Force Majeure — Why Not?
Houston — March 23, 2020 A number of articles have been written in the last two weeks about how contractors can exercise their rights under Force Majeure provisions. This article is different. This article will explain your options to seek both time and money for the effects of COVID-19. A typical Force Majeure provision provides limited relief to the party seeking to be excused from its obligations as a result of the effects of the force majeure event:
Neither Party is liable for any delay in performing or failure to perform its obligations under this Contract if and to the extent that the delay or failure is caused by a Force Majeure Event. A Party is excused from its performance obligations that are prevented by a Force Majeure Event only for as long as the Force Majeure Event continues, and obligations required to be completely performed prior to the Force Majeure Event are not excused.
In most cases, the Contractor is looking for schedule relief because it can no longer meet the agreed upon delivery date for the Project. But, in these times, more time—without more money—may actually be a worse outcome for the Contractor. Potential issues with receiving only more time include: extended overhead, workforce retention, standby charges, wage escalation, material shortages, and/or extended material storage costs.
A more thorough examination of your contract terms may lead to additional potential avenues of recovery, including provisions relating to changes in law, emergency measures, contingency definitions, and change order provisions relating to price escalation. Let’s take a look at a few of these provisions that could be in your contract, and how they might play out.
Change in Law
In the event a change is enacted to any Applicable Law after the effective date of this Contract (a “Change in Law”) and such Change in Law directly and materially adversely affects Contractor’s performance of its obligations under this Construction Contract, Contractor shall notify Owner in writing and make a reasonable proposal for complying with the Change in Law, including the estimated cost thereof. During the sixty (60) calendar days following delivery of contractor’s notice and proposal, the Parties shall negotiate in good faith to reach agreement as to (i) whether the Change in Law should be challenged, including the scope and manner of such challenge; (ii) the most economical and commercially prudent methods for complying with the Change in Law; and (iii) an equitable allocation of any increased costs that result from complying with the Change in Law and an equitable adjustment of the Completion Date as necessary to allow Contractor to comply with the Change in Law…
This type of provision can be ideal for the Contractor since it provides for an equitable allocation of any increased costs that result from compliance with the Change in Law. It is important to note that the prompt notice is advisable, if not required, and the parties must negotiate in good faith. In this case, the Contractor would most likely not want to invoke the Force Majeure provisions under the contract since it could muddle the Contractor’s entitlement to additional costs.
Emergencies (10.4 of A201-2017)
In an emergency affecting safety of persons or property, the Contractor shall act, at the Contractor’s discretion, to prevent threatened damage, injury, or loss. Additional compensation or extension of time claimed by the Contractor on account of an emergency shall be determined as provided in Article 15 and Article 7.
The reference to Article 7 means that the Contractor should be able to recover the increase costs of labor, material, equipment, insurance, and field supervision to prevent threatened injury (this includes people contracting the virus). Some of the recoverable costs might include costs additional gates for access and security, increased buses from transportation, additional shifts, split shifts, and staggered shifts in order to comply with new laws imposing restrictions on the number of people that can be in one place at one time (i.e., no more than 10 people in a given place under current requirements). The Architect will initially determine the costs but the Contractor has the right to make a claim if it disagrees with the Architect’s determination. Because of the temporary nature of these emergency issues it may make sense to both claim force majeure relief and assert a claim for emergency services to cover all of your bases.
A typical GMAX contract includes a Contingency, sometimes called a Contractor’s Contingency to pay for unforeseen increases in the costs of work. With very limited exceptions, the Contractor should be able to spend its contingency dollars on these increased costs. The real question becomes whether the Owner’s Contingency can be used for these costs once the Contractor’s Contingency is expended. For most, this will depend on whether the Contractor is entitled to claim a change order for changes in law as opposed to being subject to a blanket compliance with laws provision.
Form Amendment for Price Escalation (ConsensusDocs 200.1)
This form creates a multiple step process that provides for an equitable adjustment to the Contract Price for changes in “Potentially Time and Price-Impacted Material items. This Form Amendment is a comprehensive solution to the price escalation issue. However, it requires effective negotiation with the Owner on the front end as well as crystal–ball type foresight into (a) the Potentially Time and Price-Impacted Material Items to be listed on Exhibit A, (b) the Baseline Price and (c) the percentage cap on adjustments. Even with this amendment in place, any price escalation claim should be supported by credible evidence of the as-bid price compared to the increased price that occurred as a result of COVID-19 impacts.
In closing, these are some of the provisions that may be available to soften the blow of the increased costs of dealing with COVID-19, but only if you also comply with the notice and documentation requirements in your agreement. If any of these paragraphs are missing from your agreements, consider adding them in future contracts. Also, it is important to remember in these tough times that a responsible Contractor is collaborative in working its subcontractors and with the Owner to find practical solutions to achieve the ultimate result of completing the project to the benefit of all involved.
For more information please contact Ben Westcott.
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