Construction Contract Tips During COVID-19
Communities big and small are trying to adapt to the spread of COVID-19. This ongoing pandemic creates a unique and challenging environment for the Construction Industry. Many contractors are looking at how this crisis will affect their current or future construction projects. Because the situation is evolving daily, the future consequences are hard to predict. Global supply chains have been disrupted and some estimate it may take months to recover. Labor shortages may also become a problem. Many factors can create labor shortages including illness, quarantine, government bans, financial hardship, and workers’ fear of contagion.
As you consider ongoing and future projects, now is a good time to review contracts with your legal team on how they may handle disruptions caused by the pandemic. Pay close attention to clauses such as:
Force Majeure – “Natural and unavoidable catastrophes that affect contract performance.”
Review the contract on how it may address “pandemic,” “epidemic,” or “outbreak of disease” events. Is there language in the Force Majeure clause, or other clauses such as Delay and Time Extension clauses, which specifically reference an event such as a pandemic as “beyond the parties’ control”? Does it exclude events that are foreseeable? Consider if COVID-19 would be covered under the Force Majeure clause since it is now a known event. And finally, did the event cause the contractor’s non-performance?
If the contract only references “acts of God” as an excusable delay, review the definition of “acts of God” in the State. Some States have a broad definition, while others narrowly describe it as something caused by nature.
When considering to invoke a Force Majeure clause, it is critical to follow the contractual requirements. What do you need to do to preserve your rights to claim? Are there required documents? Is there a time limitation? Formulate a plan with your legal team and keep communication open with your clients, contractors and suppliers.
Consider negotiating a price-escalation clause in future contracts to help mitigate the disruption in material supply chains. The clause is used to change the agreed price once a particular factor beyond control of either party had been determined.
Termination or Suspension
Review the contract Termination or Suspension clause. If you or the owner want to terminate or suspend the contract there are definitions on what constitutes a termination or suspension for convenience and the rights you have in the event of termination.
Privately funded projects could cause payment issues if the funds for the project are not protected or set in escrow. As businesses look to mitigate damage caused by the pandemic, they could pull funds for the project for other obligations. Review how the project is funded and what mechanisms are in place to protect those funds throughout the project.
A Pay-When-Paid clause typically means the subcontractor will be paid within some fixed time period after the contractor itself is paid by the owner. Review the payment schedule in the contract. What provisions are there for submitting a payment request?
A Pay-If-Paid clause usually means the contractor is only obligated to pay the subcontractor if the contractor received payment for the subcontractor’s work from the owner. The subcontractor assumes the risk of the owner’s nonpayment. Review the conditions in the clause such as the owner’s and architect’s acceptance of the work before payment.
Can we be of service?
At The Hartwell Corporation, we recognize our clients depend on the services we provide and we remain committed to maintaining the level of service you have come to appreciate from us thought this difficult time. We are committed to helping our clients manage their risk and work toward their business goals. If you have specific questions regarding how a clause may affect your insurance or surety program please let us know.
We may review contracts to provide advice as it applies to insurance and surety requirements. In doing so, we rely on technical information from risk management resources and our insurance companies. Nothing in the review should be construed as promising insurance coverage for any specific claims or circumstances and the opinions provided should not be construed as legal advice. We recommend that you have any contract reviewed by your legal counsel.