performance where your project is located? All of these elements matter.
As in so many things legal, one would do well to spell out as many details as possible. If a force majeure clause is to be all inclusive – incorporate both known and unknown circumstances, be they natural or man-made, and list all events that you want to be covered. Without those specifics you may not be excused from timely performance.
COVID-19 Delays May Warrant Additional Time But Not Additional Costs
A recent decision issued by the Civilian Board of Contract Appeals (CBCA) could offer some insight as to how courts will treat the inevitable flood of COVID-19 delay claims that will soon surface. The decision stems from a case where an outbreak of Ebola disrupted a government contractor constructing a rainwater capture and storage system in Western Africa. Despite the World Health Organization declaring an “international public health emergency” the U.S. Department of State opted not to cease its operations. However, the contractor subsequently made the decision to temporarily de-mobilize and evacuate its employees from the area. Six months later the contractor returned to complete the project while providing basic medical facilities and services on the project site to ensure the safety of its workers. After the government denied the contractor’s request for an equitable adjustment for demobilization and medical expenses, the contractor appealed the decision through the CBCA.
In granting the government’s Motion for Summary Judgment, the CBCA held that the contract’s excusable delay provision (the equivalent of a force majeure clause) provided the contractor the right to additional time but not additional costs. In reaching its decision, the CBCA reasoned that the government never changed the nature of the work contracted for and likewise never instructed the contractor to demobilize or provide additional life safety measures.
While the circumstances faced by most contractors in our current crisis differ considerably from those detailed here, the CBCA’s ruling does provide some useful information on what contractors can expect in future COVID-19 disputes. Indeed, while many have been focusing on force majeure provisions to determine their liability for delays and increased costs, in most contracts including AIA A-201-2017, these provisions only provide relief in the form of additional time, not additional costs. In determining whether increased general conditions are recoverable, it will often be necessary to look past force majeure provisions in favor of language relating to suspension or termination of the project.
When a project is terminated or suspended by the owner though no fault of the contractor or otherwise terminated by the contractor due to “an act of the government” many standardized contracts provide contractors the right to recover the costs of the work completed, plus overhead and profit for the work they would have completed. Similarly, many standardized contracts provide contractors with similar payment rights when an owner breaches its duty to provide access to the site or to ensure that proper funding still exists.
Another key takeaway is that the party who makes the decision to stop work or take additional safety measures is often times the party who will be liable for the resulting increased costs. If a contractor halts work during COVID-19 without the owner’s blessing or without an order from the government, chances are any costs of delay will be the responsibility of the contractor. When the owner or an act of government halts the work, the owner will generally be responsible for delay costs plus the contractor’s overhead and profit for unperformed work. Notwithstanding, the expected outcome will depend on the particular language of the operative contract and the unique set of circumstances each case presents.
Considering this decision was rendered outside the confines of state and federal courts, in addition to the fact that the current pandemic’s effects are vastly more far reaching than those associated with the Ebola outbreak in the aforementioned example, contractors should not view this decision as a blueprint for what is likely to happen with COVID-19 delay claims. Notwithstanding, this decision does serve to remind construction professionals that a force majeure clause will generally not provide relief in the form of additional costs and the party who initiates a suspension or termination of the project is often times the one left holding the bag.
The Project Is Closed – What Do I Do Now?
If there is no suspension or force majeure or delay clause in your contract, there is an implied duty requiring the owner to make the job site available so that a contractor can perform its work. This is actually a subset of the implied duty of the contractor and the owner to do nothing that would hinder performance of the contract. So when an owner locks up the job site and prevents completion of the work, the owner is breaching its duty to have the jobsite available.
There is a related doctrine that holds that one is excused from contractual obligations if a contract is impossible to perform. In order to raise this as the basis for a claim, a unexpected and unforeseeable event not within the control of either party must have occurred and rendered contract performance impossible or commercially impracticable.
Under either doctrine, the contractor has some remedies available, including rescission, claim for extended general conditions and claims for other costs incurred due to the owner’s breach.
First, the contractor must immediately notify the owner in writing that the owner’s actions have rendered performance impossible and that the contractor will be seeking all available remedies. Given that the owner may have had no choice but to close the work, communications from the contractor should remain professional and courteous, but also firm. Most projects could probably absorb a two week shutdown without too much difficulty, but as the weeks and months start to drag on, accurate and timely record keeping by the contractor and its subcontractors will become increasingly important. At this point reaching out to your construction lawyer would also be advisable.
The contractor should also document each and every cost item related to the job closure and include the reason for the cost item, the daily cost of the item and all related or ancillary costs, as well as the reason the cost continues to accrue despite the shutdown. Periodic updates to the owner may be in order and would help keep the lines of communication open.
