by John McGill
“May you live in interesting times” is a backhanded way of wishing ill without blatantly wishing bad things. And so, here we are, living in interesting times. The COVID-19 outbreak is wreaking havoc around the world and, more immediately, locally. In the Bay Area and California generally, counties and cities are issuing restricted assembly directives or shelter in place orders to slow, if not actually stop, the spread of the disease. How long those orders last and whether they will be effective, is anyone’s guess, but it seems three weeks is the average restriction. What does this mean for your ongoing projects, and any that you have pending contracts for? If you are an “essential activity” the restrictions may not affect you- yet- but it remains to be seen what the fallout will be from all of this.
So, what are your options when the local governmental agency issues specific directives that affect your ability to even get to your project, let alone work on it. You can’t ignore the directive, but eventually, hopefully sooner rather than later, you will be back on the job. What then? How do these directives affect your contractual obligations and your contractual rights? Who bears the risk for any project delay and any additional costs? What are the defenses to the finger-pointing that may follow; the argument that YOU were contracted to perform a contract, YOU accepted the risk, so YOU have to bear the risk for any consequences, and any loss is all YOURS to bear. The following are some considerations to think about as response to what you might hear if an issue does come up.
First, there is the force majeure defense: some significant intervening cause prevented your performance of the contract. The intervening cause doesn’t just make it more difficult or costly to do the job, it has to stop your performance.
It used to be that construction contracts typically included a Force Majeure clause that excused performance when certain uncontrollable and unexpected events occurred. A typical clause might be: Subcontractor shall not be liable under this paragraph if such default is caused by strikes, lockouts, or Acts of God, as long as notice is given in writing 48 hours by Subcontractor to Contractor.
Or, the provision might be more detailed i.e.- 'Force Majeure' shall include, but not be limited to, fire or other casualty, bad weather, inability to secure materials, strikes or labor disputes . . . acts of God, acts of the public enemy or other hostile governmental action, civil commotion, governmental restrictions, regulations or control affecting, and/or other events over which the party obligated to perform (or its contractor or subcontractors) has no control.
In any case, according to the Civil Code, performance has to be “prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”
And therein lies the liability question: did the parties to the contract “expressly agree” that one party would accept all or any of the risk for a force majeure occurrence? The contract language will dictate any force majeure defense. You want to be paid; the other side wants you to pay them. What does the contract say? Other provisions in the contract will come into play; remember the contract is read as a whole, not in discrete bits and pieces. If you intend to assert that force majeure prevented your performance, you need to give notice. As a general rule, and especially now, if you have anycontract-based issue, you need to know what your contract requires. Whatever it says to do- Do it!
There are other defenses as well. Impossibility of performance or the related defense of impracticability of performance are two that can be asserted if there is an issue related to performance during this crisis. These defenses don’t necessarily allow you to make a claim for delay costs, but they can provide a defense to any claim for delay costs against you, or any claim of breach.
'Impossibility' is defined as actual impossibility (cannot be done- period), but also as impracticability because of the extreme and unreasonable difficulty, expense, injury, or loss involved. In the case of the California shutdowns and restrictions, any argument your non-performance was unjustified and therefore a breach, would likely be dismissed out of hand. Not only could your continued performance require a violation of a directive, it might involve an “injury” if your crews were exposed to the virus, whether they got sick or not.
The shutdown hopefully will result in only Temporary impossibility; i.e.- until the restrictions are lifted you cannot perform work. Once the restrictions are lifted you would need to resume work, if you can. The obligation to perform your contract is suspended only while the impossibility exists. If the local authorities extend restrictions, or if the virus takes on some new and more aggressive dimension, then the temporary impossibility could and perhaps would become a permanent discharge of your contractual obligations.
Hopefully that doesn’t happen, but even if the U.S. is no longer affected, your suppliers overseas might be. If you can only get what you need from a foreign supplier, then the condition overseas can create a permanent impossibility based on impracticability: “A performance may be so difficult and expensive that it is described as 'impracticable,' and enforcement may be denied on the ground of impossibility." But the courts have made it very clear it’s just not any facts that make performance more difficult or expensive, but only facts of the most “gravest importance”; where the performance would result in “unreasonable and excessive cost”. If you can get what you need from another supplier, even if it costs more, you need to do it. If you do though, provide notice and a change order for that cost. There are good arguments you should be paid, so go for it.
A last issue to consider if you are confronted with a claim you breached your contract by not performing: the argument of nonoccurrence or non-performance of a condition precedent. This circumstance can arise where your work follows another contractor’s work, and is dependent another’s work so yours can be performed or completed. The preceding trade may argue impossibility or impracticability in the performance of their work. In that situation, arguably there is a domino effect where the earlier work prevents the later work, and the failure of the performance of the earlier work is a failure of a condition for the performance of the later (your) work.
These are some things to keep in mind while we adjust to the new conditions this nasty little bug is creating. Hopefully you don’t need any of this information and your projects pick up and complete as if nothing ever happened; as if we did NOT live in interesting times. Stay well.
Bio: John P. McGill is an attorney representing contractors and suppliers in the Bay Area and Northern California in both private and public work disputes. He is the author of California Contractor’s DESKTOP GENERAL COUNSEL What You Need To Know About California Construction Law. 3d Ed. Contact: jmcgill@mcgill-lawfirm.com or cell- 707 337 1932.