The impact of the COVID-19 pandemic has been widespread across all industries and the ways it has forced people to adapt personally and professionally will create a ripple effect felt far beyond the crisis itself. The legal industry and the many supporting stakeholders have not emerged unscathed from this critical moment in time. Court closures and empty regulatory offices across the country spell what may be a protracted holding pattern for many in-flight litigations and investigations. This series investigates the impact of COVID-19 on specific legal practice areas starting with construction litigation.
Peers in corporate legal departments, law firms, and at discovery service providers alike have all noted the similarities they are seeing to the 2008 economic downturn, which created drastic shifts in the practice and business of law. While historically, law and discovery tend to be counter-cyclical, there is likely some truth in the anticipation that this current crisis will shift the key areas of law that are active and force some level of adaptation by firms, legal departments, and the companies that support them. In many ways, we are standing in the calm before the storm for many key legal practice areas that will be inundated with work as the world assumes a new normal.
Law faces a lumpy future
Although a recent article by Above the Law predicted that “litigation is sunk” due to COVID-19, I tend to have a more optimistic and nuanced view of the near-term future for litigation. While filings are most certainly down in many areas of law and delays are imminent as a result of court closures and furloughed regulators, there are some practice areas that are bracing themselves for an incoming tsunami of investigations and litigation. In fact, the unique impact poses a boom for many legal practices as well as an opportunity for firms and the organizations that support them to help corporate counsel pivot to adapt to these drastically changing times.
One area of law that will likely see massive impact from the COVID-19 pandemic is construction. The first part in this series will dissect the specific challenges facing organizations procuring and providing construction services during COVID-19 and the impact on legal practices supporting both.
It will come as no surprise to many folks that the same shelter-in-place orders that have most of us reading this article from our home offices and the supply chain disruptions that are making it hard to get toilet paper are having a profound impact on the massive trillion dollar construction industry. For many engineering firms, construction companies, and the organizations that have engaged them, understanding your contractual clauses, time delay or extension clauses, and liability clauses is of paramount importance. If and when your project is delayed or shut down, there is ample potential legal recourse.
Many — if not all — organizations engaging in construction today can anticipate an increase in challenges and claims related to contractual scheduling along with mediations, arbitrations, and litigation over construction delays. The force majeure clause in many contracts, a French term for superior force that is colloquially known as an “act of God,” may nullify contractual obligations in certain circumstances that are both extraordinary and beyond their control.
Courts have defined force majeure as “an event or effect that can be neither be anticipated nor controlled. The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes and wars).” Generally, it is clear-cut whether something arises to the level of “act of God” but in the case of a pandemic, which may or may not have manmade origins or liability, this classification gets murkier.
Factors used when evaluating applicability of this clause in the current situation include:
- whether the contract specifically stipulates pandemics in the force majeure clause
- whether the impact was foreseeable; and
- whether the pandemic contributed to nonperformance in this situation.
Additional considerations like the financial well-being of the parties and external market conditions have also been applied in court decisions relating to force majeure.
Delay and Extension Clauses and Excusable Events
Some frequently used boilerplate construction contracts, including the frequently used AIA A201-2017 General Conditions form (AIA form) and the ConsensusDocs 200-2017 Standard Agreement do not include force majeure clauses. Despite this omission, affected parties likely have some form of recourse under the various “excusable delay” or “time extension” clauses which offer a mechanism to extend contractually negotiated timelines or vitiate the contract completely in the right circumstances.
The AIA clauses outline specific acceptable reasons for delay which may include but are not limited to delays caused by: labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions, or other causes beyond the contractor’s control.
The ConsensusDocs agreement specifically stipulates inclusion of epidemics as cause for excusable delay and the recourse for both may include extension or termination. Federal procurement agreements generally contain provisions including FAR 52.249-14 which outlines “Excusable Delays” as including “epidemics” and “quarantine restrictions,” which should provide a contractor a time extension on the project for COVID-19 delays.
