Covid & Your Construction Contract

Now two years plus into the pandemic, the threat of continuing COVID-19 impacts on construction projects and schedules will likely continue through 2022.

Supply chains remain up in the air, or adrift at sea. Limitations on labor and materials continue. Steel prices are up 141.6% (U.S. Bureau of Labor Statistics), concrete prices and diesel prices are squeezing profits. These moving targets in the middle of the pandemic place challenges to owners, contractors, and design professionals.

Uncertainties of these types can be addressed in construction contracts during negotiations. But what if your contracts were entered prior to the current COVID-19 threats?

The use of force majeure clauses can be helpful in reducing the financial impact of the COVID pandemic, as in the AIA’s General Conditions, Section 8.3.1 (A201-2017).

• Force majeure (from the French for “superior force”) in business circles describes those uncontrollable events (such as war, labor stoppages, or extreme weather) that are not the fault of any party and that make it difficult or impossible to carry out normal business. Force majeure clauses can be used in a contract to limit liability if the contract is breached for reasons beyond a party’s control.

Even without a stated force majeure clause in your contract, other options exist that are not written into every contract but are part of the common law that apply to all contracts. Two important “equitable” tools used by the Courts are:

• Impossibility or impracticability of purpose is a common law doctrine that “allows a party to suspend or avoid performance when a supervening event beyond its control makes performance of the contract no longer capable of being performed” (AIA Contract Documents). Prohibition or prevention by law and forced supply chain closures can be the source of impossibility or impracticability of the purpose of the contract, and a limit to liability.
• Frustration of purpose is a common law defense that excuses a party from performing a contract when the contract has lost all value to one of the parties and the basic purpose of the contract frustrated. As with each of these defenses, the loss of value must be due to circumstances outside the control of either party.

Indiana’s courts have not directly addressed these issues in the context of the COVID-19 pandemic. But prior cases to point to the approach to be used. (See, Specialty Foods v. South Bend, et al, 997 NE2d 23, Ind. Ct App 2013). The scope and effect of a force majeure clause depends on the specific contract language used, and not on any traditional definition of the term. The Court’s objective is to determine the intent of the parties at the time the contract was made by examining the language used in the contract and the circumstances under which it was made.

The nature of the agreement, the facts and circumstances leading up to the execution of the contract, the relationship of the parties, and the apparent purpose of making the agreement are all subject to the Court’s review, but the Court is not at liberty to rewrite the contract or interpret it in a manner which the parties never intended. And clearly the burden of proof is on the party seeking to limit its liability.

If COVID-19 is impacting your performance under a contract, it would be worthwhile to review the facts in light of any force majeure provisions in the contract, and whether the common law provisions excusing performance are available.

These legal principles should be reviewed with your attorney during contract formation and during its execution to protect your interests and assure that your operations are protected from pandemic conditions beyond your control.

Greg Cafouros, a partner at KGR, focuses his practice on design professional liability, construction law and general liability litigation.