The current pandemic has already had a significant impact on the construction industry. The general state of the construction industry in Texas is that while construction projects are generally exempt from the business restrictions found in emergency declarations, the COVID-19 crisis has caused significant problems in areas such as financing and the availability of laborers and materials.
In Texas, some counties and most major cities have issued emergency “stay home” declarations. These declarations variously call for businesses to close to the public and for the employees to stay home, unless they are working in essential activities or businesses.
These Texas declarations, to date, have allowed businesses that are providing essential services to remain operational. Fortunately for the construction industry in Texas, these declarations typically contain an essential business definition such as, “Essential Critical Infrastructure: Work necessary to the operations and maintenance of the 16 critical infrastructure sectors as identified by the National Cybersecurity and Infrastructure Agency (CISA) including public works construction, residential and commercial construction…” As a result, construction projects are generally exempted from the declarations, but the restrictions still have caused major problems for construction projects.
According to a recent survey by the Associated General Contractors of America, almost 30% of contractors say the virus has already halted or delayed work on projects. It found that 28% of contractors reported that an owner, government agency or official directed them to halt or delay work on a project that was either active or expected to start within 30 days.
Also, 22% of contractors surveyed said a supplier had notified them that deliveries would be late or canceled. “The coronavirus pandemic has the potential to undermine what had been a very robust construction market, threatening the livelihood of countless workers and the viability of many firms,” per Ken Simonson, the association’s chief economist.
During this time of uncertainty, one of the most common legal concerns has to do with what happens if the work is stopped or delayed by (i) an order of a governmental entity (ii) the lack of laborers or material, or (iii) an order of the owner due to concerns about COVID-19 or its impact on available financing.
This article will briefly review three of the most common situations that have arisen during this pandemic: 1) Owner Suspension of Work, 2) the exercise of the Force Majeure Clause, and 3) the claim of Impossibility of Performance.
Owner Suspension of Work due to COVID-19
Many construction contracts allow the owner to suspend work for a period for any reason. A typical “suspension for convenience” clause contains language such as:
Owner may, for any reason, at any time and from time to time, by giving thirty (30) Days’ prior written notice to Contractor, suspend the carrying out of the Work or any part thereof, whereupon Contractor shall suspend the carrying out of such suspended Work for such time or times as Owner may require and shall take reasonable steps to minimize any costs associated with such suspension.
At the end of the suspension period, the builder is required to resume the work. These suspension provisions usually allow the builder an extension of time to complete the project and an increase in the contract sum for the costs of de-mobilization, re-mobilization, and certain costs related to the suspension.
Such clauses also may allow the builder to recover lost profit during the suspension and losses resulting from the disruption of contracts with subcontractors and material suppliers. These provisions may also give a builder the right to terminate the agreement and to receive defined compensation if the suspension lasts for a specified duration.
Without a suspension for convenience clause, however, an owner typically has no unilateral right to instruct the builder not to work.
Force Majeure Clauses
During this recent COVID-19 crisis, builders are concerned about interference to their work caused by orders of governmental entities or the lack of laborers or material. Typically, the answer to these concerns is found in what is called a “force majeure” clause. These clauses deal with unforeseeable circumstances that prevent a party from fulfilling a contract.
A force majeure clause is meant to excuse non-performance of obligations only when caused by circumstances beyond the reasonable control of the party or by an event that is unforeseeable at the time the parties entered into the contract. A party’s failure to perform, however, will not be excused by a claim that its performance has become more economically burdensome than anticipated.
Because there is no standard force majeure clause, each one must be reviewed to determine its application to each situation. A typical list of force majeure events might include war, riots, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations under the contract.
The clause may also require prompt notice of such an event, explain how any resulting time extensions will be handled, and state whether the party invoking the clause must exercise reasonable diligence to reduce the negative consequences of the force majeure event.
If the clause requires notice of a force majeure event, the builder needs to give the owner notice per the terms of the contract of any such event. Even if there is no contractual notice requirement, it is good practice for the builder to give the owner reasonable notice of such an event. Likewise, the builder should attempt to give the owner an indication of impacts of the event on the schedule and the contract price.
Unless the clause states otherwise, in Texas, a party seeking to invoke force majeure to excuse its non-performance is not required to exercise reasonable diligence. If reasonable diligence is required in the contract, the Texas Supreme Court has defined reasonable diligence as such diligence that an ordinarily prudent and diligent person would exercise under similar circumstances, which must be determined by the circumstances of each case.
If one of these type events occurs, but the parties have not agreed to a force majeure clause, typically the builder will need to prove impossibility of performance to excuse the builder’s performance.
Impossibility of Performance
In Texas, impossibility of performance is based on Section 261 of the Restatement (Second) of Contracts, which states:
Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
The restatement further states that the impossibility defense generally applies in the following situations: (1) the death or incapacity of a person necessary for performance, (2) the destruction or deterioration of a thing necessary for performance, and (3) prevention by governmental regulation.
Impossibility of performance is separated into objective impossibility and subjective impossibility. Objective impossibility excuses performance while subjective impossibility does not. Texas courts have said, “Something is objectively impossible if ‘the thing cannot be done,’ … In contrast, subjective impossibility is due wholly to the inability of the individual promisor. Something is subjectively impossible if ‘I cannot do it,’. . .” By way of example, if a building is destroyed, the roofer’s duty to install the roofing material is objectively impossible. But, if the roofer does not perform because its crews are not competent to install the roofing material, that is a subjective impossibility.