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Leading through a crisis: Contractual Implications

The Rice Global Engineering & Construction Forum (www.forum.rice.edu) hosted an informational webinar on May 8, entitled “Leading through a Crisis:  Contractual Implications – COVID-19 Pandemic.”

The hour-long webinar focused on the impacts of COVID-19 on engineering and construction projects in the industrial sector, and offered best practices for mitigating those impacts.  The event was moderated by HKA Director Caryn Fuller, who has more than 20 years of experience in project management and construction claims analysis.  Fuller was joined by panelists Michael Cortez, a Houston-based construction attorney and shareholder with Andrews Myers, Attorneys at Law; Brian Gaudet, a construction attorney at Kilpatrick Townsend & Stockton, LLP in Houston; and David Senko, vice president of project execution at Wison Group, based in Shanghai.

The roundtable discussion included a variety of current and potential impacts of the Coronavirus pandemic on engineering and construction projects throughout the U.S., particularly in the industrial sector.  Topics discussed included current and potential challenges, best practices to minimize their impact, and how construction sites in the near and short terms may function as a result of COVID-19.

Contractual Rights and Obligations

“In general, we are dealing with numerous complex legal issues that the courts will be grappling with for years to come as a result of COVID-19.  So, we need to lean on contractual rights and communication amongst the parties to get through the current crisis.  We’ve seen that working together to come up with solutions will be key to minimizing problems in real time,” Fuller said in opening the discussion.

Gaudet suggested that both engineering and construction firms, as well as project owners, need to first consult their contracts for information on how project delays and cost overruns associated with COVID-19 should be handled.  He also emphasized that, to perform a proper analysis, one must examine all of the COVID-19-related actions taken by various stakeholders, including government orders and each of the parties.

“We need to understand not only what our own rights and responsibilities are under the contract but, also, to look at the rights and responsibilities of the other parties under the contract,” Gaudet said.

He noted, however, that issues are complicated, and that contracts may not provide simple relief.  “It’s going to be messy,” he said.

Force Majeure and Other Delay-Related Clauses

The panel noted that, most often, a force majeure clause of the contract will be the primary clause that provides relief, although there are other potential clauses implicated as well. Gaudet explained that a force majeure clause, sometimes called an “Act of God” clause, is a concept that parties use to account for large, unpredictable events.

“No one can schedule a pandemic into a construction project…It’s an act of God,” he said.

However, whether a delay can be considered a “force majeure” is not always so clear, the panelists said.  There tends to be a variety in force majeure clauses, so whether a particular clause applies to your project depends on the language of the clause.

“By now we’ve seen many notices being sent to clients, whether they pertain to delay and disruption or force majeure.  Writing a force majeure notice letter actually is pretty easy, but proving those impacts may not necessarily be as easy,” Fuller said.

Filing a force majeure claim may not be the correct contractual vehicle for all of the impacts.  Force majeure clauses generally excuse contractors for non-performance due to events beyond their reasonable control, but, in many cases, mandate only time extensions; not recovery for additional costs.  Contractors who still are working, albeit at a slower pace due to social distancing and other mandated safety measures, may not always be able to seek relief under force majeure contract provisions.  The panelists discussed the differences between a force majeure claim with a typical “act of government” or a “change in the law” claim, which may give a contractor both a schedule adjustment as well as an increase in compensation.

Unlike many force majeure clauses, which may require a contractor or other party to be prevented from performing, a change in law-type clause may be more applicable.

The panelists advised webinar participants to check all of the provisions in their contracts; not only those related to force majeure, changes (especially changes in law), no damages for delay, and liquidated damages, but all of the clauses for guidance on how to proceed if they’re experiencing delays and are considering seeking relief.

Cortez said that causes for delays on projects that were halted to prevent further infections, in such areas as New York and much of the East and West coasts, may be easier to identify than causes for delays on projects that kept going where productivity decreased and costs are increasing due to increased safety measures caused by COVID-19.

Documentation

After reviewing its contract, a contractor seeking relief for delay should provide notice in writing to the owner, in accordance with the requirements of the applicable section or sections of the contract.  While providing such notice is standard procedure, it doesn’t guarantee the claim will be successful, or that the impacts are actually compensable.  The panel cautioned that simply declaring that COVID-19 is a force majeure event affecting the project is not going to be enough.  The particular impacts and their effects on the project will need to be explored, the panelists said.

