How Covid-19 Has Changed Construction Contracts: What you need to know to get paid
Has the pandemic led to disputes your contract wasn’t written to handle? Wondering what you could do differently on your upcoming projects’ contracts?
Watch this webinar to hear contract strategies to get paid based on a year of pandemic cases with experienced Pittsburgh construction lawyer Amanda Kraft of Blumling & Gusky, LLP.
- What provisions to include for price and project suspension protection
- Why collaboration is your #1 tool to overcome a mid-project dispute
- How to get all parties to agree to implement these contract provisions
Justin Gitelman (00:04):
I think we’ll kind of just get started here. I know that the COVID-19 this past year has clearly had a lot of impacts on construction. Uh, I know Amanda, as an attorney in Pittsburgh has seen a ton of it firsthand and you know, there’s lots, lots to talk about with cases and everything, but I’ll let her talk about all that and just take it away. Um, just before we get started, uh, if anybody has any questions throughout the presentation, feel free to put them in the chat. Uh, there will also be a dedicated Q and a at the end, but, um, without further ado, go ahead.
Amanda Kraft (01:40):
Thanks. So there you go. Um, my name is Amanda Kraft. I am a senior associate with the law firm of Bloomington Guskey, which is located in Pittsburgh, Pennsylvania. Um, I am an attorney and I practice primarily in the area of construction law. So, um, my day to day is representing owners, contractors, and subcontractors. Uh, I do a ton of construction negotiation and design contracts for projects that are located throughout the country. So not just the Pittsburgh area. Um, I’m also the local chapter president of Norwick, which is the national association for women in construction. And personally I’m engaged still. I was supposed to get married, talk about COVID impacts. I’m supposed to get married last year, not yet. Um, but I also have a nine year old stepdaughter who lives with me. Um, but to get to the important stuff COVID, um, COVID-19 is obviously the word not just of the day, but the word of year or now, I guess, about the last 18 months.
Amanda Kraft (02:55):
Um, as we all know, COVID has impacted every single project, um, throughout the country, some projects it was impacting, um, more seriously than others, obviously in a lot of areas of the country hospital construction continued. Um, but retail was more seriously impacted or highway was able to continue in some portions of the country, but in other parts of the country, like Pennsylvania, all construction projects that were not hospitals was shut down. Um, so really COVID has caused us to reevaluate the way that we contract both the terminology that we use and the manner in which we enter into negotiations with, um, other parties. It makes us focus more on risk management for all of our clients, be it owners, contractors, subcontractors, and just overall good contract practices. Um, it really makes you consider the terms that you’re putting into your contracts more seriously in light of this world, changing events, um, and the way that things have impacted us. So seriously.
Amanda Kraft (04:13):
So a brief overview of the topics I’m going to be working through. We’re going to talk a little bit about forced mature, which I’m sure everyone is absolutely sick of hearing about. Um, we’re also going to talk about, um, how to handle COVID as it currently exists in our contracts, moving forward, uh, issues to consider in a project suspension, project termination. So these are really just the takeaways, not necessarily, you know, how COVID is impacting your project tomorrow, but how the next pandemic or the next hurricane or the next tornado. Um, what things did we learn from COVID that are important that we should move into our contracts permanently.
Amanda Kraft (05:00):
So we’re going to use COVID as that sort of template. Um, the information that we’ve learned, the impacts that we’ve learned COVID as an ongoing pandemic, both initially the impacts there, and then the long-term implications of COVID. How do we take those things that we’ve learned and bring them into our contracts and utilize that information as a jumping point for our future issues addressing specifically COVID because we do have to address it to the extent you’ve got COVID issues that appear on a specific job site, but we also want to look at what did we learn about force majeure? What did we learn about project suspensions that result from either, um, long-term shutdowns from the government, uh, owner shut downs, um, and how do we take all of this information that we’ve learned and make our projects overall more collaborative and, um, get those issues in the front of our project rather than waiting until after things have suddenly gone wrong. Um, three quarters of the way through why don’t we talk about things like cost share and limitations of liability upfront.
Amanda Kraft (06:21):
So first force mature, which again, I’m sure everybody’s tired of hearing about it, but it is such an important issue as we now know. So force majeure is that by definition, unforeseeable circumstances that have impacted our ability to carry out the terms of a contract. So colloquially, we talk about it as acts of God or events that are outside of the control of the parties, but the specific definition for forced majority that would apply to any individual project depends on the language of your contract. So I’ve looked at a couple of different standardized contracts. So for example, AIA contracts, AIA the standard force majeure provision appears in the form 2 0 1, um, it’s section 8.3 0.1. And obviously this is a commonly used contract. Um, sometimes it’s negotiated sometimes it’s not, but it tends to be one that a lot of people refer to. And this one says that if the contractor is delayed at any time in either the commencement or the progress of the work by, and it covers a whole bunch of different things, labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions.
