COVID-19 Causes Breaches to Construction Contracts: Which Party Bears the Risk?

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By TYLER SCHAEFFER

Tyler Schaeffer

The COVID-19 pandemic has been extremely unpredictable in its effects on businesses. On March 16, 2020, at the very beginning of the pandemic, the Dow Jones Industrial Average plunged 2,997 points – the largest single-day point drop in history. By the end of 2021, however, the stock market had fully recovered and reached new record highs. At the beginning of the pandemic, the concern focused heavily on rampant unemployment and need for increased government benefits. More recently, the job market has been measured by the number of available jobs that remain unfilled. 

One of the most noteworthy – and perhaps not immediately predictable – consequences of the COVID-19 pandemic was its exposure of the fragility of our global supply chains; many businesses and industries experienced unprecedented delays in obtaining needed products and supplies. The breakdown in the supply chain coupled with drastic changes in consumer demand caused wild inflationary swings in the pricing of certain products and commodities. These swings in the availability and affordability of certain goods and services caused many businesses finding themselves unable to fulfill contractual obligations made before the beginning of COVID-19. 

 Which party bears the risk of pandemic-caused inability to fulfill the terms of a contract? Parties may allocate the risk of unforeseen circumstances in what is known as a “force majeure,” or escape clause, in the contract. “Force majeure” is a French term that means “greater force.” A force majeure clause allocates the risk if performance becomes impossible or impracticable especially because of an event or effect the parties could not have anticipated or controlled at the time of contracting. 

If the contract does not allocate risk through a force majeure clause, the common law provides several related defenses that may excuse performance due to unexpected causes: impossibility, commercial impracticality and commercial frustration.

  • Impossibility is the most stringent standard and excuses a party’s performance only when its performance is rendered impossible by an act of God, the law or the other party. Unforeseen difficulties, however great, will not excuse performance.
  • Commercial impracticality will excuse a party when an occurrence of a superseding, unforeseen event prevents performance, not within the reasonable contemplation of the parties at the time the contract was made and that goes to the heart of the contract.
  • Lastly, commercial frustration may excuse performance when the contract’s principal purpose is frustrated without fault by the happening of some event, the nonoccurrence of which was a basic assumption on which the contract was made.

Should a company find itself unable to fulfill its obligations under a contract due to COVID-19, looking to a force majeure clause as well as the defenses listed above provide potential avenues to escape liability for the COVID-caused breach of contract. Although COVID-19 has been with us for two years, the caselaw providing guidance on the applicability on typical force majeure clauses and these defenses is not fully developed and often has limited applicability to the specific facts in such cases. As such, none of the options above provide a sure-fire solution to an otherwise innocent party unable to meet its contractual obligations due to COVID-19.

The complications caused by COVID-19 have also inspired many companies to revisit and rethink the negotiation of their contracts to include greater protections for the risks of pandemics and their collateral consequences. Concepts such as pandemics and government shutdowns will surely be expressly appearing in future contract escape clauses. Additional rights for cancellation and for delay based on such events will also be appearing in such contracts. On the other hand, parties to contracts concerned about the other side’s potential delay or inability to perform due to unknown consequences of a pandemic will also wish to obtain protections in their contracts. There are many new and creative contract options for both sides to consider in a post-COVID-19 world.

Hopefully COVID-19’s effects on businesses will soon be a thing of the past. But, before memories of this time fade, businesses would be wise to ensure they protect themselves contractually from the risks of a severely disruptive pandemic or similar event in the future. Any contracting parties unable to fulfill their contractual responsibilities due to COVID-19 or wishing to negotiate a new contract with an escape for unforeseen circumstances caused by the pandemic should contact their attorney to explore available options.

Tyler C. Schaeffer is an attorney with Carmody MacDonald and concentrates his practice in business litigation. He works closely with businesses including construction companies in disputes, including contracts, business tort, financial restructuring and bankruptcy, and consumer protection. Contact Tyler at tcs@carmodymacdonald.com or (314) 854-8645.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.  

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