As the U.S. navigates life during the COVID-19 outbreak and some construction sites close, subcontractors are left navigating the virus’ effect on contracts they signed months or years ago. To help those in this position, the American Subcontractors Association held a webinar titled “Practical Considerations for Dealing with COVID-19.” Brian Smith, an attorney with Smith, Currie & Hancock LLP in Washington, D.C., reviewed the potential impact government mandates and other disruptions due to this outbreak could have on subcontractors, and the protections they have available.
Some of the major potential impacts subcontractors currently face are delays and disruptions; suspension orders on projects; termination for convenience; material, equipment and labor price escalations; other cost increases; and health and safety issues such as quarantining employees or being unable to procure required PPE due to shortages.
What’s in a Contract?
There are several different contract clauses that could come into play for contract glaziers depending upon the circumstance. A major one is the “force majeure clause,” which is a prevision that excuses performance when an event happens beyond the subcontractor’s control. These are events that make work impossible, inadvisable or extremely expensive and impractical to perform, according to Smith. Wars, riots and earthquakes are examples of circumstances included under a force majeure. But what about pandemics?
Smith pointed out that many subcontracts contain flow-down clauses from a prime contract. ConsensusDocs 200, a common prime contract, lists epidemics specifically. It states that an equitable extension of time will be granted. Another common prime contract, AIA A201-2017, does not specifically list epidemics. It allows for an extension of time but not compensation.
Some subcontracts also include force majeure clauses. In the example Smith shared, the subcontract states than an extension of time would be granted but that the subcontract assumes the risk of all conditions. Smith recommended paying close attention to that provision.
For a force majeure clause to go into effect the delay must be caused by the major event and not a different but concurrent cause. Another point Smith made was that these clauses go into effect for unforeseeable situations. However, as the COVID-19 response progresses, it’s becoming foreseeable that the pandemic could cause disruptions.
“Also, some owners or contractors are taking proactive steps to prevent exposure, but if they’re doing so without a government direction or mandate, that action may trigger other protections such as the change clause,” said Smith.
He advised that delay clauses may not be broad enough to cover epidemics or pandemics. Change clauses address a direct cause by the owner, contractor or parties under their control or by conditions for which the owner or contractor expressly assume the risk. He said that most change clauses include some form of “duty-to-proceed” language requiring the subcontractor to proceed with construction pending a dispute over a change or claim.
“Be careful about unilaterally stopping work,” said Smith.
Suspension of work clauses could also come into play, but Smith warned that many don’t address price increases resulting from the suspension. Lastly, termination clauses will address the value of work through the date of termination, but many not cover costs caused by early termination such as termination fees.
Common law also provides subcontractors with some protections. Impossibility of performance is when performance becomes impossible to perform. Commercial impracticability is when performance is physically possible but unfeasibly difficult or costly to perform and could result in substantial hardship to the performing party. An example would be work that can’t be performed due to social distancing requirements. Smith said that not all jurisdictions recognize commercial impracticability but most do recognize impossibility of performance.
Some insurance policies provide civil authority coverage, which covers government mandated closures of business premises that directly cause a loss of revenue. Some contractors also carry contingent business interruption coverage which deals with losses due to disruption from suppliers.
Recommendations for Subcontractors
Smith recommended that subcontractors closely monitor federal, state and local government actions that could impact construction in general or their specific projects. He also advised that they stay abreast of CDC advisories and guidelines from health officers. In addition, he recommended reviewing relevant subcontract clauses and other relief options.
Another important recommendation is to verify all sources of supply for all open subcontracts and purchase orders.
“Ask vendors and subcontractors to confirm everything in writing and err on the side of caution with early notice,” said Smith.
It’s also important to notify contractors of any current of potential delays resulting directly or indirectly from COVID-19, including any cost or price impacts, according to Smith. He added that subcontractors should track and document all impacts to work and efforts to mitigate these impacts, including attempts to find alternative sources and means of performing.
“Keep in constant communication with all uphill parties,” said Smith. “… Analyze carefully whether performance is feasible before considering or claiming a right not to proceed. There could be serious ramifications. Though you want to be safe about the pandemic you want to be equally safe about your contracts.”
Recommendations for Future Subcontracts
Smith advised that for future subcontracts, subcontractors address delays and cost impacts resulting directly or indirectly from epidemics and pandemics.