Impacts related to the pandemic should be separated from other issues that existed before the virus necessitated global shutdowns, social distancing and other precautions, Gaudet said.  That segregation also must include current impacts that are not related as well.  One particular challenge with COVID-19 is quantifying when the impacts to the project started and ended.  Days and months can matter significantly in the economics of a claim and its resolution.

“It’s important to ask, ‘when did COVID-19 impacts start and when did they stop?’ ” Gaudet explained.

“Documentation is important,” Gaudet continued.  “Your [notice] letter is step one, but you’re going to have to provide documentation showing that you were impacted, how you were impacted, and the extent of that impact.  You’ll need to tie actual delays to actual actions,” Gaudet continued.  “Delay impacts are difficult to prove with good information and are impossible to prove without it.”  Gaudet also reminded the attendees that COVID-19 will add complexity to sorting through the other issues that typically are encountered on a sizeable project.

“COVID-19 is affecting projects, but all of the normal problems that you have are still there too.  So, this is not ‘instead of;’ this is ‘in addition to.’ ”

If a particular contract requires the party affected by a force majeure event to attempt to overcome the effects of the force majeure event, there is typically some modifier describing the level of efforts that need to be taken.

Depending on the specific language in their contracts, contractors also must be prepared to show that they made “best efforts,” “commercially reasonable efforts,” or “reasonable efforts” to overcome the force majeure event.”  Those efforts much be made, whether or not they’re ultimately successful.

“You have to put in the work,” Gaudet said.

Gaudet also highlighted the importance of documenting the efforts taken so that the affected party can demonstrate in the future that they complied with their contractual obligations.

“Figure out where you stand, document all of the things that you’re doing, and keep in mind that you have to keep going,” Gaudet added.

Senko, whose international company is based in China, said that although Asia is beginning to get back to work following months of social distancing, issues caused by the shutdowns are just beginning to surface.

“The delays and costs are significant,” Senko said,   “Even though we have been dealing with COVID-19 since January in our case, we’re just getting into the [issues and impacts of delays].  It’s getting complicated rather quickly.  I think we’re in the early stages of understanding the ramifications of COVID-19.”

The issue is complicated, Fuller said.  “By now, we’ve all seen many government mandates pertaining to stay-at-home orders for non-essential workers.  Sometimes there are seemingly conflicting orders,” she said.  “There’s also been different restrictions in different locales related to whether and to what extent construction activities can take place.  Many of these orders were issued on a short-term basis, changed or re-issued and are expected once again to change if states follow the federal government’s suggestion of a multi-phased approach to reopening.  Many E & C contracts involve labor and materials crossing state lines where not only the jurisdiction of the project may be involved but other jurisdictions as well.”

Concurrent delays—two or more delays that occur at the same time and overlap—may be particularly hard to prove.  “If you have more than one delay, you may not have a compensable or excusable delay,” Cortez said.

Existing contracts in the industrial sector often specifically address this issue, and “severely limit the contractor’s ability to claim concurrent delay,” Cortez said.

“The only delays that are going to be recognized are those that impact the critical path,” he added.  “Provide accurate and timely notice.  Document early and often.  It’s going to be critically important.  Ultimately, it’s going to come down to proof.”

Suspensions, Terminations, Slowdowns and Shutdowns

The group advised owners considering suspending work, or terminating contractors for under- or non-performance as a result of the pandemic to carefully weigh the risks and benefits.  Termination for cause, termination for convenience or even suspension of work for a specific time can affect collaborative relationships that are important to the success of both current and future projects, they said.

“Slowing down or suspending projects is more than a management or legal exercise.  There are potential tangible physical impacts,” Fuller said.

Gaudet agreed.  “Who’s going to be responsible for the work if you terminate?  If you terminate, you may not be improving your position,” he added.

Documentation also will be crucial when projects that were stalled or shuttered resume in the coming weeks and months, the panelists said.

As projects restart, contractors may be asked to adhere to an accelerated schedule to get stalled work done as quickly as possible.  Contractors asked to change their project execution plans to achieve quicker project completions should assume that those are acceleration measures and document them accordingly.

Economics are affecting owners’ decisions regarding when and how to resume, Senko said, and many owners are re-assessing their capital plans.

