COVID-19 and the resulting Shelter-In-Place (“SIP”) Orders have wreaked havoc on the construction industry. The vast majority of projects have been shut down for several weeks. The shutdowns trigger a number of important contractual issues and actions that owners and contractors should consider. The specific contracts for each project should be reviewed to determine the best course of action, but this advisory identifies and summarizes several key issues for consideration. AIA form language is used for illustration and guidance.
The Shutdown Is An “Emergency.” In response to a project shutdown due to the SIP Orders, the typical construction contract will obligate the contractor to take action to protect persons and property, including the physical safety and security of the jobsite. The contractor’s duties include action to prevent threatened loss or damage in the event of an “Emergency,” which is plainly the case with the COVID-19 pandemic. The AIA contract authorizes emergency action at the discretion of the contractor, and authorizes the contractor to make a claim for additional time and compensation for the action taken. No advance notice is required under the AIA language, but it is recommended that the scope of the emergency action being taken should be documented promptly following the shutdown. See A-201, §10.4.
Cessation of The Work. The process for documentation pertaining to the physical shutdown and emergency action (including de-mobilization, jobsite security/safety, continuing responsibilities) should be implemented consistent with the contract documents. The owner should consider issuing a Construction Change Directive or a Change Order with instructions to the contractor to prepare and submit an Emergency Action and De-mobilization Plan. Similarly, the contractor should consider issuing a Request For Information, or a Change Order Request to the owner with a proposed Plan and request for instructions. The AIA Documents include several clauses that direct the issuance of such documents, and the process itself is usually familiar to all parties. The impacts, costs and time caused by a COVID-19 shutdown can be fully processed through the AIA model, following the parties’ project negotiations. See, e.g., A-201, §§2.1.2, 3.2.2, 7.2, 7.3.
Notice of Claim. Beyond the immediate requirements of the shutdown, current or possible future impacts on the cost and schedule (if not scope) are expected if and when the project resumes. Consequently, contractors should consider promptly issuing a Notice of Claim (see AIA A-201, §§8.3, 15.1, et seq.) to put the owner on notice of potential future claims for additional time and/or compensation once the project resumes. The claims process in construction agreements frequently imposes short time limits to submit claims following the triggering event, at the risk of waiving the claim entirely if not timely made. The effective date of the shutdown will trigger the time limit to submit a Notice of Claim, even if the specific amount/extended duration are not presently known or even foreseeable. Regardless, notices should be provided promptly, and contractors are advised to refer to their construction agreements and follow the specific time limits that are imposed.
Suspension and Termination. The contract may give the owner the right to “suspend” or even “terminate” the project for “convenience.” The AIA documents authorize such action by the owner at any time, but once invoked, the owner is obligated to pay for completed work, plus de-mobilization costs, plus overhead and profit (during period of suspension), or a termination fee, if any (if contract is terminated).
If the project has been shut down for 30 consecutive days due to a “national emergency,” or an order of a public authority that requires all work be stopped, upon seven (7) days written notice, the contractor is entitled to terminate and recover payment for the completed work, plus overhead and profit for future work (AIA-201, §14.1)). California case law is lacking as to whether an owner may “override” this thirty (30) period, giving rise to a contractor’s right to terminate by, suspending the project for convenience. Owners and contractors are advised to establish clear lines of communication regarding the future of the project within the first thirty days following the shutdown.
Mechanic’s Lien Timeclock. In addition to the contractual issues that are implicated in a shutdown, the mechanic’s lien laws are also involved. By statute, the time for the contractor to record a mechanic’s lien begins to run if the owner records a “Notice of Cessation.” The owner may record such a notice following a 30 day continuous cessation of work (same time limit for contractor’s termination rights). The time for all contractors and suppliers to record mechanic’s liens also begins to run following a 60 day continuous cessation of work. Both owners and contractors are advised to be aware of the statutory deadlines that apply to mechanic’s lien rights as the result of an extended COVID shutdown.
Insurance. Although insurance issues and strategies are beyond the scope of this Advisory, contractors and owners are advised to contact their insurance agents for assistance concerning the insurance consequences of a COVID related shutdown. For example, our insurance contacts advise that some carriers are extending deadlines to make premium payments without cancellation or late fees, and “business interruption” and related claims are being made and processed notwithstanding potential exclusions or other barriers. Time is also of the essence on all matters affecting insurance coverage. These and other related issues should be reviewed with insurance agents.
We continue to work with many clients on these issues and are available to assist your business as needed. If you have questions about your contractual/legal rights and remedies under any of these scenarios, please reach out to one of our construction attorneys listed below: