COVID-19 Causes Breaches to Construction Contracts: Which Party Bears the Risk?
By Tyler Schaeffer, Attorney, Carmody MacDonald
The COVID-19 pandemic has wreaked havoc on businesses. However, many of the disruptions have differed from what was originally expected. While many prepared for the pandemic to cause a massive recession and skyrocketing unemployment, these predictions have not come to pass. Rather, the economy has thrived for many sectors with the stock market at record highs. Instead of feared rampant unemployment, the job market has lately been measured by the number of available jobs that remain unfilled. Additionally, the pandemic has exposed the fragility of our global supply chains, with many businesses and industries experiencing unprecedented delays in obtaining needed products and supplies. The breakdown in the supply chain coupled with drastic changes in consumer demand has caused wild inflationary swings in the pricing of certain products and commodities.
So which party bears the risk of pandemic-caused inability to fulfill the terms of a contract? Parties may allocate the risk of unforeseen circumstances in what is known as a “force majeure” or escape clause. “Force majeure” is a French term that means "greater force." A force majeure clause allocates the risk if performance becomes impossible or impracticable, especially because of an event or effect that the parties could not have anticipated or controlled.
If the contract does not allocate risk through a force majeure clause, the common law provides several related defenses that may excuse performance due to unexpected causes: impossibility, commercial impracticality, and commercial frustration.
- Impossibility is the most stringent standard and excuses a party’s performance only when its performance is rendered impossible by an act of God, the law, or the other party. Unforeseen difficulties, however great, will not excuse performance.
- Commercial impracticality will excuse a party when an occurrence of a superseding, unforeseen event prevents performance, not within the reasonable contemplation of the parties at the time the contract was made and that goes to the heart of the contract.
- Lastly, commercial frustration may excuse performance when the contract’s principal purpose is frustrated without fault by the happening of some event, the nonoccurrence of which was a basic assumption on which the contract was made.
While a force majeure clause and the above defenses potentially provide a contracting party several bases to excuse performance based on unexpected circumstances, the application of these defenses to a pandemic, such as COVID-19, has been almost completely untested in the courts. As such, recent attention in negotiating new contracts has been paid to providing additional certainty to force majeure clauses to specifically include pandemics and their collateral consequences.
Any contracting parties who are unable to fulfill their contractual responsibilities due to COVID-19 or want to negotiate a new contract with an escape for unforeseen circumstances caused by the pandemic, should contact their attorney to explore available options.
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Contact: Tyler Schaeffer Attorney
Carmody MacDonald P.C. www.carmodymacdonald.com