Covid-19/Coronavirus Briefing Paper

Covid-19/Coronavirus Briefing Paper

March 19, 2020

By Robert L. Smith & Dean B. Thomson & Elise R. Radaj & Thomas C. Schram

Rob, Dean, Elise and Thomas are members in the firm’s Construction Law Department. Rob can be reached at 612.359.7648 or rsmith@fwhtlaw.com. Dean can be reached at 612.359.7624 or dthomson@fwhtlaw.com. Elise can be reached at 612.359.7670 or eradaj@fwhtlaw.com. Thomas can be reached at 612,359.7669 or tschram@fwhtlaw.com.

 

            As we all know from news reports, the novel coronavirus, COVID-19, is causing widespread disruption in the construction industry.  The World Health Organization declared COVID-19 to be a pandemic on March 11th, and the federal government, various states, and local governments are issuing orders in an effort to contain or mitigate the spread of the virus.  Website links at the end of this paper to the CDC, the Minnesota Department of Health, and the University of Minnesota provide guidance on how best to keep safe from the threat.  The rest of this Briefing Paper describes how contractors, subcontractors, designers, and owners can best manage and respond to the industry disruption that COVID-19 is causing. We begin by listing some of the negative project impacts that the virus and actions to combat it are causing, and then follow in outline form how to mitigate and recover monetary losses due to these impacts.

 