While some construction organizations in certain regions face shutdowns, others are finding that they have been categorized as essential services and quickly have to adapt their policies and processes to ensure continuity while maintaining appropriate security measures to mitigate worker risks. Noncompliance may expose employers to fines and/or grounds for employees to sue.
Essential construction may continue and includes roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters. At every site, if essential or emergency non-essential construction, this includes maintaining social distance, including for purposes of elevators/meals/entry and exit. Sites that cannot maintain distance and safety best practices must close and enforcement will be provided by the state in coordination with the city/local governments. This will include fines of up to $10,000 per violation.
It's always best to take all practical steps to protect essential employees, especially as it's currently unclear to what extent employers face liability if an employee falls ill. Consider contacting your insurance broker to determine if workers' compensation or employer liability insurance covers these sorts of potential claims relating to COVID-19.
Liability & Remedies
Potential financial coverage for certain aspects of COVID-19 impact may be available for organizations affected by the pandemic and the counsel representing them. General areas of coverage to both measure financial impact and determine financial recourse include the following, per the Associated General Contractors of America:
Typically allows for lost income and or increased cost but may be gated by demonstration of “direct physical loss or damage” caused by a covered event. Various coverage extends to supply chain disruption, civil directives (like shelter in place), and/or barrier to ingress & egress.
- Workers Compensation
Workers who contract COVID-19 may be entitled to benefits depending on employee type, specific circumstances, time and place of exposure, and appropriate proof of direct or indirect causation and subject to the rules of the local jurisdiction. In the event that an employee falls ill with COVID-19 and seeks compensation two main qualifiers must be met: The illness must arise out of the course and scope of employment and the illness must arise out of or be caused by conditions particular to the work and not an ordinary disease of life to which the general public is exposed. In the case of COVID-19, the unique job that an employee was performing if/when exposed and region the employee resides may impact eligibility for compensation.
- Environmental Coverage
Some pollution liability policies could respond to the cost of cleanup and related exposures for COVID-19. To apply in a COVID-19 scenario, specific conditions must be met: the relevant property must be insured, explicit inclusion of viruses and bacteria as pollution conditions in the contract, determination that illness was facility borne. With contractors pollution liability coverage specifically, specific language relating to viruses and bacteria may not be explicitly spelled out. As a result, each carrier’s coverage form would need to be evaluated to determine how potential coverage for viruses or bacteria may exist and or be interpreted.
- Management Liability
D&O, EPL or Wage & Hour and the applicable insurance policies may offer specific policy coverages and exclusions contingent on specified preconditions.
- Cybersecurity Liability and Coverage
The global shift to working from home, on potentially less secure personal devices and networks has exposed many organizations to increased cyber risk. Additional areas of increased risk include fraudulent wire transfers, insurance scams, phishing and other IT security breaches, and general business continuity and disaster recovery challenges. While a cybersecurity policy in general would not cover losses for COVID-19 related challenges, issues falling under these broad categories may be covered and should be investigated.
State and federal governments are providing financial resources to help mitigate the impact of COVID-19. These include the Coronavirus Aid, Relief and Economic Security Act (CARES Act); regulator-specific support like the Department of Defense (DOD) issuance of a Class Deviation (allowing for contracting officers to reimburse defense contractors for certain paid leave requirements related to the COVID-19 outbreak); the Small Business Administration (SBA) loan programs; and various state and local resources.. Understanding this pool of resources is increasingly important.
The construction litigation arena is poised to see a rapid uptick in activity given the increased exposure many essential workers may face, the massive supply chain and government-directed slowdowns and shutdowns, and the complexities of the contracts and insurance policies involved with these at-time multimillion dollar engagements. Understanding your financial exposure and the resources and methods to address obligations a party has is an increasingly important factor for organizations involved in large-scale construction globally. It is important to work with counsel and service providers that are well-versed in the unique challenges posed by large-scale complex construction litigation.