Allocating Contract Risks of COVID-19: More Than Force Majeure

By Jonathan B. Head

By now, you have likely seen dozens of articles talking about whether the coronavirus pandemic fits into most force majeure clauses. They discuss whether the relief could be time and money (instead of just time) and all the nuances arising under such clauses. But many other more fundamental contract issues, such as fixed price and schedule terms, have received less coverage. There has been practically no mention of the prudential question of whether exercising a “clear” contract right makes sense. This article looks through the construction buyer’s classic lens—“I want it good, fast, and cheap”—and suggests that, while certain commonly used contract responses exist for the pandemic issues, a more enlightened developer may think twice before exercising them.

Quality issues aren’t the first ones that come to mind when addressing the pandemic, but they are likely to crop up. Builders may not be able to get the highest-quality workforce, either because they can’t arrive at the jobsite (some jurisdictions and some owners are enforcing quarantines on out-of-area workers) or because the workers don’t feel secure working right now. One implication of a shutdown is the difficulty of getting inspections. Local governments are among the most cautious about returning their (heavily unionized) workforces to their tasks, including inspections. Neither of these issues is under a builder’s control. But can’t a developer just take the position that it’s the builder’s problem to meet the spec? Such a developer will likely see its job fail more inspections as a result.

Delay issues have received most of the attention in the legal press, and not without reason. While developers with restrictive delay terms may snuff out some claims, there are likely to be few more sympathetic scenarios for a legal decision-maker faced with claims that COVID-19 delays were not foreseeable. The inspection difficulties mentioned above can also easily result in project delay. Of course, COVID-19 has disrupted the famously complex supply chain of construction (and of modern American industry in general), meaning that suppliers of material and equipment cannot keep their promises with their usual certainty. They, too, are managing risk and relying on their typical strategies during disruptions—placing buyers on allocation, increasing delivery durations and pricing with risk premiums. The labor force, which has been tight for years among the skilled trades, remains tight (though perhaps for different reasons), and labor productivity suffers consequently. Faced with such delay issues, traditionally a developer would say the contract’s language requires a firm delivery date and, absent specific relief in the contract, those risks don’t belong to the developer. It might try to shoehorn everything it couldn’t defeat outright into force majeure. However, such a developer is likely to deliver to the market later than its pro forma planned to, despite a firm application of pressure. Again, builders are keenly aware that the circumstances are unprecedented and will apply their resources where they can benefit most, hoping for legal relief because of “good facts.”

Cost issues are secondary and tertiary to all the issues raised above. Nervous workers may want “hazard pay” to work under stressful and uncertain conditions. Suppliers may be willing to ship on original schedules, for a premium. Transport costs may also rise for special arrangements, despite the price of oil cratering in the market. (Many large-scale transport companies work under long-term contracts, and the disputes arising from the oil glut won’t have worked their way through the system quickly enough to lower these costs substantially.) “But I’ve got a lump-sum, fixed-price contract,” says the traditional developer. True. And rational builders are going to find ways to cover their unexpected costs, which means the developer likely will face more disputes, harder change order negotiations and less cooperation when needed at critical points. The truism that “construction is a team sport” is never truer than when crisis strikes.

What is the result of playing hardball, and what is the alternative?

The overall result of using “contract leverage” right now is probably a race to the bottom. Heavy-handed developers who don’t distinguish between useful and useless changes won’t have as much product available to a limited market and will have weaker relationships with the contracting supply chain. Contracts are for foreseeable circumstances and risks. To the extent that parties identified uncertain risks and assigned those risks plainly, then parties should live by them. But many contracts have enough play in the joints that enticing facts will get legal decision makers to grant relief from strict terms.

While we can’t throw the contracts out, we can pick battles carefully. In a time of scarcity, the worst fight to pick is one you can’t win. Even a “tie” can distract from better business opportunities. This of course applies to both contracting parties, but this article assumes a preponderance of contract advantage exists with the developer. Look at whether the grant of time or money relief that the builder seeks from you creates throughput for the project. Is there ROI in the request, or can you negotiate until there is? Is the builder really trying to escape its responsibility for a contract risk, or is it a victim of circumstances, as we all are, to some degree or another? As always, people apply the law, and some of those people have experienced great disruption and loss, making them more open to change-based arguments. Keep this in mind before taking a hard position on a “clear contract” term that costs you money in the long run.

Jonathan Head is a partner with the law firm of Weinberg Wheeler Hudgins Gunn & Dial, LLC who principally focuses on construction and manufacturing matters. He can be reached at jhead@wwhgd.com.

 

 

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