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Contracts in the Age of COVID-19: Some Suggestions to Protect Your Business
LEGAL MATTERS
Jeffrey W. King, Legal Counsel for the WFCA
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COVID-19 has caused flooring retailers and contractors to face delays due to government-imposed stay-at-home orders, supply chain disruptions, cost increases, and the lack of installers. With the anticipated surge in COVID-19 cases over the next several months, flooring retailers and contractors may again face delays and costs like those experienced last spring. Accordingly, retailers and contractors should consider taking some precautions to deal with these issues.
Contract Review
The first step is to review your contracts. It is important to understand your contractual rights and make appropriate modifications to minimize potential problems and costs. Whether a retailer or contractor can avoid liability for delays and increased costs from the COVID-19 pandemic will depend on the language in the relevant contracts. While each situation is different, some of the key construction contract clauses to consider are discussed below.
1. Force Majeure and Delay Clauses
Force majeure is an unforeseeable circumstance that prevents someone from fulfilling a contractual obligation. A force majeure clause can excuse a delay and may allow the retailer or contractor to terminate the agreement as a result of an unforeseen event specified in the force majeure clause. The right to terminate could allow them leverage to renegotiate the agreement to cover increased costs.
Most contracts include a force majeure or a delay clause, but the language of what is covered can vary. The issue of whether the COVID-19 pandemic is covered is likely to depend on whether the clause covers “epidemics,” “government action,” or “acts of God.” In the commercial market, for example, one of the most commonly used series of construction contracts is the AIA 2017 “A Series” Owner/Contractor agreements. The AIA contract does not include a force majeure clause but does address “Delays and Extension of Time.” (AIA Contract at § 8.3.1). The AIA contract provides for an extension of the contract time for excusable delay as a result of “labor disputes, fire, unusual delay in deliveries, … adverse weather conditions,” etc. The AIA contract, however, does not include epidemics, government action, or acts of God as justifying any delay. On the other hand, the ConsensusDocs, and EJCDC forms, also commonly used in the commercial market, include force majeure concepts in the
delay clause that expressly mention “epidemics” as an example of delay outside the control of the contractor. For federal government contracts, the Federal Acquisition Regulations also cover pandemics.
In addition, the retailer or contractor must show that the COVID-19 pandemic was not foreseeable at the time of contracting. Accordingly, the force majeure or delay clause may provide protection for delays on contracts entered into before the COVID-19 pandemic. For contracts entered into after March or April 2020, however, a COVID-19-related force majeure claim is unlikely to satisfy the standard of unforeseeability because the parties were aware of the COVID-19 pandemic when they signed the contracts.
Accordingly, it is recommended that every retailer and contractor review its contract’s force majeure clause to ensure it covers epidemics, government action, and acts of God. In addition, it is recommended that new contracts include a separate provision that specifies:
The parties recognize the potential for delays as a result of the COVID19 pandemic and that the retailer/contractor is not liable for any delay, including any direct or consequential damages, as a result of COVID-19, including but not limited to government actions, delay in supplies, or the unavailability of installers, including any consequential liability.
The force majeure provision will help protect the retailer and contractor in the event of new unforeseen events. The COVID-19 provision will help protect them from delays and liability in the event of a COVID-19 resurgence.
2. Doctrine of Commercial Impracticability
If a contract does not contain an express force majeure clause or other similar language, there is still hope. The common law doctrine of commercial impracticability may apply to excuse a delay because of COVID-19. While not all states accept impracticability as a defense, it is generally recognized and could be applied to COVID-19 delays. The retailer or contractor must show that COVID-19 made it impractical to complete the contract on time and that the pandemic was not foreseeable. While this may provide some protection, the better practice is to include both a force majeure clause and a clause specifically covering delay and liability as a result of COVID-19 in any new contracts, as explained above. Most contracts include a force majeure or a delay clause, but the language of what is covered can vary. The issue of whether the COVID-19 pandemic is covered is likely to depend on whether the clause covers “epidemics,” “government action,” or “acts of God.”
3. Increased Costs
The potential delays and disruption of supply chains can lead to increased costs. Some contracts may include an escalation clause, which allows a contractor to increase its contract price if the costs go up under circumstances described in the clause. Most common is a clause that allows the retailer or contractor to pass on any increase in the goods sold.