Be sure to check the contract for claim deadlines as they are often based on the start date of the delaying event. If the contract requires that a contractor submit its claim within 14 days of first becoming aware of the event, it is vital that the claim be submitted, reserving the right to amend, before the 14 days are up even if the claim is not yet complete. Monthly updates with support should be communicated to the owner.
The contractor should also communicate with its subcontractors and require that they do the same, and bundle the claims together and forward to the owner.
It may well be that litigation will be necessary to collect on such claims, but keep in mind that without accurate and organized records, a contractor won’t be able to collect anything.
The project is closed but I have a shipment arriving from overseas, now what?
Just because the jobsite is closed doesn’t mean that the supply lines to the job are shut down. In a case like this, verify with the contractor and the owner whether access to the site is permitted to allow staging of the millwork. If so, verify that there is insurance coverage for the stored materials and there is sufficient jobsite security to protect the product. If no on-site storage is available, seek an off-site bonded warehouse, make sure there is insurance for the materials stored and advise the contractor of this course of action and the cost thereof. Make this cost part of the claim.
If the project is closed and I have a rented crane on site
The job site may be shut down, but rental charges continue to accrue. Depending on the length of the shutdown, and if it is possible to access the work site, it may make sense to remove the crane. If so, the cost of demobilization and the later cost of remobilization should form part of the delay claim. If recovery is not possible, the full cost of the crane rental should be made part of the delay claim.
On the other hand, if the rental company refuses to come out and dismantle the crane and remove it from the site, then there should be no cost for the crane rental for the duration of the time the rental company refuses to dismantle. Again, documentation is crucial.
If I don’t have a written contract
The implied terms discussed above exist whether or not there is a written contract between the parties. Documentation is even more crucial here than in the case of a written contract. In addition to documenting all post-shutdown events and costs, it is also important to gather up all pre-shutdown communications so as to help establish the existence and the parameters of the contract.
Is COVID an Excusable or Compensable Delay
This is a question we often hear from contractors, and the answer is a little complicated. First, it is important to make the distinction between the virus and other diseases as well as the varied responses to these problems.
The disease, COVID-19 is caused by the coronavirus. If several employees miss work because they have contracted the disease, there is probably no basis for a claim for delay. This situation has occurred in the past, where a contractor was unable to timely deliver products because a flu epidemic caused 30-40% of its workers to be out sick for several weeks. Based on what we know so far, it’s unlikely that any one company will lose that many employees at once to COVID-19 and so employee illnesses do not look like they will give rise to an excusable delay.
Additionally, COVID-19 is considered an ordinary disease rather than an occupational disease like silicosis or asbestosis, and so it is also unlikely that workers compensation claims will cover the employees.
Responses to the disease
An excusable delay claim almost certainly exists if the project owner responds to the disease by shutting down the project and denying access to the work. Most contracts have a suspension clause that provides for an equitable adjustment in the contract sum and the contract time if an owner decides to suspend operations on a project.
As always, contractors should carefully check their contracts, and subcontractors should check their subcontracts as well as the prime contract. Be very careful to comply with all of the notice deadlines and requirements in the contract. Keep accurate records and logs and keep a close eye on the costs caused by the suspension. In some cases, the costs incurred in the suspension may be compensable.
Government mandated shutdown
An excusable delay claim should also exist if local, state or federal government mandates closure of project sites. If the government directs project owners to close down their projects, then contractors will have recourse to the suspension clauses discussed above. If the government issues the directive to contractors or simply states that construction must cease, then contractors should look at the force majeure and delay clauses in their contracts. Such unavoidable and unforeseeable delays are excusable and, depending on the contract, compensable. AIA, ConsensusDocs and federal contracts allow for compensation, EJCDC contracts do not. Because most contracts are modified from the standard form, check carefully to see that the compensability hasn’t been edited out. Refer to your construction advisor.
Not quite a shutdown
It is also possible that the project is not completely shut down, but has delays because of slow or unavailable services, supply chain problems, or worker anxiety and rampant absenteeism. One example of the first item is where a municipality has prohibited its inspectors from performing their work due to infection fears.
Recovery here is entirely dependent on the contractor’s ability to keep comprehensive and accurate records. The burden is on the contractor or subcontractor to prove that the delay is excusable and, if possible, compensable.
The first step is to keep accurate records of when the delay occurred, how long it lasted, who was affected and what was impacted. While doing this, the contractor must also show that the impacts are due to COVID-19 or, preferably, to government action related to the disease. Finally, the contractor must show that it has mitigated the effects of the impact and exhausted all alternative sources and methods.
Mitigation example 1:
County does not allow inspectors to go to job sites. Possible alternatives: get written approval from County to hire private inspector for the duration; see if inspection can be conducted using a live video link to inspector’s computer; on small jobs, get written approval from County to photograph work to be inspected.
