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Knowledge

Time to Review Contracts and Be Prepared for Construction Delays, Suspensions and Terminations

March 25, 2020

With the ongoing spread of COVID-19 (coronavirus), it is becoming inevitable that the preventative measures being implemented will have significant financial impacts on the construction industry. Accordingly, owners and contractors should be reviewing their contracts for their projects and prepare now for coronavirus-related delays.

Reviewing the Contract

The first order of business is to review the contract to determine what provisions may be relevant for either the owner or contractor to extend, suspend or terminate performance under the contract.

Often, there may be several theories to address the pervasive effects we are now facing, and may face, of the coronavirus. These include force majeure, impossibility of performance and contractual remedies to address delays confronting the project.

Whether an owner or contractor is seeking to extend time limits, explain delays, suspend activities, invoke force majeure/impossibility clauses or terminate the contract, it is crucial that both owners and contractors alike follow the required notice requirements as failure to do so may make any such notice voidable and ineffective under the contract.

AIA Contract

The AIA form contract, one of the most widely used forms for construction projects, contains standard language for termination or suspension clauses that could potentially be triggered by the coronavirus pandemic. Section 1.6.1 and 1.6.2 in the standard AIA A201-2017 form typically provides the format and method of delivery for notices.

In 2017, the AIA standard form was amended and this also amended a portion of the contractual termination provisions. While it is easy to tell each party to “read the contract,” there are certain provisions both owners and contractors should focus on when dealing with coronavirus-related delays.

For Contractors

Typically, § 8.3.1 of the Standard AIA outlines the basis for extensions of time for substantial completion of a project. The standard language allows for extensions of a reasonable time for “other causes beyond the Contractor’s control.”

Therefore, if a contractor is seeking an extension of time due to coronavirus, it is important to show how the current pandemic is causing delays beyond the contractor’s control.

Although epidemics are often not mentioned as grounds for delaying performance and arguably could be anticipated, the far-reaching effects of the coronavirus and the regulatory restrictions placed by the government to control the virus are unprecedented.

Additionally, § 14.1.1 allows the contractor to terminate the contract if the work has stopped for a period of 30 consecutive days through no act or fault of the contractor for either (i) issuance of an order of a court or other public authority having jurisdiction that requires all work to be stopped; or (ii) an act of government, such as a declaration of national emergency that requires all work to be stopped.

On March 13, 2020, President Trump issued a declaration of national emergency, and certain jurisdictions may soon require work be stopped, thus potentially triggering the requirement for a contractor to terminate the contract for cause.

For Owners

Owners also likely have potential recourses to suspend or terminate performance, and thus payments, under a contract.

Under §14.2 of the AIA A201-2017 standard form contract, an owner may terminate the contract if the contractor repeatedly refuses or fails to supply enough properly skilled workers or proper materials.

Additionally, an owner may be allowed to terminate the contract or order the contractor to suspend or delay work in whole or in part for such a time period as the owner may determine either with or without cause. These clauses are frequently amended or altered to address the associated cost implications of suspension or termination.

Cost Implications

The seminal issue in the event that either the owner or contractor invokes any of the aforementioned provisions, is a determination of the entitlement to, and amount of, damages. In some instances, the contract may address these issues, which can range from a fixed amount or for lost profits or the costs to cure.

For instance, under the standard AIA contract, in the event an owner terminates the contract for “convenience,” i.e., without any cause, the owner is liable to the contractor for work properly executed, costs incurred by reason of the termination (including any costs attributable to the termination of any subcontracts) in addition to the termination fee, if any.

However, if the owner suspends for convenience, the contract sum and contract time shall be adjusted for increases in the cost and time caused by such suspension or delay and include profit.

Other contracts may have provisions that where an owner terminates without cause or as a “convenience,” the owner is liable to the contractor for a termination fee determined pursuant to a stated amount or through a formula. The courts have held that any fee or “liquidated damages” are proper where the damages are not readily ascertainable at time of drawing of contract and are not merely a penalty.

If the owner were to terminate for cause, the contractor may not be entitled to receive any further payment until the project is completed. In the event the unpaid balance of the contract sum exceeds costs of finishing the project, such excess may be required to be paid to the contractor. In the event the costs or damages exceed the unpaid balance, the contractor may be liable to pay the difference to the owner.

As mentioned, both owners and contractors should expect that the coronavirus will result in construction-related delays or, in some cases, termination of the project. Therefore, it is important for contractors and owners to review their contracts so they may appropriately plan and prepare for the corresponding implications.

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.