[vc_row][vc_column][vc_column_text css=”.vc_custom_1643232128675{margin-bottom: 0px !important;}”]It seems like Covid-19 is an “act of God,” a “superior force,” an extraordinary event that is beyond your control, so it has to be a force majeure event – – doesn’t it?
Since the outbreak of COVID-19 in the Seattle area and across the State of Washington, Carney Badley Spellman has – understandably – received an increasing number of inquiries from construction industry clients regarding the legal ramifications of what is now a growing pandemic. The most common question is whether COVID-19 is a force majeure or “act of God” that excuses contractual performance or otherwise protects against liability for construction delays and costs caused by COVID-19. The short answer is, of course, the one you would expect from a lawyer… “it depends,” but it depends isn’t very helpful. So instead, this article provides an overview of the applicable law, standard contractual terms, and other legal and practical considerations that construction industry companies, whether owners, contractors, suppliers, or architects, should consider in evaluating their risk and course of action in light of COVID-19. And, is hopefully helpful to you in assessing your situation.
At this juncture, construction companies doing business in the State of Washington will inevitably suffer delays and impacts due to COVID-19, whether due to labor shortages, supply chain difficulties, or governmental action that restricts construction activities. While the term force majeure frequently has been used when discussing the impacts of COVID-19, one should first be aware that in the context of construction contracts, what constitutes a “force majeure” is typically delineated and agreed to by the parties through the express terms of their agreement. Consequently, the question of whether delays and costs associated with COVID-19 may be excused or allocated depends primarily on the terms of the contract at issue.
A. Washington Rules of Contract Interpretation Applied to Force Majeure Provisions
Washington follows the objective manifestation theory of contracts, meaning courts “impute an intention corresponding to the reasonable meaning of the words used[,]” and “give words in a contract their ordinary, usual and popular meaning unless the entirety of the agreement demonstrates a contrary intent.” Hearst Communications, Inc. v. Seattle Times Co., 154 Wn.2d 493, 503-04, 115 P.3d 262 (2005). Thus, courts “do not interpret what was intended to be written but what was written.” Id. at 504. Consequently, if contracting parties agree that contractual performance, delays, or increased costs will be excused if they are caused by certain events (whether defined as a force majeure or otherwise), those agreements will be enforced as written. Washington courts will generally not infer or impute additional terms or meaning to the parties’ agreement.
In Hearst, the Washington Supreme Court was tasked with interpreting a force majeure clause between the Seattle Post-Intelligencer and the Seattle Times, which provided as follows:
Neither party shall be liable to the other for any failure or delay in performance under this Agreement, occasioned by war, riot, government action, an act of God or public enemy, damage to or destruction of facilities, strike, labor dispute, failure of supplier or workers, inability to obtain adequate newsprint or supplies, or any other cause substantially beyond the control of the party required to perform.
Id. at 507 (emphasis added). Applying Washington’s rules of contract interpretation, the Court noted that the “force majeure clause provides a complete defense to liability if one party is unable to perform its obligations under the contract because of circumstances outside its control, such as a labor strike.” Id. Thus, the Court held that the clause “provides a defense to liability when a party is required to perform, fails to do so, and that failure is caused by a strike or other event within its scope.” Id. (emphasis added). While Hearst did not involve a health pandemic nor a construction contract, the decision shows that Washington Courts will first look to the parties’ written agreement to determine who bears the risk of delays and liability caused by unforeseen conditions such as COVID-19. Therefore, the first question that must be answered for assessing COVID-19 risks is what does the contract say with respect to the occurrence of a force majeure or unforeseen condition?
For example, the 2017 AIA A201 form contract provides, in pertinent part:
- 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by . . . (4) by industry-wide labor disputes, fire, unusual delay in deliveries, governmental delays (including permit delays not caused by the Owner), unavoidable casualties, or other causes beyond the Contractor’s control; . . . then the Contractor shall reasonably attempt to mitigate the delay, and the Contract Time shall be extended by Change Order for such reasonable time, limited to the actual change in the critical path and Project duration caused thereby, as the Architect and the Owner may determine consistent with the provisions of the Contract Documents.
Here, COVID-19 is undoubtedly “a cause beyond the Contractor’s control” and entitles the Contractor to an extension of time for critical path delays caused by COVID-19. Notably, the term “force majeure” does not appear anywhere in the A201 form contract. Yet, the A201 expressly contemplates that delays caused by typical force majeure events, along with any other cause beyond the contractor’s control, will be excused.
Conversely, the contract may expressly limit the categories of events that provide for an excusable delay through such language as “if Contractor is delayed in the performance of the work by reason of, and only by reason of . . . .” In this scenario, if events such as pandemics, disease, or public health emergencies are not enumerated, then the contractor (or party responsible for timely performance) bears the risk of delays caused by COVID-19.
Last, the contract may delineate a number of excusable delay events without the type of catchall provision seen in the A201 form contract (e.g. “causes beyond contractor’s control”), and without the limiting language used in the example above (e.g. “by reason of, and only by reason of”).[1] In this scenario, Washington Courts will apply the maxim of ejusdem generis, which provides that “a general term used in conjunction with specific terms will be deemed to include only those things that are in the same class or nature as the specific ones.” Viking Bank v. Firgrove Commons 3, LLC, 183 Wn. App. 706, 716, 334 P.3d 116 (2014). This leads to a much more difficult issue of interpretation if the force majeure provision, or similar clause, enumerates certain categories of events that are not the same class or nature as COVID-19. While COVID-19 is of a similar class and nature as “pandemic,” or “disease,” and (arguably) “acts of God,” it is unlikely that a Court will find that COVID-19 is of the same class and nature as “labor strikes,” “war” or “terrorism.” Further, force majeure provisions rarely specify “disease” or “pandemic,” which means there is much more uncertainty under Washington law for force majeure provisions that do not contain a catchall provision or limiting language. Under this scenario, whether a party is excused from liability or performance must be determined on a case-by-case basis.
