At a time of pandemic, we were left without a chart to plot our course. Various decisions were made to reduce the manufacture and supply of key elements of construction, from computer chips to fasteners to tools.
While the “safe” course was to hit the brakes, unprecedented spikes in unemployment and reduction in economic growth resulted. Nevertheless, construction was deemed essential, as was law and related professions. We adopted virtual tools and learned the name Zoom. As the U.S. system delegated authority to the states, there were 50 different approaches to COVID-19.
Record public assistance programs, both in terms of dollars and scope, doled out trillions of dollars at the federal, state, and local levels, cushioning the immediate effects of the pandemic and offering protections for homeowners and renters to remain in their homes. Eventually—as vaccines became available, and masking and social distancing became commonplace—mortality was reduced and the demand for housing, and related goods and services, returned. This pent up demand drove an oversupply of money combined with a reduced supply of housing, construction materials, and goods—unleashing inflation and interest rates at levels not seen since the early 1980s.
What was more subtle, yet equally profound, was a changing attitude toward work. For a period of time, the public assistance investment resulted in greater income to many who understandably delayed, deferred, or departed from their prior work altogether. Demographically, many Boomers, nearing retirement anyway, chose to do so earlier than originally planned.
These factors exacerbated labor shortages that existed before the pandemic. Key areas of skilled trades in construction—from concrete to carpentry, and the design profession industry—all suffered accordingly. Even when staffing was at levels commensurate with construction requirements, raw materials, component products, digital technologies, and finishes could not keep up with demand. Hence, “supply chain” became more than a term—it made the difference in whether a project could start, complete, and come in at or under budget.
Dealing With Supply Chain Fallout
While some risk factors to the supply chain resulted from the pandemic, others did not. War, strained economic relations among nations, tariffs, and extreme weather events and natural disasters all had dramatic impacts. Even when there are materials available, trucking capacity to deliver goods has been compromised by a shortage of drivers, equipment, and the high cost of fuel. Faced with these uncertainties, risk managers and insurance professionals have focused on solutions:
- Pre-planning with multiple sources of supply for key materials. This makes the assumption that supply will be a problem and aims to focus proactively to create alternative project delivery.
- Flexibility in construction scheduling and sequence of trade contractors.
- Cost escalation provisions in contracts to have risk sharing in the event of dramatic increases.
- Flexibility for construction contract terms for schedules for completion.
- Greater concentration and coordination on offsite improvements with existing and new infrastructure.
- Greater use of collaborative delivery models such as design-build.
- Use of and broader wording of force majeure clauses that can anticipate a greater number and type of events, including governmental orders, labor, and material shortages.
- Flexibility and aggressive risk management earlier in project development.
- Greater use of OCIP or project specific policies to address design and construction risk.
- Consideration and purchase of supply chain insurance to augment business interruption insurance to cushion the risk of transportation, product, and labor delays.
From a legal standpoint, the time spent in framing relationships between owners, designers, builders, specialty trades, and supply chain professionals has never been more important. Decisions reached, primarily those interpreting state law, focus on the enforcement of contractual language and the benefit of the bargain created thereby. The law takes years to catch up to the present, and reflects pre-pandemic views.
A Look at Force Majeure
The evaluation of legal risk often tracks what clients agree to. Written contracts still govern the vast majority of relationships in the construction field. As a result, even greater care is needed now than before COVID-19. Financial risk allocated in contract is often enforced as part of the bargain—whether it be a benefit or burden. In California, a recent series of decisions focused on long held contractual principles. Even if the ability to pay results in financial losses, that, alone, does not create force majeure. For example, in looking at force majeure, the First District Court of Appeal in West Pueblo Partners, LLC v. Stone Brewing Co., LLC (2023) affirmed enforcement in favor of the landlord against a brewery and noted:
“A recent California case is more persuasive. In SVAP III Poway Crossings, LLC v. Fitness International, LLC (2023) 87 Cal.App.5th 882, 303 Cal.Rptr.3d 863, a fitness center was unable to operate intermittently due to COVID-19 closure orders. In opposition to summary judgment in the landlord’s breach of contract action, the fitness center argued that the force majeure provision in the lease temporarily excused its obligation to pay rent. The Fourth District Court of Appeal affirmed the trial court’s grant of summary judgment to the landlord. Although the force majeure provision in that case included an exclusion for any ‘failures to perform...which can be cured by the payment of money,’ the Fourth District independently held that there was also no evidence ‘that the pandemic and resulting government orders hindered Fitness’ ability to pay rent.’ With respect to impossibility and impracticability, the court similarly held that, ‘[n]othing about the pandemic or resulting closure orders has made Fitness’ performance of its obligations to SVAP—paying rent—impossible.’ Indeed, ‘Governmental acts that merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.’ We agree.”
