Construction Law Update: What Else? Still COVID-19!

Though the COVID-19 pandemic now seems to be waning, it will have a long-lasting effect on the construction industry for some time to come. Government shutdowns, social distancing guidelines, temperature monitoring, and masking requirements are all becoming things of the past. But COVID-related issues are lingering in the construction industry, including delays, labor shortages, supply-chain disruptions and materials price escalation. The pandemic is now more than 2 years old. How will Pennsylvania courts handle COVID-related claims and defenses?

On March 13, 2020, President Donald Trump declared that the COVID-19 outbreak in the United States constituted a national emergency. A few days later, Gov. Tom Wolf issued a series of orders that had a direct effect on construction projects. On March 19, 2020, Wolf ordered all nonlife sustaining places of business to close. Construction was included in the list of activities that could not continue physical operations. The next day, construction activities were excepted if they involved emergency repairs or construction on health care facilities. On March 22, 2020, Mayor Jim Kenney signed an emergency order prohibiting non-essential business operations within the city of Philadelphia. Operators of nonlife-sustaining, nonemergency construction in Philadelphia had until 5 pm on March 27, 2020, to make construction sites safe and secure. In late April 2020, Wolf allowed certain construction activities to resume as of May 1, 2020, provided that those activities strictly adhere to the guidance of the Health Secretary.

Recent industry analysis has shown that the coronavirus has had a significant effect on the construction industry. Median delays before the pandemic totaled approximately 100 days. Post-pandemic, that median number is now over 200 days—a doubling of delays, by this measure. One in nine projects is delayed by a year or more. Materials are hard to come by, and they are expensive. Steel and lumber prices have tripled compared to pre-pandemic costs. Deliveries that used to take weeks may now take months.

So, Pennsylvania construction projects have been, and may continue to be, negatively impacted by COVID-19. Who bears the brunt of this unexpected burden? Can contractors seek damages for delays, price escalations, and/or loss of efficiency? Can owners impose liquidated damages on contractors who are delayed by the virus? The Pennsylvania courts have issued very few decisions on these crucial issues.

Owners, contractors, subcontractors, suppliers, and performing sureties should all consider whether any of the following doctrines and typical contract provisions may apply and, if so, what notice, pre-conditions and documentation requirements may apply:

  • Force majeure
  • termination
  • Suspension for convenience
  • Delay damages
  • acceleration
  • Act of God
  • Impossibility of performance
  • Frustration of purpose
  • Failure of consideration

Many standard form construction contracts contain provisions that are not labeled as “force majeure” provisions but which nevertheless excuse non-performance for acts “beyond the contractor’s control.” And even if the contract documents do not address this situation created by the coronavirus, the common law doctrines potentially apply. The American Institute of Architects’ standard form A201 General Conditions of the Contract of Construction does not contain an express force majeure clause but does address delays in the contractor’s performance caused “by any other circumstances beyond its control.” The ConsensusDocs 200 Standard Agreement and General Conditions Between Owner and Constructor expressly includes epidemics and adverse governmental actions as causes of delays beyond the control of the constructor.

Most standard form construction contracts have provisions addressing the ability of the owner or contractor to suspend work and what recourse the counterparty may have in that option were to be invoked. For example, most AIA forms address when a contractor may terminate in the face of a government-imposed shutdown.

Despite the two-year history of the pandemic, there is surprisingly little law addressing the effect of COVID-19 on contractual obligations. At the moment, the most informative case is probably 1600 Walnut v. Cole Haan Store, 530 F. Supp. 3d 555 (ED Pa. 2021), which addresses many of the above referenced potential COVID-related defenses in the context of a commercial leasehold. Although not a construction case, its holdings are instructive as to what to expect from courts when and if these construction impacts get litigated.

In Cole Haan, a commercial landlord brought an action against his tenant for unpaid rent. The tenant counter-claimed for a declaratory judgment discharging his duties under the lease. The tenant raised a variety of legal theories and contractual provisions in support of its position, including:

  • Frustration of purpose
  • Impossibility of performance
  • Impracticability of performance
  • Failure of consideration

As the court noted, the governor’s March 23, 2020, executive order prohibited the tenant from operating its retail show store out of the rented space, but it was able to re-open, with some restrictions, after a later June 5, 2020, executive order. The lease contained a force majeure clause that provided:

If either party is delayed, prevented or prevented from the performance of an obligation because of strikes, lockouts, labor troubles, the inability to procure materials, power failure, restrictive governmental laws or regulations, riots, insurrection, war or another reason not the fault of or beyond the reasonable control of the party delayed (collectively, force majeure), then performance of the act shall be excused for the period of the delay; provided, however, the forthcoming shall not: relieve the tenant from the obligation to pay rent, except to the extent of force majeure delays the commencement date; and be applicable to delays resulting from the inability of a party to obtain financing or to proceed with its obligations under this lease because of a lack of funds.

The court found that the force majeure clause was applicable but that it prohibited the relief requested by the defendant. The clause did not relieve the defendant-tenant from its obligation to pay rent. The court explained that Pennsylvania jurisprudence gives contracting parties broad discretion to allocate risk among and between themselves. Common law risk allocating doctrines are not applicable if there is an express allocation of risk in the contract. The court found that the pandemic was clearly included in the catch-all provision of “another reason not the fault of or beyond the control of the party delayed.” Because the COVID-19 pandemic was within the contemplation of the force majeure clause, it governed the rights and responsibilities of the parties. The common law doctrines of frustration of purpose, impossibility/impracticability of performance, and failure of consideration were, therefore, inapplicable.

Pennsylvania has a long history of honoring the allocation of risk among contractual counterparties, and it would seem that COVID-19 will be no exception to this inclination. The early indication is that if you have a provision that addresses the pandemic, expect the courts to enforce it as written.

Patrick R Kingsley is a partner and chair of construction at Stradley Ronon Stevens & Young. He can be reached at [email protected] or 215-564-8029. Adrial J. Garcia is an associate and member of the litigation department at the firm. He can be reached at [email protected] or 215-564-8022.

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