Pandemic Creates Cause to Rethink Overlooked Contract Provisions

Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on April 15, 2021.

The last time my byline appeared in this column, we were just a few weeks into the government-ordered lockdown, and I pondered whether construction projects could — or should — continue. In the year since, the construction industry proved adaptable as owners and general and trade contractors worked closely to ensure that work continued while keeping workers safe and complying with the various government-ordered and -recommended practices intended to slow the spread of COVID-19.

While we are still many months from being past the pandemic, we have at least neared the light at the end of the tunnel. Most adults in Oregon are now or will soon be eligible for vaccination, and there are signs of normalcy as kids return to school and the various pandemic-related restrictions that had become the new normal are slowly lifted. As our industry and communities enter this new stage of what is hopefully recovery and resurrection from the pandemic, the time is right to look back at lessons learned over the past 12 months.

Contracting Considerations

Prior to March 2020, I cannot remember spending more than five minutes negotiating force majeure language in a construction or design contract. When advising owners, I often recommended a handful of modifications to the force majeure provisions of the various industry standard forms, which were typically accepted without comment or revision by the other party.

Post-March 2020, the force majeure provision is easily the one that is most closely scrutinized — at least in terms of time and red ink. And for parties negotiating new agreements, the range of solutions has run a broad spectrum as contracting parties have looked for fair — and sometimes creative — ways to allocate the numerous risks that the ever-changing pandemic presented (and still presents).

Of course, for contracts negotiated over the past year, the parties have been in the unique position of negotiating during an ongoing force majeure event — or at least force majeure-like circumstances. Because the pandemic is ongoing, contracting parties should — at least to some degree — be able to account in both price and schedule for the known impacts of the pandemic as of the date of contracting. Thus, the challenge is drafting a provision in the midst of a pandemic that is flexible enough to differentiate between those known risks — e.g., the impacts of existing government orders and restrictions — and the unknown risks — e.g., future government orders strengthening restrictions or imposing new lockdowns due to a surge. While the rule traditionally followed in construction contracting is that the occurrence of a force majeure event gives the contractor the right to additional time — but not necessarily money, many owners have agreed to include a remedy for additional costs as part of pandemic-specific force majeure provisions. On the flip side, many such owners also want the opportunity to share in any savings in the event the work gets less expensive due to, for example, a loosening of government restrictions that comes earlier than anticipated.

But while force majeure has claimed the spotlight, there are other contract clauses that were similarly overlooked pre-pandemic that are proving equally worthy of scrutiny. One such example is the “change in law” provision. Executive orders and agency-level directives may or may not qualify as a “change in law” depending on, among other things, (a) how “law” is defined by the contract (if at all), and (b) whether the contract permits a remedy for all such changes in the law or for just a certain class of changes.

The other challenge is determining how these provisions and remedies interact within the broader context of the contract. For instance, if a new government order that imposes additional social distancing requirements does not meet the contractual definition of a “change in law,” that may not necessarily mean that the impacted party is without a remedy under another provision. Thus, contracting parties may want to include language that, for example, clarifies whether they intend that the “change in law” provision is the exclusive remedy for impacts involving government orders. While that conclusion might be inferable from a holistic reading of the contract, including express language ensures that the parties’ intent is honored.

Managing Impacts and Claims During a Pandemic

The flip side of drafting a contract that allocates risk for unexpected events such as a pandemic is how the parties implement that agreement when those risks arise during performance. For instance, most contracts require an impacted party to provide timely notice to the other party of an event or circumstance that triggers a contractual remedy. While a force majeure provision may excuse performance of certain contract obligations, it is unlikely to excuse notice requirements — even in the event of a global pandemic.

And, of course, the occurrence of a force majeure event is not a blank check for the impacted party and does not provide a remedy or excuse performance for obligations not causally impacted by the event. For instance, a contractor submitting a request for an extension of time due to a force majeure event should expect that the owner will want a critical path analysis showing that the claimed event actually caused a delay and that the delayed activity was in fact on the project’s critical path. In my experience, owners who were initially sympathetic to their contractors at the outset of the pandemic — and thus less inclined to strictly enforce their contracts — are far less willing to overlook shortcomings now that both sides have lived through pandemic conditions for more than a year.

As we emerge from a year of lockdown and conducting business in unprecedented conditions, the events of the past year will leave their mark for generations. The construction industry — like society at large — has learned important lessons that will make it better prepared to face future challenges.