Lawyers often learn of historic contract principles in their first year of law school that concern “force majeure,” “impossibility,” “cardinal change” and “mutual mistake”. Thereafter they seldom utilize such doctrines because conditions that might utilize such principles seldom arise. In the current pandemic crisis, however, all such principles may become applicable in addressing obligations and delays in construction projects. With the unprecedented disruption to business caused by coronavirus and the governmental mandates of closure, many are questioning as to how this pandemic will impact their contract rights and obligations.
- Can a contractor delay completion of a project without penalty and potential increased compensation?
- Can a purchaser delay a closing?
Any party to uncompleted construction contract needs to review their contract documents to determine the scope of all clauses impacting unexpected conditions, costs and time. They should further understand the foregoing legal principles and how they may impact events associated with the current pandemic.
- Force Majeure
Many contracts contain an often forgotten clause that extends the time to perform obligations or excuses a party from contractual obligations due to unforeseen circumstances and events outside the control of the contracting parties. Such provisions are often found in construction contracts, supply agreements, real estate sales agreement and similar contracts. An example of such a clause follows.
Force Majeure. If either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure material, failure of power, restrictive governmental laws or regulations, riots, insurrection, war, environmental remediation work whether ordered by any governmental body or other reason of a like nature not the fault of the party delayed in performing work or doing acts required under this agreement, the period for the performance of any such act shall be extended for a period equivalent to the period of such delay.
Force Majeure clauses are enforceable in most states. Force majeure clauses, however, are subject to the express terms of the document. While such clauses typically allow for a time extension they often do not provide for the additional costs associated with the delay impacts. Time without money is often of marginal benefit to a contractor. Alternatively, an owner is incurring similar economic impacts in loss of use. Such damages would effectively be precluded by such a force majeure clause. In such an event, both contractor and owner incur losses.
AIA and many similar contracts provide for the obligation of a contractor to act to prevent threatened damage, injury or loss in an emergency affecting safety of persons or property such appropriate change orders. Such provision means that the contractor should be able to recover additional costs that it incurred in responding to the emergency. In a pandemic, this may include temporary shutdowns, performance of work subject to “social distance” constraints. Given the ever-changing requirements associated with this pandemic, notice should probably be for under both force majeure and emergency clauses.
- Cardinal Change
If a contract does not contain force majeure or emergency clauses, general contract principles may offer some relief. Unexpected events, conditions or changes in work that so changes the scope of performance “that fundamentally alters the contractually undertaking of the contractor” might be considered a cardinal change in the contract obligations. Atlantic Dry Dock Corp. v. United States, 773 F.Supp. 335 (M.D.Fla.1991). In circumstances of a cardinal change, the contract terms are essentially rescinded and subject to new obligations created by the cardinal change in conditions of the Work. By definition then, a cardinal change is so profound that it is not redressable under the contract. Air-A—Plane Corp. v. United States, 408 F.2d 1030 (Ct.Cl.1969); Atlantic Dry Dock Corp. v. United States, 773 F.Supp. 335 (M.D. Fla.1991).
A cardinal change is not contemplated by the normal changes clause. See Saddler v. United States, 287 F.2d 411, 152 Ct.C1. 557 (1961); and Magoba Constr. Co. v. United States, 99 Ct.Cl. 662 (1943). If the actual work and schedule required of a contractor is so different from the work and schedule it could have reasonably anticipated from the contract documents, it may be able to assert the existence of a cardinal change and seek total compensation based on the value of the work performed as changed.
In Roberts & Schoefer Co. v. Hardaway Co., 152 F.3d 1283 (11 Cir. 1998) a contractor sought additional compensation for numerous changes in a project. The owner argued that the contractor had failed to preserve its rights under the contract or such claims were otherwise subject to various exculpatory clauses. The court held that the changes were so comprehensive that the contractor was entitled to the value of the work performed regardless of the contract limitations.
