COVID-19 Causes Construction Projects To Grind To A Halt: What Now?

Across the country, state and local governments continue to issue directives requiring construction projects to shut down. Many projects will likely be delayed for months if not indefinitely. As the spread of the coronavirus continues to wreak havoc in the construction industry, a detailed review of pertinent contract provisions is imperative:

Do your contracts contain a change of law provision? If so, the provision may afford you contractual rights or protections in response to the various legislative enactments and governmental directives resulting from coronavirus. For example, such provisions may require the parties to a construction contract to negotiate in good faith to reach reasonable agreements for complying with a change in law, including an equitable allocation of increased costs or equitable adjustment of increased costs or equitable adjustment of the completion date. Invoking the change in law provision in your contracts may provide a helpful framework for pursuing the most economical and commercially prudent response to the hardships imposed by the coronavirus.

Many construction contracts include force majeure provisions that may allow the parties to avoid their contractual obligations as a result of the coronavirus. But, if your contracts do not contain an applicable force majeure clause, other legal doctrines may nonetheless provide relief. For instance, Pennsylvania common law recognizes the doctrines of frustration of purpose and impracticability of performance as valid defenses to performance under a contract. See Hart v. Arnold, 2005 PA Super 328, ¶ 34, 884 A.2d 316, 334 (2005); citing Alvino v. Carraccio, 400 Pa. 477, 482, 162 A.2d 358, 361 (1960); Ellwood City Forge Corp. v. Fort Worth Heat Treating Co., Inc., 431 Pa.Super. 240, 636 A.2d 219, 222 (1994). The impracticability doctrine will excuse a party from performing when events or changed circumstances make performance impossible or exceedingly difficult. And the frustration doctrine will excuse a party from performing when events or changed circumstances render the other party's counter-performance valueless. Together, these common law doctrines may operate to excuse a party from performing or paying damages when the anticipated value of a contract is palpably impaired by an unexpected event such as the coronavirus pandemic.

The precise effect of the coronavirus epidemic on supply chains is not yet known. As the impacts unfold, material suppliers may invoke Section 2-615 of the Uniform Commercial Code (“UCC”) to excuse performance as "commercially impracticable” due to unforeseen supervening circumstances. Section 2-615(a) of the UCC provides that delays in delivery or non-delivery by a seller of goods is not a breach under contract for sale if performance as agreed has been made impracticable by: (1) the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made; or (2) by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. If performance in full by a supplier is commercially impracticable, the seller may allocate production and deliveries amongst its customers in any manner which is fair and reasonable. Id., § 2-615(b). The seller must notify the buyer there will be delay or non-delivery and, when allocation is required, of the estimated quota that will be made available for the buyer. Id., § 2-615(c). If a supplier successfully asserts commercial impracticality pursuant to the UCC, the common law doctrines of impracticality and frustration of purpose may operate to excuse other project participants from performing or paying damages based on resulting breaches of their contractual obligations.

Further, consider reviewing existing contracts for acceleration provisions which allow adjustments to the contract price to reflect increases in the actual cost of materials. Acceleration provisions also sometimes include termination for convenience clauses if the cost of materials has increased significantly or the materials are no longer available for purchase. If your contracts include an acceleration provision, begin gathering and preserve all documentation of increased material costs. If your existing contracts do not include an acceleration provision, consider adding one to future contracts that properly accounts for the probable increases in actual material costs as the full range of disruptions to the supply chain unfolds.

As you are likely aware, many of the rights and obligations specified in a construction contract require timely and written notice. For instance, written notice within a specified timeframe is likely required to invoke and protect rights under provisions involving delay damages, extensions of the contract time, adjustments to the contract price, change orders, force majeure, acceleration, stop-work requests, and terminations. Now is the time to review the notice provisions in your contracts, including when a notice is required, who the notice should be sent to, and the time period in which the notice needs to be sent. Failure to do so may result in the loss of your contractual rights and protections.

While DFL Legal’s physical office may be closed, we continue to operate remotely during these difficult times. If you have a question about these or any business matter, please contact us at (412) 926-1815.