This article was originally published in the September 25, 2020 edition of the Daily Journal of Commerce Oregon.
My op-ed of May 22, 2020, entitled “Excusable Delays on Construction Projects Because of the Pandemic” discussed the potential assessment of liquidated damages if a construction project is delayed by issues related to the COVID-19 pandemic and potential avoidance of those damages through a contract’s force majeure provision. This article will discuss the question of whether such damages can be avoided if there is no force majeure provision.
In the absence of a force majeure provision, a contractor would have to rely on the defenses of impossibility, frustration of purpose, and impracticality. Under the defense of impossibility, a party may avoid contractual liability for, among other things, an “act of God,” which is an occurrence whose magnitude and destructiveness could not have been foreseen by the contracting parties.
The defense of frustration of purpose requires that a supervening event substantially frustrate the contractor’s principal purpose, the nonoccurrence of that event was a basic assumption of the contract, and the frustration was not the fault of the contractor.
Similarly, the defense of impracticality requires a supervening event that makes performance impracticable, a basic assumption of the contract was that the supervening event would not occur, the impracticability was not the contractor’s fault, and the contractor has not assumed a greater obligation than would be required by law.
The pandemic certainly seems to fit the definition of an act of God and a supervening event that frustrates or makes performance impractical. However, given the recent nature of the pandemic, there is no case law specially applying these defenses to COVID-19 pandemic-related delays. The cases that have applied the defenses to other sets of facts are careful to distinguish between supervening events that make performance impractical and instances of mere increase in cost of performance. That is, if the cost of performing the contract merely increased due to factors not specifically attributable to the pandemic, then a contractor would be unlikely to successfully avail itself of the defense.
For example, a contractor argued that its delayed performance was excusable because its key employees were incapacitated during a flu epidemic in New York. Asa L. Shipman’s Sons, Ltd., GPOBCA No. 06-95, 1995 WL 818784 (Aug. 29, 1995). The court rejected the contractor’s defense because, while the contractor had proven that there was a flu epidemic during the relevant time period, it had failed to prove how the flu caused the specific delay or what steps the contractor took to overcome the impact of the flu and continue performance. The court also determined the contractor failed to establish any other efforts it had made to overcome the illness of the alleged key employees.
In another case, the court similarly held that proof of an epidemic alone was not sufficient and that a contractor must show that it had exhausted all other alternatives and that its performance was commercially impractical. Jennie-O Foods, Inc. v. United States, 217 Ct. Cl. 314 (1978). These cases show that the occurrence of an epidemic by itself is not sufficient to constitute excusable delay and avoid liquidated damages. In addition to proving the epidemic occurred, the contractor must also show that epidemic was the direct cause of increased cost of performance and that the contractor attempted to mitigate its damages.
If the contractor successfully invokes these defenses, the remedy is typically excused from further performance. However, unless the pandemic has made it truly impossible to finish the project and the contractor just wants out, that remedy seems like overkill for most contractors. Most contractors simply need more contract time in order to complete the project due to delays and inefficiencies created by social distancing guidelines, supply chain interruptions, and other pandemic-related delays and impacts. The defense of impracticability does provide for another remedy in some circumstances—a temporary excuse of performance that would conceivably excuse performance during the pandemic.
As the months go on and owners attempt to assess liquidated damages on construction projects, these defenses will likely be litigated, thereby providing clarity on how courts respond to the defenses in the context of the COVID-19 pandemic. In the meantime, contractors should be careful to track their pandemic-related increased costs, document how the pandemic caused those cost increases, and show that they made reasonable efforts to mitigate the cost increases.
Brent Carpenter is a shareholder at Jordan Ramis PC and focuses his practice on construction law. Contact him at 503-598-7070 or brent.carpenter@jordanramis.com.
Tags: Construction, Construction and Development
