Apr. 1, 2020

COVID-19 and Construction Contracts

The current pandemic is dramatically affecting every aspect of our lives, and the construction industry is no exception.  As of the writing of this summary, contractor clients are contacting our firm advising that jobs are being shut down and asking what their rights are.  Owner clients are asking what obligations they have to allow construction to continue.  For now, despite orders from South Florida counties and municipalities to “stay at home” or “shelter in place,” active construction projects are being considered “essential” activities that can continue (subject to following social distancing guidelines at the job site).  However, given the almost daily changes in information and governmental action, there is no guarantee that this will not change.  In fact, a March 27 Wall Street Journal article noted that in some states, construction has been limited to only projects involving “essential” construction, such as hospitals.  All other jobs are being shut down.

One of the key considerations for owners, developers, contractors, subcontractors or suppliers in understanding their rights and obligations is the language of their contracts.  Specifically, I would like to focus on what is known as a “force majeure” clause, which is commonly found in contracts of all kinds.

The purpose for including a force majeure clause in a contract is to delineate circumstances under which the performance of either or both parties is excused because events beyond the parties’ control render performance by either or both parties impractical or impossible.  Typical force majeure clauses list events such as “acts of God”, war, strikes or labor disputes, etc.

How are force majeure clauses interpreted by Florida courts? 

There is not much case law on force majeure in the construction context in Florida.  The vast majority of cases discussing force majeure in Florida state and federal courts deal with pre-construction condominium sales under the Interstate Land Sales Act, specifically the effect of a force majeure clause on a developer’s commitment to complete construction within 2 years.  But there are very few cases relating to the effect of a force majeure clause on a construction project that is ongoing.

One principle is clear from Florida case law – force majeure clauses will be interpreted narrowly.  Practically, this means that if you want an event to constitute a force majeure which excuses either or both parties’ performance, it needs to be specifically listed in the force majeure clause.  This raises the concern, of course, that the parties could fail to include an event that, with hindsight, they would have intended to operate as a force majeure. To account for this possibility, it is common for contracting parties to include a catch-all phrase at the end of their force majeure clause, such as “or any other circumstance which is beyond the control of the parties and not foreseeable at the time of contracting.”  Such catch-all phrases, however, do not guarantee that a court will interpret them as the parties hope, because if the court finds ambiguity in the language it may not be enforced.  Thus, in drafting contracts with force majeure clauses, it is essential to consult with qualified legal counsel to ensure that the parties’ intent is fully captured by the language of the contract.

Besides defining the events that constitute force majeure, the contracting parties also should define the effect of the force majeure event on their respective rights and obligations.  Does such an event merely excuse timely performance by either party?  Or would it also entitle the party impacted by the event to additional compensation?  The importance of clear contract language in determining the rights of the parties is seen in a federal court case that arose out of the many hurricanes that hit Central Florida in 2004.  Despite the fact that the contract was a fixed-price contract, the contractor sought extra compensation under the force majeure clause for unforeseen costs as a result of the impact of the hurricanes.  The court rejected the claim, not only because the contracts were fixed-price, but also because the force majeure clause was expressly included as part of the “no damages for delay” clause in the contract.  Thus, although there clearly were multiple force majeure events during these construction projects, the court looked to the language of the contract to determine the rights of the parties.

But what if you already have a contract and it doesn’t contain a force majeure clause?  Can extreme circumstances still entitle a party to relief from its performance obligations?  The answer is yes, because Florida courts also recognize the common law doctrines of “impossibility of performance,” “frustration of purpose” and “acts of God” as providing an excuse for failure to perform under a contract, under appropriate circumstances.  Courts are cautious about applying these doctrines, and they each have their own elements, but the common thread is unforeseeability.  The event which is claimed as an “act of God,” or which one party claims renders its performance impossible, must be something which was not within the contemplation of the parties at the time the contract was executed.

How does all of this relate to the current COVID-19 pandemic? As noted previously, construction projects for now are being allowed to continue.  But what if social distancing requirements (such as maintaining six feet of space between individuals) render it difficult or impossible for a particular contractor to perform its work?  It seems clear that a global pandemic would constitute a “force majeure” and was certainly not foreseeable at the time of contracting for most project.  Thus, even if a contract contains a force majeure clause which did not specifically list “diseases” or “pandemics,” the parties to the contract may still be able to argue impossibility of performance, “act of God,” or frustration of purpose if the circumstances merit it.

But what about contracts being negotiated currently? It could be argued that the possible effects of the COVID-19 pandemic (or any future pandemics) are now foreseeable to contracting parties.  If these effects are foreseeable, defenses such as impossibility of performance or acts of God would not be available.  The burden thus would fall to the parties to address in the contract the possibility of either party’s performance being severely affected by this or future pandemics.  This highlights the necessity for experienced legal counsel to aid in the drafting of contract language, specifically the definition and effect of force majeure.

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