As the world grapples with COVID-19, the economic effects are taking their toll on many industries. One sector that has been greatly affected is the construction industry. Whereas it was thriving and access to funding was easy as well as project backlogs, it is now at a standstill.
Not to suggest that the industry did not have challenges of its own, but they all seem insignificant compared to the coronavirus. With a national emergency declared on March 13, 2020, as well the stay at home and state of emergency orders issued by many states, construction projects have stalled. Though some states have provided provisions for specific construction tasks to continue, they are still limiting; not to mention the shortage of materials as well as other personal protective equipment required.
Construction contracts highlight the responsibilities and liabilities of both the project owners and contractors in case projects do not progress as agreed upon. In light of present circumstances, you may want to go back to your contract and find out how contract clauses such as the ‘force majeure’ among other legal theories, will distribute this unusual risk between both parties.
Another effect of the COVID-19 on the construction industry will be an increase in surety claims in the coming months. Construction surety bonds offer protection against financial loss in case as a project is not completed on time as well as against disruptions.
Undoubtedly, most projects are far behind schedule, which sets the stage for an unprecedented scenario for various stakeholders. Read on to find out how ‘force majeure’ clauses and how bonds claims will apply.
What Is Force Majeure?
‘Force majeure’ is a French term that means superior or irresistible force. In major construction contracts, force majeure clauses are inserted. Such clauses offer relief from liabilities that arise from contractual obligations in case events beyond a party’s control arise, thus making performance illegal, commercially impractical, inadvisable, or impossible.
In the clause, such disruptive occurrences (force majeure events) are listed. Though force majeure clauses vary from one contract to the next, the following events are generally included:
- Terrorist attacks
- Natural disasters
When Are Force Majeure Clauses Applicable?
First and foremost, to invoke a force majeure clause, it must be present in your contract. Begin by reviewing your contract to determine whether your company can get any relief for project delays. Even still, you must be able to demonstrate that your inability to perform contractual obligations is directly linked to the event. In this case, it will be COVID-19.
Also, the force majeure event must not only impose economic strain, but also have physical or legal restrictions that hinder your capacity to perform. In addition, the force majeure event must be explicitly listed on the contract for it to be applicable. Any catch-all phrases are disregarded in courts. However, since it is beyond reasonable expectation to include an outbreak of a specific disease, especially a novel one, COVID-19 is likely applicable under pandemic and ‘acts of God’ if listed.
Things to Know When Invoking a Force Majeure Clause
Ultimately, project owners and contractors have one objective; to see the project through on time. If due to COVID-19 you are unable to meet contractual obligations, give timely notice to the other party. This serves as a professional courtesy, and it also ensures your rights to any relief for delayed performance or non-performance cannot be waived.
When it comes to payments, you may need to look for relief from other sections of the contract if the force majeure clause has a carve-out section.
If non-performance extends for a period between 30 to 75 days, the non-affected party reserves the right to cancel the contract. Therefore, invoking a force majeure clause also puts your position in the contract at risk.
Effective communication is always the key to navigating such situations successfully. If there are delayed shipments or other factors affecting performance, update the other party. They are most likely willing to find solutions together.
COVID-19 Related Bond Claims for Nonpayment and Project Delays
If your project has been delayed or completely stalled, it is prudent to go through your contract to understand the details of the clauses that can earn you relief. Other than the force majeure clause, take a look at work stoppage or suspension of work, change in law, terminations, material escalation, and protection of work, as well as health and safety requirements.
Timeline for Filing Bonds Claims
One of the biggest risks claimants face with bonds claims is filing them late. As per bond notice requirements, a claim should be filed within 90 days from when the project was initially shut down. Therefore, your window for filing a claim is closing fast if your project stalled from the onset of the epidemic. However, some states have adjusted their statute of limitations for filing lawsuits.
If your project has been frequently stalled since the pandemic, all such delays must be well documented, and the same information relayed to project owners and sureties. This will ensure that your right to file bond claims for delays is not compromised in the future.
How Sureties Stand to Benefit From Federal Legislation
Sureties will undoubtedly face significant economic challenges this year, with bond claims set to rise exponentially. Fortunately, they too may be able to get some relief due to the recently passed CARES legislation. With CARES in play, businesses can seek assistance from the federal government for payroll challenges.
Though there is uncertainty as to whether a bonded contractor can request such assistance before filing a bonds claim, this does offer hope for reducing surety losses.
Surety and Construction Go Hand in Hand
In the world of construction, there are many risks involved that can not only delay but also derail a project completely and translate to significant financial losses. This is why it is vital to have the necessary insurance for each project and a partner that stands with you when things are tough.
Harris Insurance Inc. is an insurance agency that offers surety bonding. Reach out to us today to leave the worries of project delays in the past.