Amanda Kraft (07:48):
So this is the provision that we use. If there’s a hurricane, if there’s a fire on your job site, if there’s a strike, um, or other causes beyond the contractor’s control. So this is the provision that a lot of people were referring to when COVID first started. So everything got shut down. We don’t know what’s going to start again. We’re dealing with governmental shutdowns, don’t have, um, you know, labor unavoidable or labor unavailability. Um, people aren’t coming to the job site. Everybody has to stay home. This is the provision that we were referring to in order to be able to allow people to figure out, you know, what are we going to do? Um, owners have to abide by these rules as well, but the contractor shouldn’t have to eat all of that time. Um, so here it says that, you know, you take that issue to the architect.
Amanda Kraft (08:49):
The architect says whether or not the events have established a delay and they justify that delay. And then the contractor is awarded contract time in order to be able to extend the reasonable time that the architect determines. So if your job has been shut down as the result of, you know, before, when you started COVID, um, a governmental shutdown and the government says, I’m sorry, you’re just not allowed to, um, have anybody on your work site. Well, that was one issue under force mature, the secondary issue wise. Then we were allowing workers to come back to job sites, but then there were restrictions on the number of employees that were allowed in any particular location. So for example, in Pennsylvania, the governor released very specific restrictions saying that, you know, there were only allowed to be for employees or for workers within 1200 square feet, and they had to stay X number of feet apart.
Amanda Kraft (09:58):
Well, that makes it literally impossible to carry out certain tasks because you have to have more than four people in order to be able to lift things, move things, hold things for each other. Um, and then there were restrictions on the number of employees that were permitted to be able to be in an elevator at the time. Well, if you can only put two men in an elevator, then it’s going to take you a really long time to get your 50 employees to the 50th floor of a building to be able to do whatever work that’s going on there. So these restrictions ended up impacting not just the ability to come to the site, but the efficiency with which people were able to carry out the actual work and all of those issues were being addressed under this force majeure provision. So we’ll look at consensus docs, which is another standardized template version.
Amanda Kraft (10:59):
Um, a lot of people utilize consensus docs as an alternative to AIA, or maybe they use them kind of in conjunction with each other. But consensus docs has a similar provision. It appears in, I pulled their general conditions, which has formed 200 section 6.3 0.1. The contractor’s delayed at any time in the commencement or progress of the work, similar to the AIA by any cause beyond the control of the constructor, the constructors then entitled to equitable extension. And then they give examples of potential causes. And one of those was epidemics or sorry. Um, here we go, epidemics or adverse governmental actions. So to the extent that there is a governmental shutdown order, this is what was being relied on and where, you know, the government was issuing restrictions as to the number of workers that were permitted on the site. That’s again, a place where we were talking about adverse governmental actions.
Amanda Kraft (12:07):
So using the term epidemics here, we now know it’s not just an epidemic. So first thing right off the bat, we’ve learned as one, we should include something like epidemics or pandemics in our force, majeure provisions, just in case. Um, hopefully we don’t get another one, but still just in case. So we should include those kinds of terminology into our force, majeure provisions. We also definitively need to include adverse governmental actions. And perhaps we need to be even more specific. We need to talk about things like shut down orders, national emergency orders, because it wasn’t just the adverse governmental action. Usually for all of us that was viewed as the government shuts down our job site for some sort of violation of policy or an OSHA violation, something like that. None of us had in mind, oh, by the way, the entire country, the entire country is going to be shut down by a federal order saying that nobody can go anywhere or do anything.
Amanda Kraft (13:14):
Attorneys didn’t anticipate that that’s not how we were drafting our force majeure provisions. So now that’s something that we should consider because now we know that that’s a possibility. Now we know that that is a potential circumstance that could arise as the result of who knows what comes up next week. And we need to make sure that we’re talking about that specifically. And the reason that we need to talk about it specifically is in some jurisdictions, to the extent that you don’t identify a specific cause of your force majeure events, you can’t recover for that. So for example, in New York, if you don’t identify specifically terrorism or epidemics or adverse governmental actions, and you just merely say, acts of DOD, that’s not enough. That means that terrorism, epidemics and adverse governmental reaction or actions will not get any recovery. So it’s obviously every state treats things a little bit differently.