Many, if not most, contracts set a fixed price and do not contemplate passing through cost increases. For these contracts, the retailer and contractor need to consider whether there is a basis to pass on the increase in costs. The first step is to review the contract to see if it allows any pass-through of cost increases. Second, consider whether the delay was at the customer’s request, such as delaying installation over-concern with COVID-19. In that case, a retailer or contractor may be able to argue that the customer caused the increased cost. Third, discuss the issue with the customer to see if the cost increase could be shared.
To address the issue, it is recommended that any new contract include a provision that specifies:
The price quoted is based on the current prices of the flooring ordered. If there is a delay in performing the contract that is caused by events specified in the force majeure or by the customer, the retailer/contractor can pass on any increase in the price of the flooring ordered.
If the customer is concerned or objects to an open-ended price, the retailer and contractor may want to limit the right to pass on costs increases that are a result of delays or supply interruptions caused by the COVID-19 pandemic.
4. Emergency and Safety Clauses
Many form contracts, like ConsensusDocs, authorize the contractor to act in an emergency affecting the safety of persons or property and to obtain compensation for the costs incurred, such as buying personal protection equipment (“PPE”), disinfectants, and similar items. As suggested above, whether or not the contract contains an emergency and safety clause, the retailer or contractor should give the customer prompt notice of the additional costs and try to work out sharing these unanticipated increases.
5. Suspension and Termination Provisions Some contracts allow the owner or contractor the right to suspend the work without liability. If the contract allows suspension, it is important to determine who has that right, when and the reasons that allow suspension, and whether notice of suspension is required. Such a provision allows delays without liability even without a force majeure clause.
Some contracts also provide that the retailer or contractor can terminate a contract if the work is stopped for a period of consecutive days through no act or fault of the retailer or contractor. The AIA contract, for example, allows termination if the work is stopped for 30 consecutive days, including as a result of an “act of government, such as a declaration of national emergency that requires all work to be stopped.”
The right to suspend or terminate may provide an opportunity to negotiate new terms to cover increased costs and other issues. It is important that the retailer or contractor know these rights to protect itself..
6. “Pay-if-Paid” or “Pay-When-Paid” Provisions
A retailer or contractor may not have been paid because the general contractor has not yet been paid. It is key to check whether a contract has a “pay-when-paid “or a “pay-if-paid” clause. The courts in most states consider a “pay-when-paid” clause as simply a timing mechanism and generally will require the prime contractor pay the subcontractor whether or not the owner paid the prime contractor. In contrast, courts generally have found that a “pay-if-paid” means exactly what it says: the prime contractor has no obligation to pay subcontractors unless the owner first pays the prime contractor. In some states, payif-paid provisions are not even enforceable. If you find you are not being paid under a subcontract, check to see if the general contractor can hold pay until and unless it is paid by the owner. For more information on paywhen-paid verses, pay-if-paid clauses, see What’s in a
Word? “Pay-if-Paid” or “Pay-When-Paid” Provisions—
There May be a Big Difference, in WFCA’s Premier Flooring Retailer (2nd Quarter 2018).
Insurance Coverage Business interruption insurance is typically purchased as part of a company’s commercial property insurance policy but can be a stand-alone policy. In many commercial property insurance policies, business interruption coverage is triggered when the policyholder sustains “direct physical loss of or damage to” insured property. In the event of a claim for Coronavirus-related business interruption, the issue is whether this “physical loss” requirement has been met. Arguably the Coronavirus, which causes the disease COVID-19, creates a physical loss.
Courts across the country have not settled upon a uniform rule for when insured property has suffered a “physical loss.” To date, the courts have split on whether COVID-19 causes physical loss that is covered by the business interruption insurance policy. Some policies specifically exclude business losses caused by bacterial or viral infections. Claims under policies with these exclusions have not generally fared as well in the courts.
In addition, many commercial property insurance policies provide coverage for business income losses sustained when a “civil authority” prohibits or impairs access to the policyholder’s premises. Accordingly, in the event that a federal, state, or local governmental authority issues orders limiting or prohibiting access to a store or facility, there may be coverage under a business interruption policy.