B. Contracts Without Force Majeure Provisions
As noted in the A201 example in Section A above, construction contracts do not always use the term “force majeure,” nor is this term required. However, it is also possible that a construction contract does not contain any provision or language that addresses the parties’ respective liability or relief for unforeseen circumstances that prevent contractual performance. Under such circumstances, the doctrine of impossibility may provide relief to the party who can no longer perform its contractual obligations due to COVID-19.
Washington, along with most jurisdictions, recognizes the doctrine of impossibility, which “discharges a party from contractual obligations when a basic assumption of the contract is destroyed, and such destruction makes performance impossible or impractical, provided the party seeking relief does not bear the risk of the unexpected occurrence.” Tacoma Northpark, LLC, 123 Wn. App. 73, 81 (2004). Therefore, if a contractor, subcontractor, or supplier agrees to furnish labor, materials, or equipment for the construction of a project, but is no longer able to do so due to COVID-19, they may rely on the doctrine of impossibility to avoid their contractual obligations and liability for non-performance.
However, as noted in Tacoma Northpark, the doctrine of impossibility is not available if the party seeking relief bears “the risk of the unexpected occurrence.” Id. Likewise, the doctrine of impossibility does not excuse performance “merely because it became more difficult or expensive than originally anticipated to keep contractual obligations.” Id. Consequently, if a contract contains a force majeure clause, or similar provision addressing delays caused by unforeseen conditions, it is highly unlikely that a contractor, subcontractor, or supplier can successfully rely on the impossibility to excuse its performance obligations. By agreeing to categories of events that will excuse a contractor’s performance through a force majeure clause, the contracting parties have made a clear and deliberate allocation of risk for unforeseen circumstances that may affect the contractor’s ability to perform. If COVID-19 is not captured within the force majeure clause (either expressly or via ejusdem generis), the contractor bears the risk of this unforeseen event.
Thus, the doctrine of impossibility will only relieve the contractor from its contractual obligations and liability for non-performance if the contract fails to address delays caused by unforeseen circumstances.
C. Practical Considerations: Government Regulations, Safety, and Good Faith
Even if the respective contractual obligations and remedies with respect to COVID-19 are clear, there is still the question of when the parties’ are entitled to relief from performance.
Both the doctrine of impossibility and force majeure provisions discussed above require that performance delays are caused by the unforeseen condition, i.e., COVID-19. This poses a dilemma for owners and contractors alike. If a contractor seeks to proactively cease construction activities prior to actual labor or material shortages attributable to COVID-19, there is a risk that the resulting delays, or a portion thereof, will be considered voluntary and not legally caused by COVID-19. Likewise, if a project owner insists that a contractor continue construction activities, the owner runs the risk of incurring liability for any subsequent COVID-19 incidents relating to the project. Any direction to continue work or refusal to grant a work stoppage by the owner could be considered an act of negligence or a breach of the implied duty of good faith and fair dealing, particularly as the spread of COVID-19 becomes more pervasive and the health risks become better known.
Given the recent orders of Governor Inslee, and action by other federal, local, and state officials and agencies, all construction industry companies should anticipate that future governmental orders will require them to cease all, or substantially all, construction activities. Under Washington law, a party to a contract generally cannot require the other party to perform its contractual obligations where such performance would violate the law. See, e.g., Sienkiewicz v. Smith, 97 Wn. 2d 711, 716, 649 P.2d 112 (1982). Likewise, most construction contracts contain provisions, which require the contractor (and its subcontractors) to comply with all applicable governmental laws, rules, and orders and maintain a safe workplace. See e.g. 2017 AIA A207, §§ 5.3.4, 10.2.2, 10.4. Thus, it is highly likely, if not inevitable, that both project owners and contractors will be required to cease construction activities by both applicable governmental action and by the terms of their contracts.
For project owners, it is critical to cooperate and accommodate contractors affected by COVID-19 to prevent potential violations of governmental orders (and applicable penalties) and foreclose any argument that their acts or omissions were a violation of the implied duty of good faith and fair dealing or negligent. However, owners should ensure that they expressly reserve their rights (in writing) to seek damages, or other available relief, from contractors in the event of any mutually agreed upon shut-down or suspension of work.
Similarly, contractors must be cognizant of their legal and contractual obligations with respect to their employees’ health and safety and the health and safety of their subcontractors, suppliers, and any other third parties on the project site. Additionally, contractors must ensure that they follow all contractual written notice requirements with respect to delays and impacts caused by COVID-19. As most construction industry professionals are aware, Washington law requires strict compliance with contractual notice provisions, with very limited exceptions. See Mike M. Johnson, Inc. v. Cnty of Spokane, 150 Wn. 2d 375, 386, 78 P.3d 161 (2003). Therefore, contractors of any tier should provide written notice in the time and manner required by their contracts to preserve any rights they may have connected with COVID-19 delays and impacts.
[1] As noted by the Ninth Circuit Court of Appeals, “[t]he maxim of ejusdem generis, however, is inapplicable where the contract language is unambiguous,” F.T.C. v. EDebitPay, LLC, 695 F.3d 938, 944 (9th Cir. 2012). Thus, Courts will not apply this principle if the excusable delay events are expressly limited to the enumerated categories.
[2] Under Washington law, “there is in every contract an implied duty of good faith and fair dealing that obligates the parties to cooperate so that each may obtain the full benefit of performance.” Rekhter v. State, Dep’t of Soc. & Health Servs., 180 Wn. 2d 102, 112, 323 P.3d 1036 (2014).
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