Amanda Kraft (14:24):
And perhaps, you know, something that could be positive out of this particular series of events is, you know, how many people really did include pandemics in their force, majeure provisions previously, um, you know, maybe New York will change their policy and say, well, certain things are just going to have to be covered by acts of God. But you know, we’ve now learned it’s better to be specific and incorporate those other issues that we know are possibilities that could arise in the future. So, sorry, there we go. Um, there’s also other templates. So there’s other types of provisions that could apply, um, the far so federal regulations have their own language that is, uh, specific to issues which arise that would be deemed forced, mature. They included things like epidemics and quarantine restrictions. Again, maybe that’s language that we should be incorporating into our, um, agreements in the future.
Amanda Kraft (15:30):
Um, those quarantine restrictions could address a lot of those governmental actions that were addressed previously. I also added language, um, that I had been using in my agreements. Um, so I do a lot of customized template work. Uh, so not just utilizing the AIA or consensus docs, but drafting customized agreements for my clients. So owners, contractors, the whole Sherman. Um, but my language had previously stated that force majority were events that were preventing the performance of obligations under an agreement caused by externalities, not within the parties control, which are unforeseeable and for which a party could not prepare or prevent including. And then I had a whole list of things, but my list included governmental regulations or controls the inability to obtain any materials or services or through acts of God. So my clients, my contractor clients were able to utilize this particular provision by saying, you know, I don’t have the ability to obtain materials or services right after everybody was able to return to work.
Amanda Kraft (16:45):
Um, in many instances, the supply chain did not quite catch up and we’re going to discuss this a little bit further because now there’s additional supply chain issues, but at least immediately after COVID supply chain, didn’t catch up. So now everybody was yay. We can go back to work, but we don’t have the necessary PPE. There’s not sufficient masks. I can’t get masks for my guys. So they can’t come on the job site or, you know, whatever material you needed to have to be able to immediately return to the job site. And by including a provision like this, that inability to obtain materials or services it’s, um, it kind of does a front end run on that particular issue and makes it a little bit easier for you to negotiate later, to be able to get time extension, to be able to address those types of issues.
Amanda Kraft (17:43):
So the issue is whether or not your circumstance, some circumstance that we can’t even contemplate yet is going to be covered by the force majeure provision. So you want to be able to take the experience that we now have those issues that arose during the course of COVID that we know impacted our projects and incorporate that language into your force majeure clause for the project that you’re entering into tomorrow. So some of the more recent concerns that are now arising have to do with those materials issues. So I’m getting calls from clients about material escalation, there’s procurement delay, it’s impacting, um, owners on the level of, they can’t turn over their projects. Um, it’s impacting suppliers because they can’t get the materials in order to be able to construct whatever they’re doing. And then everybody in between is trying to figure out how do we get stuff and who’s gonna pay for it.
Amanda Kraft (18:47):
So the first thing you have to turn to is those force majeure provisions. So, as I said, in my customer agreements, mine identified things like inability to obtain materials. Well, that saves you at least a little bit right there, because you’re saying I’m not able to get access to these materials, but what happens if you don’t have that particular provision, yours just says, you know, acts of God is material in it. Like the inability to be able to get insulation or windows, is that really a force majeure? That would just be an open-ended acts of God. That’s a little bit more unclear. And it’s probably going to depend on very specific case law in your state. So what do you do on the day that you go, you find out I can’t get insulation without having huge cost overruns. They’re going to require insane shipping costs.
Amanda Kraft (19:47):
I can’t do this. I, as the subcontractor can’t afford to be able to do this. This is going to put me in the hole and the con the contractor or the owner just says, no, I’m not going to pay for it. What do you do under those circumstances? Well, at that point, you have to make a decision. Are you as the subcontractor, willing to walk away from a job, knowing that there’s a possibility that the owner could Sue you for breaching the contract that is in fact, a possibility that something could occur. And under those circumstances, you kind of have to evaluate, um, you know, what are your alternatives? If you are approached with a breach of contract lawsuit, from an owner or a contractor, you as a subcontractor, what kinds of defenses would you have and how viable are those defenses? So in that case, we have to look at state statutes or case law.
