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Contracts, Coronavirus, and the Courts in Texas

With Varying Orders Throughout the State, A Look at the Impact on Contracts and How Courts May Rule

May 21, 2020 Photo

On March 13, 2020, Gov. Gregg Abbott declared a State of Emergency in Texas due to COVID-19. As a result, specific counties adopted orders mandating closure of all but essential businesses. 

Following the recommendation from the federal government, on March 29, 2020, Dallas County adopted construction-industry rules, titled, “Stay Home Stay Safe, Rules for the Construction Industry,” that provided guidance on the meaning and application of the shelter-in-place order by Dallas County, which classified construction as an essential business.

The purpose of these rules is to outline the steps that every employer and employee must take to reduce the risk of exposure to COVID-19, to ensure a safe working environment for employees, and, ultimately, to minimize liability exposure for employers.

On April 3, 2020, Harris County also issued a shelter-in-place order, naming construction services as essential. However, the order by the mayor of Austin excluded construction from essential businesses. As a result, construction companies and developers have been seeking legal guidance on how to address the multifaceted issues that inevitably become intertwined when implementing a shutdown process in compliance.

A general contractor whose job site was put on hold due to the agencies’ orders may claim damages for delay or extension of time as a result of COVID-19. First, Article 10.4 of AIA form A201-2017 states as follows:

In an emergency affecting safety of persons or property, the Contractor shall act, at the Contractor’s discretion, to prevent threatened damage, injury or loss. Additional compensation or extension of time claimed by the Contractor on account of an emergency shall be determined as provided in Article 15 [Claims] and Article 7 [Changes in the Work].

However, there is an argument that AIA had a purpose of compensating contractors for short-term emergencies, as opposed to a global months-long pandemic, and, as such, COVID-19 may not be considered an “emergency” within the meaning of Article 10.4.

If the court or the parties mutually agree that the suspension was due to an emergency, Articles 7 and 15 of AIA will apply. Article 15 allows contractors to make a claim for an increase in the contract price, without giving prior notice.

Article 7.3.4 gives architects a discretion to determine a reasonable adjustment in price in case a contractor disagrees with the adjusted price or simply does not respond promptly for an execution of a change order.

Second, Article 14.1.1 allows contractors to terminate the contract if the work is stopped for a period of 30 consecutive days through no act or fault of the contractor, a subcontractor, a sub-subcontractor, or their agents or employees:

  1. Due to the issuance of an order of a court or other public authority having jurisdiction that requires all work to be stopped; or
  2. Due to an act of government, such as a declaration of national emergency, that requires all work to be stopped.

Thus, a Texas contractor may be able to terminate contracts if it is able to show that that the reason for the suspension of work was either item one or two above. It is likely that the party opposing contract termination will try to show that there was an intervening cause of the suspension unrelated to the pandemic. 

A force majeure clause or the doctrine of impossibility may become center of disputes. Courts will have to look at each contract’s language. Contractors may also request additional time in case of delay in delivery of materials, per Articles 8.3.1 and, for a reasonable time determined by the architect.

However, in the past, courts have found it: “[d]ifficult to allege that performance is excused simply because one or more key personnel were affected by an epidemic”; required contractors to “estab-lish the actual extent of the delay caused by the epidemic” [see Ace Electronics Associates, Inc., ASBCA No. 11496, 67-2 BCA 6456 (July 18, 1967)]; and found that “[f]ailure to establish reasons for not obtaining materials from another source can result in denial of excusable delay and an extension of the time.” (see Cryer & Parker Elecs., Inc., ASBCA 15150, 71‐2 BCA ¶ 8943)

Finally, per Article 8.3.3, recovery of damages for delay is also available based on other provisions of each specific contract. Thus, if Texas courts are posed with a challenge of ruling on a construction claim due to COVID-19, they will create precedent law during unprecedented times.

Overall, in Texas, most counties have classified construction as an “essential” business during the COVID-19 pandemic. While the government restricted the safety terms of construction contracts, it will be up to the courts to determine whether potential contract delays could be excused or warrant claims for extra time and compensation.

About The Authors
Anna DeMaggio

Anna DeMaggio is an attorney in the Houston office of Wilson Elser Moskowitz Edelman & Dicker LLP.  Anna.demaggio@wilsonelser.com

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