    1. Potential Impacts to Contractors and Construction Projects
      1. Schedule Delays
      2. Supply Chain Disruption
        1. Products from China and Europe
        2. Long-Lead Procurement Delays
      3. Cost Increases
        1. Inefficiency, Acceleration, and Disruption Costs
        2. Material Cost Escalation
      4. Labor Shortages 
      5. Governmental Action/Work Restrictions
      6. Financial Uncertainty
    1. Schedule and Delay
      1. Contractual Basis for Schedule Relief
        1. Force Majeure 
          1. Concept of Force Majeure
            1. The effect of a force majeure clause is to excuse performance in the event an unforeseen circumstance occurs.  Whether and to what extent performance is excused will depend on the specific language of the clause, and the party seeking relief must establish that the force majeure clause applies. 
            2. Several keys to force majeure relief are:
              1. Providing adequate and timely notice that the claimed force majeure event has impacted performance;
              2. Connecting the effects of the force majeure event to the performance impacts experienced;
              3. Documenting delays and costs experienced due to the force majeure event; and
              4. Taking reasonable steps to mitigate impacts.
          2. Example Clauses
            1. AIA – Section 8.3.1 of A201 General Conditions provides relief for “unusual delay in deliveries . . . or other causes beyond Contractor’s control.”  
            2. ConsensusDocs – ConsensusDocs 200 provides schedule relief for “any cause beyond the control of the Constructor.”  Further, Section 6.3.1(j) refers to epidemics and 6.3.1(k) refers to adverse governmental actions.   
            3. EJCDC – Article 4.05(C) of the EJCDC Standard General Conditions provides for an equitable adjustment in Contract Times (as the exclusive remedy) for delays, disruption and interference caused by “unanticipated causes not the fault of and beyond the control” of the parties, including “epidemics.” 
            4. FAR 52.249.14 is the default clause for excusable delays in federal construction contracts. In paragraph (a), it lists excusable delays and specifically includes epidemics and quarantine restrictions. 
            5. MnDOT Contracts – Section 1806.2.A of the 2018 Standard Specifications defines “Excusable, Non-Compensable Delays” as any delay that is “not the Contractor’s or the Department’s fault or responsibility, and that could not have been foreseen by the Contractor.”  The definition specifically includes epidemics.
          3. Subcontracts
            1. Most subcontracts contain a “flow down” clause allowing subcontractors to take advantage of whatever rights the general or prime contractor has in regard to the owner, including rights related to force majeure.  
            2. The MN-AGC Form Subcontract – Paragraph 12 provides “[n]either Party shall be in default hereunder for any delay up to forty-five (45) days of any duty caused by an act of God, war, embargo, civil disturbance, strike, or other occurrence beyond the Parties’ control.”
      2. Material Adverse Change – Some contracts have clauses that provide relief in the face of material adverse changes.
      3. Impossibility and Frustration of Purpose
        1. Concept of Impossibility: 
          1. Minnesota recognizes that performance of a contractual duty may be excused when performance becomes impossible due to the existence of a fact or circumstance which was unknown by the performing party at the time the contract was signed.
        2. Concept of Frustration of Purpose:
          1. Performance can also be excused when a party’s principal purpose in making a contract is frustrated, without that party’s fault, by the occurrence on an event which both parties to the contract assumed would not happen.
        3. Keys:
          1. These are high legal standards.  While it is not necessary that performance is literally impossible, it still must be shown that the burden on performance was significant, and the risk was not allocated to either party.  
      4. Commercial Impracticability under Section 2-615 of the Uniform Commercial Code 
        1. Concept of Commercial Impracticability:
          1. Lesser standard than impossibility, and excuses delays or failures in the delivery of materials or goods if those delays or failure are caused by an unanticipated event, or by compliance with a government order.  
          2. Keys:
            1. Applies to the sale of goods and materials.
            2. Can be specifically modified by the parties’ agreements.
            3. Supplier must provide notice of delays to buyers.
          3. If Supplier may still make some deliveries, Supplier must allocate delivery of supplies among multiple buyers in a fair and reasonable manner.
    2. Costs Increases
      1. Force majeure clause likely does not give relief for cost increases, but some non-standard clauses might.  
      2. Escalation Clauses
        1. Perhaps specific contracts have language addressing possible tariffs that is broad enough to apply.
        2. In addition, if your contract includes the ConsensusDocs 200.1 Amendment, which was put in place to address tariffs and other circumstances where prices could fluctuate, that may provide relief for escalation, delay and additional money for extended general conditions, but only if the product at issue was identified in the Amendment. 
      3. Change in Law provisions may provide relief if virus-related laws are passed affecting construction.
    3. Suspension and Termination
      1. Owners may choose to suspend or terminate for convenience.
      2. Contractors should evaluate what their contract allows and what notice must be given in the fact of a suspension or termination for convenience.
    4. Acceleration and Constructive Acceleration
      1. Owners may expressly accelerate a contractor’s performance coming out of impacted time period; make sure compensation terms for the acceleration effort are negotiated and memorialized before acceleration begins.