Amanda Kraft (20:52):
And we have to look at a couple of different arguments, but some of them are that you’ll probably hear about are things like impossibility. It was impossible for me to carry out the terms of this agreement, honestly, while it sounds really good, that might not be your best argument. Impossibility is based on you saying that there’s no more installation, period installation no longer exists, but you have a contract that says that you have to provide installation. That’s not really the case here, that the case that we’re running into right now is there installation does exist. It’s just prohibitively expensive. It’s so expensive. It’s going to put us into bankruptcy. It’s so expensive. There’s no way that the costs that I’d originally proposed to the contractor, to the owner. I can’t make up my, my profit on this. There’s, there’s no way it’s just going to put me in the home.
Amanda Kraft (21:53):
Under those circumstances. That’s really more of an impracticability argument. So you’re saying instead it’s impractical for me to be able to do this. That’s more of a cost balance arguments, um, that it’s unrealistic for someone to expect you to be able to do that, to be able to extend those costs associated with ever with whatever the materials were that you were trying to obtain or whatever services you were originally going to perform. Um, and then it becomes a question of factually, what did you know at the time when entered into your agreement? If, you know, like if I was entering into an agreement today, for something like insulation, I know that it’s practically impossible to get it. Um, I know that I would, in order to be able to meet a tight deadline, I either need to negotiate my deadline to be longer. I need to negotiate into my agreement, provisions that say that I cannot promise that I’m going to have installation by X date, because that is not a realistic objective.
Amanda Kraft (23:03):
I need to negotiate an additional costs for expediting the materials to my location or to the job site. I need to calculate in a lot of those factors, but I know that today, what did I know in January were those the same types of considerations that I was making in January? Did we know how tight those kinds of timeframes are? And that’s literally the kind of analysis that you have to do when deciding do I try to negotiate with this owner and say, look, I can’t get an installation. Anybody else that you hire to be able to replace me? They’re not going to be able to get it either. Nobody’s stockpiling installation in case of a pandemic. So because of that, just keep me on mil, share the cost, we’ll share the burden that’s coming out of this material, escalation issue, the material procurement issue. I’ll do my parts to be able to make efforts to escalate it. And how about this? We will share the cost. So that way subcontractor on their own is not carrying this cost owner on their own is not cheering. It’s not going to carry the cost on their own. And both of you were avoiding all of the legal costs that would go into, you know, duking this out in a courtroom or arbitration somewhere, um, when nobody’s going to be able to get the project to move forward.
Justin Gitelman (24:39):
Awesome. Thanks for sharing all that. Amanda, that’s extremely helpful context on kind of what has been going on with the pandemic and projects that are ongoing and all this stuff that we haven’t been able to predict. Um, and now, you know, we’ve learned a lot, so we were able to predict a little bit more forward. Um, I’m sure everyone here is wondering, I was going to say raise your hand, but maybe just say in the chat, if this is what you were thinking, like, what can you do for new projects and going forward, um, now that you have this knowledge, uh, with your contracts. Um, so, you know, I just wanted to say in regards to that, um, it’s just always a good idea to talk to your attorney. Um, if you have one on retainer, if you don’t, Amanda is certainly great, especially if you’re in the Pittsburgh area. Um, but also Levelset can actually pair you with an on-call local attorney anywhere in the country for a very low flat rate. Um, so if you want to learn more about Levelset, legal guard, it’s just that Levelset.com/legal guard, pretty simple. And I’ll make sure to follow up with a link to that at the end of this as well. But, um, back to Amanda, I know she wants to talk a little bit more about what to do for, you know, implementing those new contracts and reviewing and planning for the future. Um, so yeah,
Amanda Kraft (25:59):
So, um, some of the things that we want to consider in moving forward in our new contracts, um, obviously we want to be able to go specifically review those force majeure provisions, make sure that we’re incorporating the terminology associated with governmental restrictions. Pandemics. Let’s talk about material and availability now that we know that those are potential issues that are going to impact projects. Um, we’ll also want to consider things like cost sharing and cost mitigation, whose obligation is it to mitigate costs for material and availability. Um, how do we want to share those costs upfront in our, in our contractual terms? So way to the extent something arises that we don’t foresee we’ve already addressed it right off the bat. Um, we also want to review our delay provisions, um, things like waivers of consequential damages, safety management, and notice requirements are so important. Um, so one of the things that I’ve done is specifically address COVID in its own place in my agreements.