The bottom line is coverage will depend on the language in the policy and how each state court interprets that language. Lawsuits, including class actions, have already been filed over whether business interruption insurance covers losses from the Coronavirus. The results of these cases will impact whether a flooring retailer or contractor has coverage, but they need to have filed a claim. A flooring retailer or contractor may be told by its insurer or broker that the policy does not cover loss of business due to COVID-19. They should not just accept such a denial of coverage. Rather, file a claim. Many policies have time limits on when a claim must be filed, and a business does not want to miss the deadline. If the next wave of COVID-19 infections result in shelter-in-place orders or cause losses, retailers and contractors should file new claims. There may or may not be coverage, but there certainly is no coverage without filing a claim.
Finally, Congress is considering the Pandemic Risk Reinsurance Program, which would provide federal funding for business interruption insurance for pandemics, including COVID-19. To have access to the funding, the insurer must voluntarily elect to join the program, and it would cover only losses incurred after January 1, 2021.
Operating Safely
The Center for Disease Control (“CDC”) and the Occupational Safety and Health Administration (“OSHA”) have issued guidance on preparing workplaces to guard against COVID-19. In addition, some states have issued standards, and some have mandated that these standards be applied. Insurers and other groups have also issued suggested precautions employers and retailers should take. Whether mandated or just considered suggestions, these guidelines should be applied to minimize risks to employees and customers and the possible liability if a customer or employee becomes ill with the Coronavirus. These federal and state guides can be reviewed at WFCA.org under its Coronavirus section (https://wfca.org/page/ resources-and-useful-links).
Floor covering retailers and contractors should also consider having customers sign liability waivers to limit claims for damages if a customer contracts the Coronavirus. It is important to understand that some states view liability waivers more favorably than others, and some states (Connecticut, Montana, and Virginia) will not enforce liability waivers. Moreover, it is unclear whether a Covid-19 waiver would be enforceable. The courts have simply not ruled on waivers under the unprecedented circumstances presented by the pandemic. It is possible that COVID-19 waivers in some jurisdictions will be held to be against public policy. Nonetheless, waivers are recommended because they are easy to employ and, if drafted properly, may well be enforced and avoid liability. A sample form for Residential Customers can be assessed on WFCA.org at https://wfca.org/sites/default/files/document/LiabilityReleaseForm_Residential_0.pdf, and a form for Commercial Projects can be assessed at https://wfca.
org/sites/default/files/document/LiabilityReleaseForm_Resi-
dential_0.pdf.
Protect and Notice Claim COVID-19 shutdowns, stay-at-home orders, slowdowns in the supply chain, or lack of labor does not mean that the deadlines applicable to certain aspects of the project have stopped running. Deadlines and other time periods will continue to run on mechanic’s lien and bond
claims. Accordingly, it is critical to determine and preserve applicable deadlines for notices of claims, lien rights. For more information on mechanic liens, see Mechanic’s Liens—Little Mistakes, Big Problems, in WFCA’s Premier Flooring Retailer (2nd Quarter 2020).
Conclusion With the likely resurgence of COVID-19, retailers and contractors need to be prepared for new restrictions, supply and labor interruptions, delays, and added costs. It is recommended that each retailer and contractor take the following actions:
● Review and Revise Your Contracts: Retailers and contractors should include new language in their construction contracts, specifically addressing their rights and responsibilities concerning
COVID-19. Specific language is a better option than wondering how standard clauses might apply to the pandemic.
● Check with Legal Counsel: Retailers and contractors should have legal counsel review and advise on all contracts, any new provisions, and other legal rights that may provide relief from
COVID-19 losses.
● Communicate with Customers: Maintain communication with clients, contractors, and keep them informed of any issues. It is important to work with your customers, contractors, and suppliers to resolve delays and cost issues that result from the COVID-pandemic. Pre-planning will avoid many issues. ❚
Notice: The information contained in this article is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
There already have been lawsuits, including class actions, over whether business interruption insurance covers losses from Coronavirus.
Jeffrey King has more than 35 years’ experience in complex litigation with a focus on contracts, employment, construction, antitrust, intellectual property and health care. He serves as legal counsel for WFCA and other trade associations, and is a LEED Accredited Professional. For more information, contact him at (561) 278-0035 or jeffw@jkingesq.com.