      2. Owners may not provide schedule relief to which contractors are entitled, which can give rise to ‘constructive’ or implied acceleration’ claims.
    5. Notice
      1. Timing – Make sure to read your contract and give timely notice.
      2. Contents – Be as detailed as required or as is possible.
    6. Documenting Claims
      1. Keep accurate, contemporaneous records of schedule and cost impacts.
      2. The more detailed, the better.
      3. Photograph the current and periodic status of the site.
      4. Ensure compliance with “Time Impact Analysis” or similar specified scheduling requirements.
        1. Address any arguable concurrent delays in your schedule analysis.  If you would have been late irrespective of the impacts from the virus, you may not be entitled to (or be able to prove) a critical path delay.
    7. Mitigation
      1. Contractors may have an obligation to mitigate their damages and the damages to others in face of delay and increased costs.
    8. Protecting Statutory Payment Rights
      1. Depending on the type of project, contractors may have available statutory lien, bond, and prompt payment remedies.  In order to protect those rights, contractors should ensure they have provided all necessary notices, and have determined where claims need to be filed in the event payment is delayed.  This includes providing pre-lien notice, and serving and filing mechanic’s lien statements within 120 days of the contractor’s last day of work on a project. 
    9. Insurance
      1. Business Interruption (BI) Insurance
        1. Can be stand-alone, but is typically part of a company’s property policy.
        2. This insurance is intended to protect a business against loss of income related to disasters and other emergencies.
          1. Contingent business interruption (CBI) provides coverage due to disruptions to a contractor’s customers or suppliers, and given the amount of product manufactured by countries affected by the virus, such as China, this could become important coverage.
        3. Often requires the interruption to flow from a “direct physical loss or damage” to insured property.
        4. Whether business interruption insurance might provide coverage for loss of income related to COVID-19 will depend upon the terms and conditions of the applicable policy.
      2. Builder’s Risk and Property Policies
        1. Property policies are sometimes known as “all risk” policies and are structured to cover all risk of loss or damage to insured property, except to the extent those losses are excluded by those policies’ many express exclusions. The trigger for most property insurance policies will be physical damage to insured property.  Further, most traditional property policies exclude losses resulting from a virus or disease. However, following past virus outbreaks (SARS, Ebola, etc.), a few carriers introduced coverage for disease. In addition, many policies contain a “Civil or Military Authority” clause, which provides coverage when an action by a civil authority, such as a government, prohibits access to property.  Recently, the City of Boston shut down construction projects in the city, and given such a directive, coverage may be available. Given the increasing likelihood of such directives by state and local governments, businesses should review their policies to determine whether they contain such coverage and whether physical damage to the property is necessary for coverage.
        2. Be mindful of potential coverage exclusions present in every type of policy.  Policies often have what they call an “absolute” pollution exclusion, but it is debatable whether or not a virus is considered a pollutant, and there are cases holding that it is not. 
        3. Delayed Completion Coverage/Delay in Start-Up Insurance – This coverage can be added by endorsement to a builder’s risk policy.  It is recommended that contractor’s review applicable builder’s risk policies to determine if this coverage was added. 
      3. Commercial General Liability 
        1. May provide coverage if customers or others claim bodily injury or property damage, including loss of use resulting from that damage, arising from COVID-19.
      4. Workers’ Compensation Insurance
        1. Workers’ Compensation usually covers injuries “arising out of or in the course of employment.”  Those injuries can include an illness, but the worker typically has to prove the illness was caused by his or her employment, and with COVID-19, it may be difficult to prove that the job caused the virus as opposed to an outbreak in the city in which the job was located.  On the other hand, if an employee on a job tests positive for the virus, an employee may be able to prove causation if the employer does not take appropriate subsequent job-site precautions to limit the risk of transmission.
      5. Specialized insurance products such as trade disruption insurance or supply chain risk insurance may also provide coverage.  
      6. Give notice and keep records to support insurance claims, just as with contract claims.
    10. Labor and Employment Issues.  
      1. According to CDC’s Interim Guidance for Businesses and Employers regarding Coronavirus 2019, employers should:
        1. Actively encourage sick employees to stay home;
        2. Separate and send sick employees home;
        3. Emphasize respiratory etiquette and hand hygiene by all employees;
        4. Perform routine environmental cleaning; and
        5. Limit non-essential travel.
      2. Employers should also pay attention to federal, state and local leave laws.
      3. Safety and OSHA regulations – Keep in mind that OSHA’s general duty clause requires employers to furnish workers with place of employment that is free from recognized hazards or are likely to cause death or serious physical harm.
    11. Federal, State and Local Legislation and Executive Orders
      1. National Legislation
        1. The U.S. House of Representatives passed the “Families First Coronavirus Response Act” (H.R. 6201) on March 14, 2020, and a technical corrections bill on March 16, 2020.  The bill may still change as it moves through both chambers of Congress.  
