Tips for Owners and Contractors with Projects in the “Grey Area” of California’s COVID-19 Orders

In response to COVID-19, construction projects in California are currently subject to a statewide Executive Order and potentially other similar (or dissimilar) “stay home” or “shelter in place” orders or directives issued by counties and cities. Under the California statewide order, only businesses needed to maintain continuity of operations of identified federal critical infrastructure sectors may continue to operate. Construction is not identified as a separate “critical infrastructure sector,” but many construction projects fall under the umbrellas of other sectors, such as “critical manufacturing,” “energy,” “healthcare,” and “commercial facilities.” The California State Public Health Officer also designated the following “essential workforce” members of relevance to the construction industry (this is not an exhaustive list):

• “Construction Workers who support the construction, operation, inspection, and maintenance of construction sites and construction projects (including housing construction)”
• “Workers such as plumbers, electricians, exterminators, and other service providers who provide services that are necessary to maintaining the safety, sanitation, construction material sources, and essential operation of construction sites and construction projects (including those that support such projects to ensure the availability of needed facilities, transportation, energy and communications; and support to ensure the effective removal, storage, and disposal of solid waste and hazardous waste)”

One challenge somewhat unique to owners and contractors is that the applicable orders are generally directed at identifying “essential businesses” or “critical businesses,” while owners and contractors may have a mix of projects—with some likely essential (such as construction of a hospital), others likely not (such as construction of a nightclub), and many falling in a grey area in between. When analyzing “grey area” projects it is recommended to focus on the traits of the particular project rather than attempt to understand whether your business—which may include a range of projects—can generally continue to operate.

For example, some orders exempt “housing construction” or “construction of housing.” But that does not necessarily mean that your luxury housing or high-end home/condominium project will be deemed “essential” or  “critical.” Even market rate housing projects may not all fall within the bounds of the orders as some orders appear directed at affordable housing, housing for individuals experiencing homelessness, or starter single-family homes. Further questions arise if, by way of example, your mixed-use apartment project includes a grocery store on the ground floor. (Or what if it includes the potential for a grocery store but there is no committed tenant?)

These are uncharted waters and where there is no clearly “correct” answer, owners and contractors are advised to apply a restrictive reading of the applicable order(s). While the determinations are not always clear, courts are apt to err on the side of the balancing of the health and safety of the public and workers, versus the economic benefit for those nonessential activities, given the unique circumstances the public is facing. These circumstances may also change hourly or daily so owners and contractors should be vigilant in checking for updates.

While you may not receive a clear answer on whether your project can proceed, the following are some additional steps owners and contractors should consider when faced with projects in the grey area of the orders:

• Contact the Applicable Governing Body: Communication with the issuing governing body is strongly recommended in light of the ever-changing responses to the pandemic. Local governmental bodies will likely be more responsive to inquiries, while the state may direct you to its “frequently asked questions” website for guidance (click here for the FAQ page). While there is no guarantee you will receive a prompt response, any guidance you can receive will be beneficial if you are faced with justifying your actions after-the-fact with the benefit of hindsight.
• Ask the Owner/Contractor for Guidance: One option to potentially minimize the risk of moving forward on a “grey area” project is to seek the input of the other party at the table. While public owners may be able to provide more definitive guidance, private owners may also have insight into whether their project should be regarded as “essential” or “critical.” Contractors unsure of whether their project can continue should ask the owner for input and consider requesting that the owner direct the contractor to continue construction. Owners should consider the opposite approach and pose the same question to the contractor—who may be receiving guidance from multiple owners and/or governing bodies on similar projects that could inform the decision on your project.
• Seek Legal Guidance on Contractual Rights and Insurance: The terms of your construction contract and available insurance coverage should impact your decision on any given project—especially if you are balancing your risk among multiple “grey area” projects. Click here for more information on force majeure Even if your contract does not include a helpful force majeure provision, in California, as in some other states, there may be additional legal grounds to evaluate (e.g., the equitable doctrines of “frustration of purpose,” “commercial impossibility,” or “commercial impracticability,” and applicable statutes, such as Civil Code § 1511(2), which provides potential bases for excusing performance). Your insurance policy(ies) may also contain business interruption or other applicable coverage. Additional insight regarding business interruption insurance is available here.
• Consider (and Reconsider) the Risks: The last thing any owner or contractor should do is make a bullish decision to proceed with construction on a project that risks shutdown for exceeding the bounds of an applicable order. While the penalties for failure to comply with the orders are also a moving target, violation may come with fines or OSHA penalties or be a misdemeanor, and may also subject the owner and/or contractor to administrative fines and penalties, as well as potential civil liability in tort lawsuits. But there is also the risk that someone may contract COVID-19 and get ill or worse as a result of working on your “nonessential” project. Although tracing the source of any given infection will be challenging (if not impossible), the orders are in place to prevent the further spread of the virus on nonessential projects, and owners and contractors should be mindful not to interpret these orders too liberally.