Amanda Kraft (27:12):
So I’ve created a COVID addendum with the purpose of being able to hopefully one day rip this page off of the back of my templates and just ignore it forever. But I’ve established a specific definition associated with COVID-19 now that we know that COVID is impacting our projects force mature, arguably doesn’t doesn’t apply anymore because it’s no longer unforeseeable. We know that COVID impacts our thing. We know that that exists. So we can’t use and foreseeability and acts of God as an excuse anymore, to not be able to perform. We want to talk about COVID very specifically, we want to be able to raise this COVID language so that we will create a definition of what COVID is, what is a COVID event, same way. We talk about a force majeure event. We want to make sure that we’re discussing COVID impacts what things are impacting your project.
Amanda Kraft (28:20):
And then you want to make sure similar to you having a force majeure provision that excuses your performance and identifies that, you know, a failure to perform. Isn’t a default. We want to be able to incorporate similar language into our COVID Dundrum. We want to make sure that the parties are each individually bearing their own costs. We want to talk about things like material, escalation or procurement that are issues that are related specifically to COVID. So we’re trying to address all of the COVID related issues together in one location. So that way you’re not getting some degree of overlap from, you know, gas unavailability because of pipeline got shut down by hackers. You know, that’s a separate issue. That’s an issue that we’ll address through force majeure. But to the extent that COVID is the issue that’s impacting your labor productivity or your material, escalation, we want to talk about that in one location.
Amanda Kraft (29:25):
We also want to talk about specific waivers of consequential damages. You want to have a waiver of consequential damages, most likely in the terms of your agreement, just, you know, as good performance, but, um, you definitely want to be able to have a provision in your COVID agenda that talks about what types of damages would be permissible or impermissible as a result of COVID impacts. So are you granting extended general conditions? Yes or no? Um, are you going to grant additional labor costs? Yes or no. Um, but by putting those items on one agenda, it allows the parties to the contract to be able to reasonably negotiate those issues that we know could potentially exist. This is also the place that I normally recommend that owners particularly mandate that their contractors and everybody below them act in compliance with whatever the regulations of the day are.
Amanda Kraft (30:30):
So social mitigation, um, social distancing, industrial high dream reporting requirements. We all know that those requirements change literally on a daily basis throughout the entire course of COVID and are still changing a little bit, you know, for schools, we still have no idea what the requirements are going to be in the fall. So by owners passing that requirement downstream to the parties who are actually going to be on the site that does, um, it has the effect of mitigating those responsibilities from the owner and placing them with the parties who are really going to be, you know, handling the COVID impacts on the site themselves. So they want to make sure that the safety plan that’s being developed for the project includes safety plan issues, addressing COVID specifically. And honestly, for an owner, you want subcontractors and suppliers to take this off your hands. You don’t want to have to know who has to notify, who have infections or how many infections or today’s requirements, three feet away from each other versus six feet for each other.
Amanda Kraft (31:48):
Owners don’t want anything to do with any of that. And subcontractors who are on the job site, you really need to know what those requirements are like. You need to be the ones who are carrying those out. So it’s important that you’re developing your safety plans and then making sure that your safety plan is amended changed, reflects whatever those rules of the day are. That that is absolutely essential. Now, right now, it seems like most people have gone back. Most states have gone back to act in whatever way you were doing prior to all of this occurring. Um, but I know in some cases there’s still restrictions about, or individual companies are developing their own restrictions based on face masks who’s required to wear face. Um, are there vaccination policies that are in place, um, that issue, that vaccination issue? I didn’t go into detail here on my agenda for COVID mostly because it’s such an open issue.
Amanda Kraft (32:57):
Um, basically what I’m recommending my clients to do is if the owner has an established policy, then the contractors have to require their subcontractors to comply with whatever that policy is. It seems as though most companies are going with a very, um, if you’ve been vaccinated, you don’t have to wear your mask. If you have not been vaccinated, we ask that you do wear your mask. We’re not going to ask for any necessary proof of any of this, but, um, that that’s basically seems to be a common party line. Um, obviously that will vary by state to the extent that there are specific regulations about whether or not you can request medical information or vaccination information from your employees. I’m not going to go into detail on that because that is, there are 50 different policies across the country, and we’re not going to go there, but it’s definitely an issue that is a complication. And it’s definitely something that, uh, I would recommend talking to your lawyer and employment, lawyer, um, construction lawyers, you know, any of those things about those particular issues related to vaccinations.
Amanda Kraft (34:18):
So one of the things that we really learned a lot about were rights of suspension and termination. Um, so once COVID started to impact the country and jobs were shut down, then individual states started to reopen kind of separately. I represent a couple owners who own specifically retail centers. So retail centers took a major hit during the course of COVID because the businesses, the tenants themselves were not able to return to work necessarily as fast as some other types of commercial operations were because of that. Um, my clients who are the property owners elected to not proceed with certain redevelopment immediately. So then the owners were taking the responsibility for suspending certain contracts and not moving forward with their work, not making things pretty complicated because it depends on what your contract says again. So the AIA contract, for example, says that upon seven days notice a contractor can terminate the contract.