        2. The bill impacts employers in the following ways:
        • Family Medical Leave (Section 3102)
          • As drafted, this only applies to employers with less than 500 employees and government employers, and would go into effect 15 days after the date of enactment
          • Provides employees who have been on the job for at least 30 calendar days the right to take up to 12 weeks leave under the Family Medical Leave Act (FMLA) to care for a child if school or childcare is unavailable due to COVID-19
          • After the first two weeks of leave, employees will receive a benefit under this provision of no less than two-thirds of employee’s regular rate of pay
        • Unemployment Insurance (Section 4102)
          • Authorizes $1 billion for emergency grants to states related to unemployment insurance (UI) benefits
            • $500 million authorized for immediate additional funding
            • $500 million reserved for emergency grants to states that experience at least a 10% increase in unemployment
        • Paid Sick Leave (Section 5102)
          • As drafted, this only applies to employers with less than 500 employees and government employers, and would go into effect 15 days after the date of enactment.  The labor department can exempt businesses with less than 50 employees from compliance. 
          • Identified employers are required to provide the following:
            • Two weeks paid sick leave at the employee’s regular rate to quarantine or seek care for COVID-19
            • Two weeks paid leave at two-thirds of the employee’s regular rate to care for a family member or for child care purposes
          • Full time employees are entitled to two weeks (80 hours) under the bill and part-time employees are entitled to the average number of hours they typically work in a two-week period
          • Employers will be required to post a notice informing employees of their rights to leave
          • As drafted, the bill expressly does not preempt existing state or local paid sick leave entitlements
        1. The Senate has not yet considered the legislation, but Senate Majority Leader McConnell expects it to pass later this week once the Senate reconvenes.  Senator Klobuchar and Senator Smith have called on the Senate to pass the bill immediately.   
      2. Minnesota Legislation and Executive Orders
        1. Locally, Governor Walz signed S.F. 3813 into law on March 10, 2020, authorizing approximately $21 million towards COVID-19.  These funds, along with the already existing $4.6 million in Minnesota’s public health response contingency account, will be used to support investigation into COVID-19, monitor the spread of COVID-19, provide information, coordinate response activities, and conduct lab analyses. 
        2. In addition, Governor Walz issued Emergency Executive Order 20-05, which temporarily suspends strict compliance with Minnesota’s unemployment insurance law.
          1. The Executive Order suspends the week-long waiting period, allowing workers to become eligible for unemployment benefits as quickly as possible.
          2. The Order also relaxes certain requirements for obtaining unemployment insurance benefits when the presence of the employee in the workplace could jeopardize the health of others or when the employee’s ordinary childcare is not available.  
          3. The Order also provides that the Minnesota Unemployment Insurance Program shall not use unemployment benefits paid as a result of the COVID-19 pandemic in computing the future unemployment tax rate of a taxpaying employer.  
      3. Government-Ordered Work Stoppages
        1. As set forth above, the City of Boston recently shut down all construction projects.  
        2. As of March 17th, no similar shutdown has been declared in any of Minnesota’s cities.  
    12. Contracts and Contract Amendments Currently in Negotiation
      1. As of today, when negotiating future contracts, it may be difficult to argue that delays and increased costs are not “foreseeable,” which calls into question whether contractors can rely on some force majeure clauses that require the event to be one that could not have been foreseen by the contractor.  
      2. Contractors should specifically deal with COVID-19 in any contracts, GMP Amendments and change orders they are signing now and for the foreseeable future by including language specifically entitling the Contractor to an extension of time, an equitable adjustment of the contract price, or both to account for impacts resulting from COVID-19 or any similar pandemic.
    13. Resources
      1. Centers for Disease Control and Prevention https://www.cdc.gov/coronavirus/2019-nCoV/index.html
      2. Minnesota Department of Health https://www.health.state.mn.us/diseases/coronavirus/index.html
      3. Center for Infectious Disease Research and Policy (University of MN) http://www.cidrap.umn.edu/covid-19

Announcements

Fabyanske, Westra, Hart & Thomson, P.A. welcomes its newest shareholder, Rob Smith.  Rob, a graduate of Concordia College (Moorhead, MN) and the University of Minnesota Law School, has over 20 years of experience as an attorney, almost all of which has been exclusively devoted to construction law.  He comes to the firm after spending the past seven years at PCL Construction Enterprises, where he oversaw all legal matters involving PCL’s commercial buildings operations in the U.S.  Rob is a former chair of the MSBA Construction Section, was previously a shareholder at Leonard, Street and Deinard, P.A., and also served as Associate General Counsel at Life Time Fitness.

Fabyanske, Westra, Hart & Thomson, P.A. is pleased to announce the election of its new President and Executive Committee. The following six attorneys now comprise the Fabyanske Executive Committee: Rory Duggan (President), Matthew Collins, Richard Jensen, Mark Becker, Thomas Tucci, and Jeffrey Jones.

 

This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2020 FWH&T.

RELATED ARTICLES BY THIS AUTHOR