Owners, contractors and subcontractors across the country are encountering delays arising from the COVID-19 pandemic, and face an unclear reality as to how such delays will affect various project schedules and budgets. In Michigan, such delays are increasingly inevitable as a result of Gov. Gretchen Whitmer’s Stay Home, Stay Safe order for Michigan residents, which has halted construction across the state (except under specific circumstances). In short, the impact of this pandemic and resulting governmental orders largely depends on the terms of the particular construction contract in play.
Standard construction forms may provide some clarity for owners and contractors who have active construction contracts on such forms. For example, under Section 14.1.1 of the AIA A201-2017 General Conditions, a contractor may terminate the contract if the work is stopped for 30 consecutive days for reasons including, among other things, the issuance of a court order or order of a public authority having jurisdiction, or an act of government such as a declaration of national emergency, either of which requires that all work on the project be stopped. More explicitly, Section 6.3.1(j) in ConsensusDocs 200 Standard Agreement and General Conditions between Owner and Constructor provides that a contractor delayed by a cause beyond its control, such as an epidemic, shall be entitled to an equitable extension of time for performance under the contract.
Other non-standard construction contracts may contain a clause that would allow a party to receive damages in the event of delays. Construction delays are typically classified as either inexcusable or excusable delays. An inexcusable delay occurs when a contractor or another party (such as a subcontractor or supplier) is at fault for the delay due to such party’s own fault or neglect. However, an excusable delay occurs when circumstances beyond a contractor’s or other party’s control lead to a delay, through no fault or neglect of their own.
Conversely, many other construction contracts contain a no damages for delay clause. This clause typically appears in a contract between an owner and a general contractor, or a general contractor and a subcontractor, and shields a party from liability caused by a delay of the project. Thus, despite the delay, this provision generally prohibits a party from recovering damages resulting from another party’s delay (unless such delay is attributable to the misconduct or intentional act of the delaying party), often only providing an extension of time to perform.
Whether a delay attributable to the COVID-19 pandemic would be the type of delay contemplated by a no damages for delay provision depends on the specifics of the clause and the other terms in the parties’ contract.
A contract may also contain other provisions that affect liability for delays, such as a force majeure clause, which might relieve a party’s obligations under the contract due to uncontrollable delays. Force majeure refers to an unexpected event that cannot be predicted or controlled by the parties, such as fire, flood, governmental order, acts of God, etc., which then prevents a party from timely performing its contractual duties. The provision typically relieves a party of their contractual duties, but in most contracts a force majeure clause merely delays a party’s time for performance rather than excusing it altogether. A force majeure clause will apply strictly in accordance with the terms of the contract but will only be allowed as an excuse for delay attributable to the particular event that caused the delay (e.g., the COVID-19 pandemic and Michigan’s resulting Stay at Home order), and not to any other delays in performance that may have occurred prior to the force majeure event.
Ultimately, the rights and obligations of the parties to a construction contract in the midst of the COVID-19 pandemic will be largely governed by the terms of the contract itself. It is imperative that parties to construction contracts carefully follow the rules of the notice provisions of the contract (i.e., providing timely notice of delays to the other party [or parties] to the contract), regularly communicate with one another, document such communication and, if necessary, potentially negotiate a change order to account for the governmentally-mandated delays. Varnum attorneys stand ready to assist you with understanding the particulars of COVID-19’s impact on your construction contract.