One of the economic sectors hardest hit by the global disruption and uncertainty stemming from COVID-19 is the construction industry, particularly here in New York City. Supply-chain disruptions, social distancing and shelter-in-place orders have upset the delicate timing at the heart of Gotham’s typical construction contracts, which require materials to be delivered, and trades to operate, according to a highly-choreographed schedule. Additionally, New York State Executive Order No. 202.6 (the “Executive Order”, as updated on March 27, 2020), mandates the cessation of all non-essential construction projects.
For owners, construction managers, general contractors, and trades/sub-contractors/material suppliers, understanding their respective rights and obligations in the face of these and other COVID-19 related delays will be key to keeping active projects on track where possible, and mitigating the fallout otherwise.
Does Your Contract Feature a Force Majeure Clause?
Generally speaking, a
force majeure
is an external, unpredictable, and “irresistible” (or “mandatory”) event or set of circumstances which frustrates a contract, and excuses non-performance thereof. All three of the foregoing elements are necessary: the
force majeure
cannot have been caused by one of the parties to a contract, it cannot have been reasonably foreseeable by the parties, and the effect of the
force majeure
cannot be optional. Furthermore, a party invoking
force majeure
would need to show that it has attempted to mitigate the damage caused by the triggering event, and that performance of the contract was impossible (or as otherwise defined in the contract, if the
force majeure
clause excuses non-performance based upon a standard short of impossibility, such as commercial impracticality).
Typically, an owner would cite
force majeure
as a defense to promises to pay for construction services (such as in the form of shutting down a job site). A construction manager or general contractor might also cite
force majeure
as a defense to its own promises to pay sub-contractors, or in defense of attempts to cancel contracts with sub-contractors before the latter’s services are rendered; a sub-contractor might cite
force majeure
as a defense to its promise to perform certain work, or as a defense to supplying certain labor and/or materials.
While
force majeure
is a concept with a long history of use in contract litigation, it has no universal definition and may be employed with greater or lesser specificity in a given contract. Accordingly, the first step is to determine whether (and if so, how)
force majeure
is defined in any applicable contract(s). For example, the World Health Organization has classified COVID-19 as a “pandemic”, which would generally trigger any
force majeure
clauses excusing contract non-performance in the event of a pandemic. Importantly, New York law will not assume that contract performance is excused on the basis of
force majeure
unless the applicable contract contains a
force majeure
clause; even then, New York courts construe
force majeure
clauses narrowly. Non-performance will not be excused on
force majeure
grounds unless the specific facts and circumstances which have led to non-performance are set forth in the contract’s
force majeure
clause.
Does Your Contract Otherwise Provide for Excusable Delay?
Not all contracts contain explicit
force majeure
provisions – for example, the standard AIA A201-2017 contract form (the “AIA Contract”) does not speak to
force majeure
. On the other hand, that contract
does
speak directly to excusable delay, and sets forth certain contractor rights.
Specifically, § 8.3.1 of the AIA Contract provides for “reasonable” extensions of time for a contractor to complete its work in the event of a delay caused by factors outside a contractor’s control. § 14.1.1 of the AIA Contract provides a contractor with the right to terminate the AIA Contract if work on a project is stopped for 30 consecutive days through no fault of the contractor, or upon an act of government which requires all work to be stopped on a project (including emergency declarations, such as the Executive Order). Such a termination must be upon seven days’ notice to the project’s owner and architect, and entitles a contractor to payment for work already performed, as well as reasonable overhead and profit on work not yet performed.
Can You Assert Legal or Practical Impossibility?
Even if your contract does not contain a
force majeure
clause, and even if your contract does not otherwise contain provisions allowing for reasonable extensions of time (or termination rights) in the event of governmental action such as the Executive Order, you may still have options: New York law recognizes the doctrine of impossibility as a defense to contract non-performance, though it is construed
very
narrowly.
New York courts recognize both “practical” and “legal” impossibility. Both require that the event(s) rendering contract performance “impossible” be unforeseeable, and interpret that requirement strictly; for example, “unexpected” economic downturns and changes to local zoning laws have both been held as
not
establishing the impossibility of contract performance. On the other hand, an unforeseeable court or governmental order banning certain activity required for contract performance
would
create legal and/or practical impossibility; though obviously this has not been tested in court, the Executive Order’s mandate that non-essential construction activity shut down (and that even essential construction activity maintain social distancing while operating) may fit this defense.
You may also be able to argue that non-performance of a contractual obligation is excused because an unforeseeable event has destroyed the underlying purpose of the contract, even if performance technically would have been possible. Importantly, New York courts do
not
generally find that a contract’s purposes has been frustrated merely because of changing economics; the fact that COVID-19 has prevented one or more parties from enjoying all the advantages of a contract typically will not “frustrate” the contract’s purpose.
In the end, given the interlocking nature of construction contracts in New York City, it is likely that you will be on both sides of the above arguments: at times you will be seeking to excuse non-performance, and at times others who owe you contract obligations will be seeking to excuse their own non-performance. Sorting out the best way forward will require analysis of how invoking COVID-19 will impact all aspects of your business.
* * *
For more information about EGS’ construction and commercial litigation practice, please contact Anthony Galano, III, Esq. (
agalano@egsllp.com
) or John B. Horgan, Esq. (
jhorgan@egsllp.com
).
We remain operational and we are here to guide you through these challenging times.
