As posted in the Legal Intelligencer
It’s safe to say the possibility of a pandemic was not on the construction industry’s metaphorical radar when it hit; but what we have learned in recent months will both help press forward in dealing with COVID-19 and better prepare us for the next public health emergency. Many construction businesses have partially re-opened since the governmental shutdowns caused by the initial wave of the coronavirus pandemic. The current situation, however, has brought with it some restrictions and related challenges that have required innovative approaches to remain efficient and maintain already low profit margins. As newly-confirmed coronavirus cases begin to rise across the country again and predictions of a second pending wave become closer to reality, it’s a good time to assess the effectiveness of current operational plans and plan for the next showdown.
While the degree was jurisdictionally dependent, all companies were restricted in some capacity due to governmental order. As we better understand the virus and how it works, large scale shut-downs become less likely. Construction companies will need effective plans to work with social distancing, telework, and extensive sanitization efforts moving forward though. We also saw significant disruption to supply chains, slower on-site production levels due to reductions in force relating to fallout from the pandemic, and cash flow shortages induced by the pandemic. Legally, construction contracts and insurance policies lacked remedies to deal with the novel problems COVID-19 created; and many businesses did not have the necessary personal protective equipment or relevant policies and procedures to handle the crisis.
Many construction contracts had language in them that provide some guidance in a post-pandemic environment; but all of them were woefully deficient addressing the impacts of a pandemic directly. The work arounds include things like the cardinal change rule and common law principals of force majeure that might apply in specific circumstances. Better planning is in order to prepare for similar crises and the resulting business interruption in the future.
Force majeure provisions are common in commercial contracts and are intended to protect parties against unforeseeable events such as “acts of God”. These clauses usually include things like war, terrorism, labor strikes, or quarantines (i.e., events that are outside of the party’s control, but make performance of the contract impossible). As a legal matter, the fact that performance of a contract would be more expensive or challenging due to the coronavirus is not a force majeure event by itself. See generally Sunseri v. Garcia & Maggini Co., 148 A.2d 81, 298 Pa. 249 (1929). Something more is required to excuse performance. Consider whether common law force majeure might apply, as the common law in most states provides the defenses of impossibility, impracticability, and frustration of purpose in certain factual circumstances. Depending on how significantly the project is impacted, the cardinal change rule may also apply. Separately, any new contract should include “pandemics” and “public health crises” as specifically defined force majeure events.
In addition to force majeure issues, consideration should be given to other parts of the contract. Many construction contracts have provisions on suspension of work or termination. When properly drafted, these clauses include details relating to who has the power to take those actions, the reasons those actions can be taken, and the process for accomplishing them. While contracts drafted before March 2020 likely don’t address the unique situation of a pandemic, what we have learned about the impact of public health emergencies on projects suggests that a protocol agreed to in advance – perhaps a “quasi-mediation” process that allows for specific targeted solutions depending on the nature of the problem – are in order. Given the now known health protocols put in place and cash flow problems created by the pandemic, change order clauses and requests for proof of financing clauses should have some tie back to force majeure events. Other clauses calling for similar approaches include notice provisions, scheduling and delay clauses, as well as insurance and indemnity language. Give thought to how you propose to deal with these issues that on many, but not all levels, are out of your control.
Practical considerations outside the contract
Moving forward, construction companies should create small task forces that include in-house personnel and trusted external advisors to track public health emergencies. This task force can allow for earlier planning of a forthcoming threat to the company. Once the company knows that public health emergency is likely, a number of practical considerations can be taken into account. Companies can stock-pile materials needed to keep work on the critical path and required PPE to mitigate against future shortages and keep projects running. Similar to preparing for a significant weather event, safety protocols can be activated and more efficiently put in place while personnel are still on site. This will allow for a more seamless transition to work during the crisis. Companies should consider investing in a robust technology platform to allow them to communicate with their employees and business contacts. Mandated telework will require it and the ability to communicate effectively during a future crises will minimize any impact on the business.