Mitigation example 2:
Light fixtures to be shipped from China will not be available for twelve weeks. Possible alternatives: consider alternate sourcing for same or similar products; if similar, obtain architect approval for substitution; consider use of cheap, temporary fixtures to permit remaining work to go forward and inspections to be conducted. Track additional costs.
Mitigation example 3:
Citing infection fears, subcontractor has required its employees to stay home. Possible alternatives: seek alternate sources for the same scope of work; evaluate the feasibility of self-performing certain parts of subcontractor’s scope; evaluate the feasibility of performing around subcontractor’s scope of work.
Made a reasonable decision based on the circumstances.
It must be emphasized here that we are not recommending that a contractor try to get workers to come to project sites where the risk of infection is great. On the contrary, when a contractor needs to prove that it has “tried everything” to mitigate the impacts, it needs to show that it investigated all alternatives, that it weighed the available options and that is made a reasoned decision based on the circumstances.
Time Is Of The Essence In Your Construction Contract, And It Matters
Timing can be everything, especially if there is a “time is of the essence” provision in your construction contract.
Most people enter into such a contract with the understanding that performance will occur within a specific timeframe. When that doesn’t happen, people tend to look to the terms of the contract for recourse. And if they find specific language, making it clear that time does matter – that “time is of the essence” – then they’ll have found a contract provision which could make all the difference. Where “time is of the essence” is included in a contract, delayed performance of the particular or general contract terms will likely result in a material breach of the contract. This essentially allows the non-breaching party to terminate the contract. In a subcontract, the general contractor will specify a completion date and often include the “time is of the essence” provision. If the subcontractor does not complete its work on or before that date, the general contractor may choose to terminate the subcontract, hire another subcontractor to complete the job, and sue the original subcontractor for breach of contract.
Interestingly, if a contract does not include such a “time is of the essence” provision, a delay will not be considered a material breach so long as performance is effectuated within a reasonable time. For example, a “time is of the essence” provision can be waived if the parties continue their dealings regardless of late performance. In that case, courts will tend to not enforce termination of a contract. But be aware that simply granting extensions to perform will not necessarily constitute a waiver. To preserve your “time is of the essence” provision, it is advisable that you grant extensions in writing expressly noting that the defaulting party is still in breach of the contract. In that way, when you’ve had enough of the delays, you can still choose to terminate the contract.
Be mindful of “time is of the essence” provisions – they’re not just generic contract provisions but useful tools to enforce performance dates.
Are These Protections in Your Construction Contracts?
The Coronavirus changed our world in so many ways. Everyone in every industry has been impacted, including construction. And the one place where contractors have immediately made some changes has been with those previously ignored clauses in fine print within their contracts – clauses dealing with force majeure, delivery delays, price protections and government policies.
Those force majeure clauses must now be more precise. Parties to a construction contract should give more thought to force majeure definitions. When seeking to limit exposure, contractors must be specific and clear in the language they select when defining the scope and effect of a force majeure event so as to protect themselves from unexpected liabilities.
Before signing any new contract, consider several questions: What events are considered force majeure? Who is responsible for suspending performance? Who can invoke the clause? Which contractual obligations are covered by the clause? How should the parties determine whether the event creates an inability to perform? What happens if the force majeure event continues for more than a specified period?
An effective force majeure clause should specifically include any delay, disruption or suspension of the work due to illness, quarantines, closures, government stay at home orders and other restrictions, and include both owner and contractor directives as well as municipal and governmental orders. And the result should not only be an extension of time but an equitable adjustment to the contract price. Finally, such measures should preclude or forgive the assessment of any damages, including liquidated damages.
The virus has brought into focus the problems caused by interruptions and delays in the delivery of materials caused by the pandemic. As a practical matter, contractors now realize they must develop some flexibility both in their expected completion dates as well as in their supply chains to reduce the potential liability associated with delay. Notice and regular communication is imperative. Write into any purchase order or request that a supplier shall notify a customer in writing ten (10) days in advance of any expected delay in delivery and shall thereafter regularly communicate scheduled delivery dates, available product substitutes or replacements, and intended efforts to mitigate the effects of such interruption. Then have clearly written escape and relief clauses within your contracts to adjust completion times adversely impacted by unforeseen events.
Documentation supporting any cost increases, typically limited to materials, needs to be kept and presented as evidence of any price increases caused by disruptions or delays in the contractor’s supply chain. Include a termination clause as an escape from contracts where the “cost of materials has increased exponentially or the materials themselves have become difficult or impossible to find.”
During the current pandemic, we have seen a variety of inconsistent approaches by local governments. Policies have differed substantially depending on the industry involved and the particular government issuing the directive. The determination of what work is “essential” and what is not affects every industry, including construction. In drafting future contracts, what constitutes a “change in law” is a term to be discussed.
Being more versus less specific is the key. Add those words and phrases which better define the unforeseen, now that the virus has brought so much into focus. And take the time to have your legal advisor review any contract before signing it.