As a result, financial hardship, generally, is not a defense to performance. Most pre-pandemic force majeure clauses focus on natural events—earthquakes, hurricanes, or other similar events. Some also focus on Acts of God. Others specifically enumerate a list of awful things, but few, to date, list pandemics. Often, in an event where force majeure does apply, it typically acts as a time period for delay in performance rather than a source of additional compensation or full excuse from contractual duties.
Various states differ on their enforcement, ranging from specific mention of an enumerated peril to others that focus on an unexpected, unanticipated event beyond a party’s control. As these matters revolve around the application of state law, stakeholders need to examine which state, which court, and even which judge to get a better read on how these matters will be evaluated. After three years of pandemic and its fallout, contracts must address these issues, and the parties and their insurers need to evaluate and account for the risk.
Not surprisingly, case law development since COVID-19 has varied depending on the jurisdiction. With all of the office space that was mostly out of use due to remote workforce developments, payment of commercial rent started in our courts. While cases may not reach the appellate level for some time, they illustrate the juncture of government shutdowns, risk prevention of disease, and development of a mobile workforce that may not need those facilities in the near or perhaps long term.
For example, in Florida, the United States District Court, Southern District of Florida carefully examined the nexus between the non-payment of rent, government orders, and the benefit of the contractual bargain. Last fall, in Palm Springs Mile Associates, Ltd. v. Kirkland Stores, 2020 WL 111353 (U.S.D.C., S.D. Fla. 2020), the court determined there needed to be a strong nexus between the event and non-performance, noting that commercial tenants are not free to walk from their obligations.
Restrictions on use of facilities for travel may not necessarily constitute force majeure such as requirement for use of masks and use consistent with local health requirements. [See Lampo Group, LLC v. Marriott Hotel Services, Inc., 2021 W.L. 3490063 (U.S.D.C., M.D. Tenn. 2021)]. Even in circumstances of cancellation, disputes arise as to the appropriate scope and measure of damages for lost travel. [See Rudolph v. United Airlines, Inc., 519 F. Supp 438 (N.D. Ill. 2021)]. Thus, the uncertainty of remedies and alternatives upends the assurance of how travel occurs and what reasonable expectations exist to fashion remedies that more practically and efficiently move disputing parties forward.
Considering Other Doctrines
In the supply chain, certain states have traditionally held suppliers to comply with their service and production contracts. For example, in Texas, where base prices for alumina rose and regulations interfered with manufacture, the court still enforced the benefit of the bargain secured by the contract. [See Sherwin Alumina, L.P. v. Aluchem, 512 F. Supp 957, 965-968. (S.D. Texas, 2007)].
In the sale and exchange of goods, the Uniform Commercial Code Section 2-615, which is adopted in most states, provides that a contingency that was an assumed non-occurrence may serve a breach of duty under a contract to furnish goods. Further, in California, common law impossibility may arise when: (a) there is an unforeseeable event; (b) which is outside the control of the parties; (c) which renders performance impossible or impracticable.
Thus, even in the absence of a force majeure clause, other doctrines such as legal impossibility may apply based on traditional common law principles. There must be a showing of extreme circumstance of which the contracting party had no part in creating, combined with efforts to cure, before this theory gains traction before a court.
Ultimately, supply chain considerations have been and will be a part of the design, construction, risk management, and forensic evaluations at peer review during construction and post loss for the foreseeable future. Supply chain has and will be a permanent risk factor for the vast majority of construction projects. As a result, successful management of these risks requires all stakeholders to take a proactive and integrated approach to project evaluation to minimize risk and control unfavorable outcomes accordingly.