“Some projects are being terminated and suspended due to COVID-19 impacts,” Fuller added.  “This can be as a result of a Contractors performance, an Owners concerns about the health impacts of COVID-19, either proactively or as a result of a reported case on their project, or to try to slow capital spend.”

A Look Ahead

When work does resume, protecting workers’ health will be vital.  In the U.S., the Occupational Safety and Health Administration provides valuable information on protecting workers health, Senko said.

“In the acronym HSE, the ‘S,’ for Safety, used to be paramount.  Now, the ‘H,’ Health, will play a bigger part in our execution going forward,” he added. “We’re entering a new era with respect to execution and control of work.”

In China, where work already has resumed, project teams are reassembling, and project owners are largely welcoming and supportive of contractors, consultants and suppliers during the upswing.

“A smart guy once told me, ‘if you take care of your employees, you will prevail,’ ” Senko said.  “Take care of your employees first.  In China, we’re back 100 percent, and our clients are with us.”

In the U.S., some areas are seeing dips in cases of infection, while others, such as the South and Midwest, are experiencing upticks.  Whether projects are considered “essential” and can thus continue varies from state to state.

“It’s been confusing to say the least,” Senko said.

Cortez agreed.  “Protocols are rapidly changing in this time,” he said.  “OSHA, the Associated General Contractors of America, and the CDC and its guidelines, are setting the tone for the best practices moving forward.”

Temperature checks, health screenings, masks, anti-viral fogging will likely be the norm at jobsites in the coming weeks and months, Cortez added.  In addition, the construction industry has become more familiar with virtual technology during enforced shutdowns and quarantines, and will likely increasingly embrace technology to solve problems going forward.

Remote inspections and video conferencing may replace in-person inspections and meetings, and drones may be used more frequently to inspect work, document progress, gauge productivity and even assess workers’ health, Cortez said.  Drones could soon be able to hover above on-site workers to take temperatures or register labored breathing and other abnormalities, Senko added.

Resources and Best Practices

In addition to OSHA, the CDC and the AGC, the U.S. Chamber of Commerce also provides helpful information, as does a Stanford Law School web-based database of searchable law firm memos regarding COVD-19 and its legal implications, the panelists said.

Cortez agreed.  “Review your contracts.  That’s going to be the be-all, end-all for determining the best first or next steps you can take,” he advised.  “You really need to look at what your contracts say.”

“Document early and often.  This is going to be vitally important moving forward,” Cortez added.  “[Also,] mitigate your damages on current projects.  Look for alternative sources of material and delivery systems.  Talk to [your team] about potential suspensions or delays.”

The group also advised talking with an attorney or experienced claims consultant before making decisions about how best to proceed.

Flexibility in the present while thinking about the future also is critical, Senko said.  “Be flexible and aware, to be able to best adapt to every new direction that comes your way, and plan like never before to minimize the need for resources.”

The benefits of collaboration can be two-fold, helping to both solve current problems and bolster crucial relationships and collaboration on future projects.

“Lead by example,” Cortez said.  “Whether you’re a CEO, owner, contractor, laborer or supplier, communicate that we’re all going to have to work together in order to come out on the other side of this.”

The Rice Global E&C Forum fosters the discussion and study of problems and opportunities facing the contracting side of the E&C industry.  The forum’s roundtable meetings are held monthly, with presentations by distinguished international speakers on subjects related to current issues facing the engineering and construction industry.  For more information on the forum and its work to educate and support the industry, visit https://forum.rice.edu/upcoming-events/monthly-roundtables/.For more information on how your firm can be best prepared for impacts of COVID-19, email us at inquiries@hka.com.  Webinar summary written by HKA technical writer Tricia McCunney-Thomas, inquiries@hka.com.


The information provided in this article is intended for general educational purposes only.  It does not constitute legal or business advice, and it should not be relied upon as the basis for your business decisions.

In general, we are dealing with numerous complex legal issues that the courts will be grappling with for years to come as a result of COVID-19. So, we need to lean on contractual rights and communication amongst the parties to get through the current crisis. We’ve seen that working together to come up with solutions will be key to minimizing problems in real time.”
Caryn Fuller, Director HKA

This publication presents the views, thoughts or opinions of the author and not necessarily those of HKA. Whilst we take every care to ensure the accuracy of this information at the time of publication, the content is not intended to deal with all aspects of the subject referred to, should not be relied upon and does not constitute advice of any kind. This publication is protected by copyright © 2020 HKA Global Ltd.

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