There is no automatic or easy formula that can be used to determine whether a change (or changes) is beyond the scope of the contract and, therefore, in breach of it. “Each case must be analyzed on its own facts and in light of its own circumstances, giving just consideration to the magnitude and quality of the changes ordered and their cumulative effect upon the project as a whole.” Wunderlich Contracting Co. v. United States, 351 F.2d 956, 966, 173 Ct.Cl. 180 1965); Atlantic Dry Dock Corp. v. United States, 773 F.Supp. 335 (M.D.Fla.1991). This is a doctrine that is easy to claim but is very difficult to ultimately prove.
- Impossibility or Impracticability of Performance
Impossibility is a concept recognized in unforeseen events that make performances of a contract obligation impossible. It has been defined as circumstances:
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.
See Restatements of Contracts 2d Section 261.
As stated in the comments to this section “even though a party, in assuming a duty, has not qualified the language of his undertaking, a Court may relieve him of that duty if performance has unexpectedly become impracticable as a result of a supervening event”. wo illustrations of the Restatement assist in this analysis.
- On June 1, A agrees to sell and B to buy goods to be delivered in October at a designated port. The port is subsequently closed by quarantine regulations during the entire month of October, no commercially reasonable substitute performance is available (see Uniform Commercial Code § 2-614(0), and A fails to deliver the goods. A's duty to deliver the goods is discharged, and A is not liable to B for breach of contract.
- A and B make a contract under which B is to work for A for two years at a salary of $50,000 a year. At the end of one year, A discontinues his business because governmental regulations have made it unprofitable and fires B. A's duty to employ B is not discharged, and A is liable to B for breach of contract.
Closure of a port due to quarantine regulations would be considered an event that made performance impossible. Mere onerous hardship or financial loss is not sufficient to utilize this doctrine. No party can be relieved of a contractual obligation because terms impose an onerous hardship, the contract has become difficult or burdensome to perform, or because one party has made a bad bargain. See also Home Design Center v. County Appliances of Naples, Inc., 563 So.2d 767 (Fla. 2d DCA 1990). In Home Design Center, a tenant asserted that it should be released of lease obligations because insurance had been terminated and it had difficulty in obtaining new insurance for its business which was a condition of the lease terms. The Court held that such financial difficulty did not constitute impossibility.
A directive to close a bar is essentially the equivalent of illustration 1. Difficulty in working and potential losses, may be more akin to illustration 2. Detailed analysis of the specific factual circumstances and the applicable contract language is thus necessary in all such matters.
- Mutual Mistake
Another contract theory that may be asserted relates to the doctrine of mutual mistake as to the conditions of performance. A true mutual mistake as to underlying conditions for performance may justify rescission of contract obligations similar to the impossibility doctrine. When a contract is rescinded for mistake, no further rights are available under the contract. The value of any work performed may thus be subject to principles of quantum meruit. Unilateral mistakes give no relief.
Plan of Action
Regardless of available legal claims or defenses, the best course of action is a planned action.
- Review and identify all applicable contract terms re changed conditions, time, delays, and cost increases.
- Identify all federal, state and local guidelines that may impact a project schedule, employee safety, material deliveries and related costs.
- Develop and keep detailed records as to such impacts caused by governmental guidelines.
- Make daily inspections with photographs.
- Keep detailed job logs and job meeting minutes.
- Keep detail cost records for all increased costs in order to pursue claims for extra costs, insurance and any governmental assistance programs that may be applicable.
- Meet with all impacted project members, upstream owners, downstream trades, and project architects to discuss and attempt to develop a common plan of response.
- If a shutdown becomes necessary coordinate with local authorities, and all project members. Provide for temporary egress and access as needed. Maintain necessary security measures and lighting.
- Make sure that all contract required notices are made and updated as required.
Our team will continue to share the latest developments and provide insights on the spread of coronavirus and potential impacts across sectors including the construction industry.