Amanda Kraft (35:32):
If work is stopped for a period of 30 consecutive days through no actor fault of the contractor for any of these reasons. So one of them is a court Republic order or an act of the government. So in Pennsylvania, our construction, like most of the construction, except for hospitals were shut down for a period of almost 75 days. So basically any contractor who had an AIA contract after 30 days had the right to be able to terminate their contracts. Now going into this timeframe, I don’t think any owner anticipated that except for some real fault of the owner, generally, where there was construction was not able to move forward because of, you know, some legal issue. They didn’t expect the government to issue shutdown order saying no construction is permitted for 75 days. If that was the case, you know, owners wouldn’t have wanted to be able to agree to a provision like this.
Amanda Kraft (36:38):
Um, consensus docs had a similar provision that said same thing, 30 day suspension by order national emergency or to the extent that the suspension has, uh, been undertaken by the owner. So now that we realize that contractors could have been terminating during all of this time period, we really have to analyze whether or not having that type of provision is appropriate. So from the owner’s perspective, absolutely not. I don’t want to give my contractor the right to be able to terminate a project when I definitely haven’t been the one who suspended it, this has all been out of my hands. This was a pandemic. I had no idea that this was going to happen, but from a contractor’s perspective, regardless of why this project has been suspended, I deserve the right to be able to get out of this project because otherwise I’m eating the costs associated with having this suspended.
Amanda Kraft (37:36):
I’ve got workers who are sitting in the warehouse waiting to go to a job and can’t go. So now I’m still paying for their health insurance and all the other costs that are associated with having those employees. So owner obviously doesn’t love this provision, contractors all about it. So how do we address that? Well, perhaps we come to some kind of sliding scale in the middle. So we say, all right, well, after 30 days, instead, the owner will start compensating for extended general conditions, labor productivity, those kinds of things, but the contractor can’t terminate, unless it’s been 90 days worth of suspension or 75 days worth of suspension. So that’s where it becomes important to be able to negotiate and discuss these provisions. Contractors have to be thinking about, you know, where does this benefit them? They want to be able to preserve those rights.
Amanda Kraft (38:36):
Knowing now that it’s very possible that a job could be suspended for 75 days, but an owner wants to make sure that they’re addressing cost mitigation strategies for, to the extent that a project is extended or, um, suspended for 75 days. They don’t want all of their contractors to be shutting down jobs on them. And they want to make sure that they’re mitigating those costs during that time period. So that way they’re not just throwing money at the contractor where work’s not continuing during that time period. So this is one of those issues where it’s really important to be able to address it in your contract. You want to be able to talk about this provision about what happens, where there’s an extended period of suspension. Let’s talk about having a step down rate so that when X happens after 30 days, X happens after 60 days. And to the extent that this project’s been, you know, suspended for 90 days, I guess then maybe then the contractor needs to have a right to be able to terminate. Um, or you parse it out based on who’s the cause of the suspension. Is it the owner suspension? Is it a governmental suspension based on some force majeure event or a COVID issue? That’s again, it’s something that needs to be considered and addressed in the terms of your agreement.
Amanda Kraft (40:03):
So, same thing for subcontractors don’t feel left out subcontractor agreements, generally state that their rights to termination are consistent with the rights that a contractor has to terminate their agreement. So that means where a contractor has 30 days after suspension to be able to terminate. Then a subcontractor would be able to do the same thing. The issue here is that means that even if a contractor has elected, perhaps not to terminate their agreement with the owner, all of the subcontractors would still have the right to do so. So then you effectively have an empty contract because all of the subcontractors have elected to terminate as the result of an extended suspension of the project. So you want to make sure that if it’s an owner, the contractor is being obligated to certain things, and that those obligations are flowing downstream to the subcontractor and contractors. You want to make sure of the same thing you want to make sure that to the extent your obligations to the owner are going to continue. You want to make sure that unless you’re terminating this agreement, the subcontractors aren’t going to do it either because that mess protects you and your liabilities to an owner.
