Contracts in the COVID-19 Era

by David Podein, Partner at Haber Law

By this point in the COVID-19 pandemic, almost every person in business, construction, and real estate has heard the term “Force Majeure” more times than they can count. This is an important contract clause for a party required to perform obligations—and whose performance might be delayed or limited by unforeseeable events or events outside of their control such as civil or labor riots, wars, fires, terrorism, explosions, weather disasters, and acts of G-d. The typical force majeure contract clause will excuse such a delay in performance or provide the party with additional time to perform if the delay is the result of a force majeure event.

But what about unforeseeable governmental restrictions or even economic disasters—especially on a statewide, national or even global scale? Would the 2008/2009 global financial crisis qualify as a force majeure event under your boilerplate force majeure clause? Would the 2020 COVID-19 pandemic qualify as a force majeure event under your boilerplate force majeure clause?

When there are millions of dollars at risk in the contract or construction project, the parties should not leave these issues open to interpretation. Contractors should strongly consider including contract clauses that expressly cover governmental restrictions, shutdown orders, and/or other impairments of the contractor’s ability to perform the work.

Additionally, developers and project owners with substantial bargaining power may attempt to impose an “Economic Unavoidable Delay” clause into their contractor agreements.

For example, “Economic Unavoidable Delay” shall mean economic or political conditions or events that result in a significant decline in economic activity spread across the economy and materially impair access to debt or equity markets by developers for development of projects in the United States similar to any phase of the project or allow a committed debt or equity participant to terminate its debt or equity commitment, such as a temporary or long term liquidity crisis or major recession. The performing party shall be entitled to an extension of time because of its inability to meet a time frame or deadline specific in this agreement due to Economic Unavoidable Delay equal to the duration of the Economic Unavoidable Delay, except that the outside deadline for the project shall not be extended by more than [X] years due to Economic Unavoidable Delay.

Most parties will not have the bargaining power to demand extensions of time and performance for an “economic unavoidable delay” when negotiating their contracts, and this example is certainly not a one-size-fits-all solution. However, in larger transactions, this is an issue that contractors should anticipate.

Staffing and scheduling is another major issue in the negotiation of construction contracts, especially now with the COVID-19 pandemic. Sometimes owners or developers will have a desire to speed up the project, and contractors are often willing to comply with same so long as the parties have agreed upon additional compensation for the contractor adding additional labor power to accelerate the schedule. As a result of the ongoing COVID-19 pandemic, contractors, especially those with limited staffing, sub-contractor, and/or labor pools, may want to consider negotiating a “deceleration” clause. What if there is a COVID-19 outbreak amongst the contractor’s employees or sub-contractors? Is the labor pool deep enough to keep the project staffed at the levels required to meet the schedule and completion deadline? Contractors would be wise to consider a staggered approach that would allow the contractor, upon proper cause such as a COVID-19 outbreak, do decelerate the schedule (i.e., extend certain milestones and/or completion deadlines).

Additionally, a staging and logistics plan is very important. This item heavily depends on the type of project/real estate asset. A roofing contractor performing exterior work on a single-family home or stand-alone commercial building is materially different than a plumbing contractor that is repairing occupied units in a high-rise condominium association. Contractors should be very mindful of the type of real estate asset in bidding and planning the project. What type of interior access is required? Is the building occupied? Does the condo association have specific COVID-19 restrictions (access, PPE, limited number of persons in certain areas, etc.) that could impact the staging and logistics of the work? Is the condominium association part of a larger community (i.e. a master association) that has separate and additional rules and restrictions?

Another important issue is who should bear the burden of enforcing compliance with COVID-19 restrictions? Early in the bidding and negotiation process, the parties should expressly address who will be responsible for enforcement on the job site. Is the owner expecting the contractor to have a designated person to take temperatures, monitor social distancing and mask-wearing compliance? Has the contractor allocated another person on the team for this task? Is the contractor expecting the project manager or owner’s representative to handle this?

It is important for contractor and owners/developers to be aware of these new contract issues—and to address them fairly and early on in the bidding and negotiation process. Waiting until the contract drafting phase, when one side’s lawyer adds a whole batch of COVID-19 related clauses in the revised contract, is not ideal.

These factors, and many others related to COVID-19, depend on the bargaining power of the parties, the type of project, and the amount of risk avoidance or willingness of the respective parties. The suggested contract clause and issues mentioned in this article are certainly not the same for everyone, and parties should consult with the legal counsel and project professionals when planning for and addressing these issues in their next project and contract documents.

David Podein is a Partner at Haber Law and has been with the firm since 2009. He concentrates his practice in the areas of construction law, real estate, and community association representation. He is recognized as a Florida Super Lawyers’ Rising Star and a Florida Legal Elite Up and Comer. Podein can be reached at 305/379-2400 or [email protected].