A word on insurance
Businesses typically obtain insurance policies to protect against accidents and unforeseeable occurrences – it’s the point of insurance. However, many businesses found it very difficult to find coverage in their policies for losses suffered during the first wave of the COVID-19 outbreak. One of the central issues was whether the loss resulted from the pandemic itself or the mandated state shutdowns. In those cases, indemnity and other contract clauses may provide some relief. Moving forward, construction companies should focus on obtaining additional coverages to close this gap; but understand that there is a paucity of insurance products on the market that specifically address pandemics right now. Until the market responds, construction companies should consult with their attorneys and insurance brokers to find a better strategy to cover future pandemic related losses between the contract and insurance policy.
Internal policies and procedures
Construction companies can also update their internal policies and procedures to minimize business interruption and financial losses. New federal laws have imposed changes to leave policies, teleworking has brought in a number of considerations unique to that set-up, and both office and field safety policies need to be updated to account for social distancing and sanitization efforts. Adaptations to employee handbooks are in order to communicate the changes to the Family Medical Leave Act and other employment laws. Expectations regarding maintaining a healthy and sanitary work environment, work time, behavior on videoconferencing, and other elements of teleworking are also important to address. Every company should have a COVID-19 safety plan – and in fact many project owners are requiring it – to protect employees and set expectations in a way that communicates it’s safe to be at work. In addition to protecting against liability later, it also communicates to employees that their health and safety is rightly the company’s top priority.
Specifically, the Center for Disease Control (“CDC”) has provided guidelines on how employers can safely reopen small businesses, which include but are not limited to: examining policies for leave, telework and employee compensation; defining essential employees and business functions; and preparing business continuity and safety plans. The CDC’s “top tips” to protect employees’ health includes actively encouraging sick employees to stay home; developing other flexible policies for telework; promoting proper etiquette for coughing and handwashing; and providing education and training materials to employees. The Occupational Safety and Health Administration issued Guidance on Returning to Work making similar recommendations. It’s not clear how OSHA will enforce these recommendations though; and enforcement has not been aggressive to date. Company policies and procedures should account for these realities nonetheless. A tool box talk is not a bad place to start.
The COVID-19 emergency has certainly been a learning experience. In many ways, it was unwelcome. It has also been positive in that it has forced companies to grapple with complex issues that they may not have otherwise considered. Those challenges range from the academic analysis of contract clauses to practical efforts to mitigate risk outside the contract. Each of these considerations are important and can have a huge impact on your client or company. The COVID-19 emergency is likely a long way from over, and future public health crises will need to be addressed. Companies should take the lessons learned over these last few months and apply them to be better prepared for the next wave if and when it comes.
ABOUT KATHRYN PETTIT
Kathryn E. Pettit, a counsel in the firm’s suburban Philadelphia office, focuses her practice on construction law. Before becoming an attorney, Ms. Pettit received her Bachelors of Science in Civil Engineering from Syracuse University. She brings her technical background and perspective to the representation of her clients.
Ms. Pettit has counseled and represented owners, construction managers, contractors, subcontractors, and design professionals in all phases of construction projects. She has experience representing clients in disputes arising from a wide array of construction projects, including both private and public. She has litigated numerous construction claims, from the owner, contractor, and design professional’s perspectives, in state and federal court, as well as arbitrations. Ms. Pettit also has extensive experience representing homeowners in suits against the builders of their properties due to building envelope defects, including stucco defects.
ABOUT JOSH QUINTER
Josh Quinter is a commercial litigation attorney, with a focus on construction law, and an Associate Managing Principal. Mr. Quinter actively works with his clients in the areas of business planning, contract negotiation and project consulting, risk management and dispute resolution, and litigation. His client service and professionalism have earned him the distinction of being named a Pennsylvania Super Lawyer, a Lawyer on the Fast Track, and a Rising Star.
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