Amanda Kraft (41:28):
So some other issues, um, of addressing those costs, sharing types of issues, risk management issues that we know arise now, as the result of something like COVID-19 that we think could potentially impact projects in the future. So we want to try to get terms that pertain to things like cost sharing. So the owner’s going to address costs for site safety. And to the extent that a project does need to be shut down. For some reason, the owner will address costs of demobilization and re mobilization. If there’s going to be a suspension period, regardless of the cause of that suspension, unless it’s, you know, a contractor fault versus, or a subcontractor fault, um, the owner will still foot the bill for that. Perhaps the owner and the contractor will share costs of material escalation. Usually, um, the way that my contracts have been negotiated recently, the contractor will eat the cost of lost, of lost labor productivity.
Amanda Kraft (42:38):
Um, so having their employees sitting, um, you know, there may be some shared costs associated associated with that, but maybe not all of the costs associated with that loss product Tivity. Um, again, shared material, escalation costs, shared procurement costs. Um, but labor downtime, that’s something that maybe is going to be managed by the contractor. Ultimately it comes down to a matter of practicality, not illegal. These cost sharing aspects need to be, if you’re in, in the middle of a contract, or if you’re looking at negotiating a new contract, it should be addressed as a matter of practicality. It there’s no legal precedent saying, well, demobilization costs are definitely on the owner and remodelization costs should definitely be on the contractor that that doesn’t exist. Um, but what you are doing is you’re trying to reasonably share the costs between the parties. Same way that I talked about material escalation, where you’ve got current costs that you’re looking at materials aren’t available, the owners, aren’t going to be able to find another contractor.
Amanda Kraft (43:55):
That’s going to be able to come in without warehouse worth of insulation for their project. It just doesn’t exist. But comb negotiations associated with let’s share these liabilities. Let’s share these costs between us let’s work together and collaborate to be able to move this project forward in order to be able to avoid delays to the extent possible and be able to kind of take a very practical mindset, um, is really the best way of addressing these issues right now, because either party being stuck in saying, well, there’s no way I’m going to front any of the costs associated with this is just going to impact the project negatively and could result in lawsuits. The other aspect here is risk management. Um, so obviously a lot of people very early in COVID were talking about, um, whether or not insurance was going to come save them.
Amanda Kraft (44:57):
Um, what kind of insurance will, you know, is there coverage? Is there not coverage? Is that a thing that we can deal with? How, how do we, how do we get coverage for this? So recently in Pennsylvania? Yeah. I’m actually in Allegheny county, which is where the city of Pittsburgh is. Um, there was an interpretation of language called physical loss. So in the insurance policy, um, there was language that required there to have been a physical loss, which resulted from the COVID impacts in this particular case, it was, um, a dentist who was unable to operate their dental practice as the result of COVID and the restrictions that were going on. Um, during that time period in Pennsylvania, specifically dental practices that were not emergency based were not permitted to be able to operate. So although they’re considered medical in a lot of ways that that wasn’t, um, an exclusion for us.
Amanda Kraft (46:10):
So, sorry, Manisha. Um, so an insurer was trying to, um, generally they talk about direct physical loss or damage as a tangible impact. So for example, that’s classic a building burns down, you can’t use the building because the direct physical loss, the building, um, burned down is as the result of the fire. So here obviously COVID is much more ethereal. The it’s not as though the virus itself attached to the building or, you know, took the building apart, building block by building block that that’s not the case at all. So it’s, re-interpreting that physical loss. So in our case, um, this case called Hungarian versus CNA, uh, the court ruled that the direct physical loss of was not limited to merely a physical alteration or damage, but it also included the deprivation or loss of use associated with the property. So dental practice, I just was not able to utilize its.
Amanda Kraft (47:30):
So as the result of that and the governmental shutdown workers do use COVID and at the time the fact that we thought that we couldn’t touch anything or come into like physical spaces where it’s possible that other people were infected, um, it impacted that business’s ability to utilize their physical space and that the economic losses associated with having their business shut down were secondary to the physical loss of use of the space. So that was a first, we hadn’t seen an opinion like that come out previously, generally the opinions were based on, um, just physical losses to the property. Um, there are other opinions in Pennsylvania that say exactly that, that there was no physical loss of property because there was no physical damage to the property itself. Um, so it looks as though, I mean, this is, uh, this was a trial court opinion, which was unique in a lot of ways.
Amanda Kraft (48:37):
I can practically guarantee that this case along with all the others are going to be working their way up through the court system. Um, and across the country, there’s going to be a lot of, I think, diversity of opinions. Um, and you know, it’s going to be interesting seeing how this series of events impacts the way that we’ve interpreted, um, insurance law and whether or not there can be recovery for physical loss for loss of use, as opposed to, um, the physical damage issue. Um, I can’t wait to see what happens. It’s going to be interesting. Um, I have no prediction on this line, you know, sometimes you’ll know, um, you know, which way a particular case could go. This one, I have no idea. So we should see you probably over the course of the next year or so. Um, additional opinions, um, both from Pennsylvania and coming out of other jurisdictions related to interpretations of physical loss.
