(Last updated March 23, 2020)
COVID-19 is rapidly impacting much of our society and our economy, and your business may be hard-pressed in the near future. Some businesses are reeling from the impacts of forced closure, and many others may soon be impacted by supply chain and labor issues as the workforce adjusts to living in the time of the pandemic.
The real estate and construction industries are already feeling the impact, and clients are facing several questions. How will COVID-19 impact your tenants? What will be the impact on your construction projects? Is there any relief for your businesses ongoing obligations in light of a severe slowdown, or possibly a forced shutdown.
Carrington Coleman is working to alert our clients to many of the legal issues that will arise as a result of the current crisis. This alert addresses “force majeure” clauses, which are common in many contracts, including those involving real estate such as construction contracts and leases. Many contracts may lack these clauses, but Texas recognizes the concepts of “frustration of purpose”, “impossibility of performance”, and “commercial impracticability” to excuse performance when it becomes impossible.
Force Majeure or “Acts of God”
A force majeure clause allocates risk for events beyond a party’s control. These commonly include floods, earthquakes, other natural disasters, and governmental actions. If the phrase “force majeure” does not appear in your contract, look for “act of god” or other provisions that address performance in the face of changed circumstances. Evaluation of the applicability of force majeure clauses requires an analysis of both the specific language of the contract and the factual situation.
Many construction contracts use the AIA form documents. The unmodified language in the A201 General Conditions § 8.3.1 provides contractors an extension of time to complete the project if there are “labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions . . . , or other causes beyond the Contractor’s control.” Because COVID-19 may cause labor shortages as employees become ill, or supply shortages based on the impact on the supply chain, Owners should expect Contractors to claim COVID-19 justifies an extension. Section 8.3.1 is often heavily negotiated or edited, however, so parties should read their particular contract carefully, particularly those relating to adequate labor forces.
While the contract provisions provide guidance to avoid or resolve disputes about responsibility for delays and cost increases, both Owners and Contractors should be motivated to mitigate disruptions and complete projects. In many instances, transparent discussions regarding the constraints and mitigation solutions available could be more helpful than circling the wagons. It may make much more sense to negotiate change orders that adjust scope, schedule, and pricing rather than allowing projects to come to a halt and hoping a judge, jury, or arbitrator will make things right.
Owners and occupants of existing buildings will also need to closely review the force majeure clauses in their lease agreements. As issues arise between landlords and tenants in the midst of this crisis, a force majeure clause in a lease can offer protection if performance of lease obligations is impossible or delayed due to an uncontrollable event, like COVID-19. While a tenant’s obligation to pay rent and other monetary obligations may be commonly excluded from force majeure clauses, performance of non-monetary lease obligations, such as a landlord’s obligation to provide access to the leased premises or timely construct and deliver the leased premises to a tenant, or a tenant’s obligation to continuously operate its business in the leased premises, may be excused during an applicable force majeure event. Landlords and tenants should pay careful attention to the force majeure clauses in their leases to determine whether COVID-19 triggered such clauses and whether performance of certain lease obligations are or are not excused if such clauses are triggered.
I Don’t Have a Force Majeure Clause—Am I Just Out of Luck?
What if your contract does not have a force majeure clause? Are you left with absolutely no argument? No. Texas courts have recognized the interchangeable concepts of “frustration of purpose”, “impossibility of performance”, and “commercial impracticability” to excuse performance when supervening circumstances made performance under the contract impossible. The doctrines do not apply in every instance as impossibility is a high threshold, but Texas courts have recognized three situations in which they may be available: (1) death or incapacity of a person necessary for performance, (2) the destruction or deterioration of a thing necessary for performance, and (3) prevention by government regulation. It remains possible that the global supply chain interruptions and government-ordered closures of businesses in response to the current health pandemic might trigger common law protections.