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Contractors and Sureties Beware – New Force Majeure Clauses in Public Works Contracting are Here

By May 20, 2020May 10th, 2024One Comment

With the progression of COVID-19, public works contractors and their sureties have been focusing on the impacts of the Pandemic, with particular attention to Force Majeure issues.  Essentially, the analysis has been tailored to whether the Pandemic would be grounds for a contractor to claim Force Majeure, and thus be entitled to additional time to complete their project without penalty.

Often missed within this discussion is what happens with the contractor’s affirmative cost claims.  While Force Majeure may lead to a public works contractor receiving more time to complete a project due to COVID-19, what about additional costs associated with the Pandemic?  The successful Force Majeure contractor may find themselves avoiding liquidated damages on a project, but significantly over budget due to the Pandemic.  This has significant repercussions for both the contractor, and any downstream subcontractors, vendors and material suppliers.

Is the Public Works Contractor Entitled to Additional Costs due to COVID-19?

Whether a public works general contractor is entitled to additional costs due to impacts associated with COVID-19 will depend largely on the specific terms of the underlying prime contract.  How does the prime contract treat additional costs due to unforeseen events?  Equally as important, does the prime contract contain strict notice requirements obligating the contractor to timely place the public works owner on specific notice of impacts.  No notice, no claim.

Likewise, most public works prime contracts contain specific provisions about the form of notice and submission of claims for extra costs.  For example, most prime contracts obligate the contractor to also submit documentation supporting the additional costs (labor rate increases, material price increases, etc.)  Additionally, some public works prime contracts further obligate the contractor to provide a Time Impact Analysis (TIA) with detailed schedule fragnets to show how the unintended event (COVID-19) specifically impacts the project’s overall critical path schedule.  Compliance with requirements like this cannot be understated.

Contractor’s Should be Aware of New Contract Language Limiting your Right to Recover Costs Associated with COVID-19

Lately, we have seen an increase in the use of revised contract language from public works owners seeking to address the cost impacts associated with COVID-19.  This language is usually highly detrimental to the contractor and may be hidden within the bid specifications, or attached as an addendum.  An example of a new contract clause that owners are using through addendum:

This contract revision is damaging to the contractor because while it excuses the time impacts of performance for the contractor, it very clearly provides that the contractor will not be entitled to damages or additional payments for any of the impacts caused by the delay.  Put plainly, days, but no dollars!

Do Contract Clauses Which Preclude the Contractor from Recovering Costs Associated with COVID-19 Run Afoul of Public Contract Code Section 7102- “No Damages for Delay”?

With the inclusion of contract clauses limiting a contractor’s ability to recover damages associated with COVID-19, a further question becomes whether such a clause would violate Public Contract Code Section 7102.  Section 7102 is the “No Damages for Delay” statute which provides:

“Contract provisions in construction contracts of public agencies and subcontracts thereunder which limit the contractee’s liability to an extension of time for delay for which the contractee is responsible and which delay is unreasonable under the circumstances involved, and not within the contemplation of the parties, shall not be construed to preclude the recovery of damages by the contractor or subcontractor.”

“No public agency may require the waiver, alteration, or limitation of the applicability of this section. Any such waiver, alteration, or limitation is void. This section shall not be construed to void any provision in a construction contract which requires notice of delays, provides for arbitration or other procedure for settlement, or provides for liquidated damages.”

Generally speaking, Section 7102 was implemented to protect public owners from unilaterally shifting the costs of delays onto the contractor through the contract documents.  The question thus becomes whether Section 7102 can be used as a shield to protect the contractor from clauses seeking to unilaterally shift the costs of COVID-19 onto the contractor.

Unfortunately, the answer appears to be no.  While there is no legal authority interpreting Section 7102 in a Pandemic environment, Section 7102 was enacted to preclude the shifting of damages caused by the public owner.  Specifically, the beginning of Section 7102 provides:

“Contract provisions in construction contracts of public agencies and subcontracts thereunder which limit the contractee’s liability to an extension of time for delay for which the contractee is responsible….”

In enacting Section 7102 the Legislature intended this prohibition to apply only for damages directly or indirectly caused by the public owner.  Howard Contracting, Inc. v. G.A. MacDonald Construction (1998) 71 Cal.App.4th 38.  COVID-19 is a Force Majeure event, caused neither by the contractor, nor the public owner.  Therefore, this protection likely would not apply at all in a Force Majeure setting.

What Should a Bidding Contractor do to Improve it Chances of Recovering Damages Associated with COVID-19?

We are strongly recommending that contractors provide timely notice to owners if they anticipate additional costs associated with the COVID-19 Pandemic, regardless of whether the prime contract contains specific language allowing so.  Failure to provide notice may function as a waiver of your rights to seek additional compensation at the end of the job.

Likewise, it is critically important for the contractor to track and submit all costs associated with the impacts of COVID-19 and provide accurate time impact analysis to the owner as part of the claim submission.  Again, preserving your rights to pursue those additional costs at the end of the project through a formal claim is paramount.

We are also recommending that, to the extent possible, contractor’s immediately strike COVID-19 compensation limitations.  Unfortunately, this language is often found within the bid solicitation itself, so the contractor bidding the project has already assumed this limitation by submitting a bid.

Contractors need to carefully review all of the contract documents contained within the bid solicitation prior to bidding and evaluate the documents with their surety and legal counsel.  Unfortunately, once clauses like this are agreed to in the signed contract, there is a likelihood that the contractor will be stuck with the limitation and their ability to recover COVID-19-related costs reduced.

For more information on contractor cost issues related to the COVID-19 Pandemic please contact Frank J. Lanak ([email protected]), or Colin K. McCarthy ([email protected]).

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