Amanda Kraft (49:50):
So, ah, yes, again, please remember to be able to, uh, review your waivers of consequential damage language. Um, that’s another way of managing risks, um, discussion of those safety standards, making sure that you’ve contemplated insurance policies and what your insurance policies actually say about things like physical loss, um, whether that does include loss of use or whether it only includes physical damage, whether you have, uh, the ability to be able to obtain a virus type of explosion or not. Um, those are issues that should also be considered, um, while you’re working through new risk management aspects of your contracts.
Amanda Kraft (50:38):
Another point that I love to make, which makes everyone, you know, their like dispute resolution, of course you’re a lawyer. This is, you’re always going to talk about disputes, but it’s so important, especially when we realize all of these issues. If we have not appropriately negotiated them, or if you haven’t considered something and we have pandemic or whatever of 20, 23, we haven’t contemplated those issues. It’s possible that we could end up in court. Um, it’s not where we want it end up. Um, we don’t want to have to take these issues to court. We don’t want to have to be filing mechanics when you means and going through the process of, you know, extending these funds, we want to make sure that to the extent that that does become necessary, we’re getting all of the players in one room. We want to be able to limit the cost associated with this, but we want to make sure that our dispute resolution provisions are global and that everybody is being required to participate in the same type of dispute resolution. That means that the architect doesn’t have an arbitration provision, but the contractor has, um, mitigation and then the subcontractors have arbitration and some of them have to mediate. And some of them don’t, we want to make sure every single party that is on a job site is all required to participate in the same type of dispute resolution. We want to get everybody in the same room at the same time through joinder provisions, through consolidation provisions, and with everybody electing to proceed in the same way at the same time.
Amanda Kraft (52:25):
So our key takeaways of the day in moving forward with your contracts review and revise your force, majority provisions, as we’ve talked about, we’ve learned so much from COVID and we want to make sure that we’re taking what we’ve learned and putting it into our future contracts with regard to force majeure second specifically, address COVID address it separately from force majeure, make an agenda that one day you’ll be able to rip off or talk about it in its own special paragraph. But you want to be able to talk about COVID specifically and independently because it’s no longer considered unforeseeable three. Then I want to review your provisions associated with suspension and your right to determinate, where there is a suspension for you’re going to want to talk about cost sharing. We all know, know how difficult it is to be able to get materials. Material determined is a major issue.
Amanda Kraft (53:24):
So let’s get that out front and address cost sharing objectives. And, um, all in your terms of your agreement, you want to go through those risk management strategies, uh, confirming insurance liabilities, um, making sure you’ve got waivers of consequential damages, um, addressing, you know, maybe liquidated damages issues as well. And finally, six let’s look at those dispute resolution provisions. Let’s make sure that they’re global, that everybody’s able to be joined in the same particular dispute resolution, make sure that subcontractors are being pulled to the same place that the architect and owner and the engineers and the professionals on the job. Let’s get everybody in the same room at the same time. Okay. I’m at my question. Slide,
Justin Gitelman (54:17):
Um, thing. Thanks again, Amanda. Um, yeah, if, uh, if anyone has any questions, feel free to ask them now. Um, and otherwise I think she’ll probably have her contact information up on a slide here and also available afterwards. Um, and you can also ask a question anytime on Levelset community at, uh, Levelset dot com slash payment dash help. Uh, we have a network nationally of almost 2000 construction attorneys who are happy to answer any questions you have about contracts or anything to do with Damon. Um, and yeah, so I don’t, it doesn’t look like we have any questions here. I mean, someone asked, um, if the recording will be sent out as well as the slide, so yes, that will be sent out tomorrow. Um, but other than that, anything else you’d like to add? Amanda?
Amanda Kraft (55:06):
I don’t think so. If somebody has a question and they, you know, didn’t want to ask it in front of everybody else in front of the whole class, um, absolutely feel free to contact me. I’ve provided my email address, phone number, um, and I’ll be available to answer anything that I can.
Justin Gitelman (55:23):
Awesome. Well, thank you again and thanks for everyone who tuned in live here. Uh, hope you found it valuable. Um, I know I did. And, uh, yeah, have a great rest of your day. Bye.