Surety Bond Quarterly Professionals in Surety Bonding
By Alexander Gorelik
It is quite clear that 2020 has been an unusual year, to say the least. The global Coronavirus pandemic has already taken many thousands of lives and fundamentally affected millions more. However, the impact of the pandemic has not stopped there either, with most economies around the world coming close to a halt. That has certainly been true as much in the United States as elsewhere in the world. And while some people may point to a more limited impact on the construction sector than other fields, as those in the industry well know, the pandemic definitely did not bypass construction either.
Despite that concerning start to the year, however, both contractors and their sureties must keep in mind that the other “acts of god” that usually worry them around this season are not going away either. In fact, with the hurricane season about to get well under way, a number of experts are predicting that 2020 may be a record year. Pennsylvania State’s Earth System Science Center, for example, suggests that the 2020 Atlantic hurricane season could bring in as many as twenty named storms.
Of course, even a single hurricane can be critically devastating to the area that it hits, as a number of storms from our recent memory confirm. For instance, 2017’s hurricane Harvey alone caused an approximate $125 billion in damage, which was then followed by two other massive hurricanes that year, hurricanes Irma ($77.2 billion in damage) and Maria ($90 billion in damage). Among many other things, such calamities can have significant impacts on the construction industry. But given the already fragile state of the economy in general and the construction industry in particular from the pandemic this year, the additional challenges brought by even a more minor hurricane may very well make an already difficult situation worse.
Given this potential scenario, knowledgeable contractors, their sureties, and those sureties in a takeover scenario likely have at least a few contractual defenses at their disposal. Indeed, there are at least five types of contractual provisions that can be particularly helpful to keep in mind for avoiding such a “perfect storm.” This article serves as a brief reminder of the meaning and significance of those terms.
1. Suspension Clauses
Construction contracts will frequently contain clauses that address the owner’s or a prime contractor’s ability to suspend the project (for instance, A201 § 14.3.2., FAR 52.242-14—Suspension of Work). Indeed, these clauses exist specifically to allow the suspending party to direct its contractors to pause its work on a project for a specific period of time, while allowing it to limit the type of damages that the suspended party may seek. In practice, these clauses may even allow a suspended contractor to recover both time and monetary compensation for the impact of any suspension. Of course, the specific language of such a clause in the agreement will typically decide whether that’s the case.
Sometimes, however, the suspending party can create a suspension even without an explicit direction to that effect. Those occurrences are termed as “constructive suspensions” and appear where the suspending party prevents its contractor from being able to perform project work but does not issue any specific orders to that effect.
As a result of the broad rights afforded to the parties by such provisions, hurricanes can serve as the perfect scenario for their use. Accordingly, contractors who seek to recover under these provisions should be aware of the specific requirements and remedies imposed by any variants of these terms in their contracts. As such, contractors should review those clauses now to at least assess what a proper suspension notice under the contract requires and what steps, if any, the clause may obligate them to take. After all, it is better to do so before it becomes a necessity and another party’s direction to suspend the work immediately awaits.
2. Termination for Convenience Clauses
In some cases, contractors may instead be able to obtain a recovery of certain costs as a result of a termination for convenience. These terminations occur under the authority of contract provisions that allow the owner or a prime contractor to terminate the contract for reasons other than a contractual breach, that is, for their own convenience. As this definition suggests, termination for convenience clauses are distinct from those clauses permitting terminations for either a default or cause, which typically afford the exercising party the right to terminate a contract after encountering a breach.
In fact, unlike the provisions that permit parties to terminate contracts for default, termination for convenience clauses (for instance,A201 § 14.4.3., FAR 52.249-2—Termination for Convenience of the Government (Fixed-Price)) allow the terminated parties to obtain certain monetary compensation that would often not be otherwise obtainable. As an example, the A201 2017 Standard Form Agreement allows the terminated contractor to receive payment for “the Work properly executed; costs incurred by reason of the termination, including costs attributable to the termination of Subcontracts, and the termination fee, if any, set forth in the Agreement.”
Dramatic impacts stemming from hurricanes can definitely create situations prone for the use of such provisions. So contractors must be aware of the remedies afforded to them under these terms and remain prepared for their use. Both contractors and sureties must also be vigilant, however, to document any directions to terminate, resulting costs, and other related facts carefully, because that can be crucial to protecting them from a potential misuse of the terms.
Indeed, even though terminations for convenience rarely impact the surety, for example, there are certainly cases where that can occur. Most frequently, such situations are created if the terminating party decides to convert a termination of a contract for convenience to a termination for default. As usual, however, early preparation can mitigate the potential of such events occurring.
3. Emergency Clauses
Some construction contracts may also contain emergency clauses, which can become quite useful at this time. The A201 2017 Standard Form Agreement, for instance, contains § 10.4, which 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 Disputes) and Article 7 (Changes). (Emphasis added.)
The fact that this clause is focused on “addressing emergenc[ies] affecting safety of persons or property” is significant. After all, hurricanes can create these exact situations. So where this clause is part of their agreement, contractors may be able to recover costs or time that they incur to prevent damage, injury, or loss, in certain circumstances. But to do so, contractors must not to forget the requirements of the standard “Claims and Dispute” and “Changes” processes either. In fact, any recovery will depend on a contractor’s ability to comply with those regular procedures (such as any routine notice and approval requirements).
4. Material Escalation Clauses
In the case that a hurricane exacerbates any already existing issues or creates new ones with a supply of materials, contractors will, of course, have to rely on any escalation clauses in their contracts for a remedy. These clauses will typically allow for an adjustment to the contract value to address the impact of any significant increases. These clauses are not present in every contract, however, so contractors should make sure to review their agreements to identify whether such terms exist, and any specific requirements that they may establish, if they do. As with the above clauses, contractors must be especially cognizant of any notice requirements in particular, because they always have a material effect on one’s potential recovery.
5. Force Majeure Clauses
Finally, contractors facing the impact of a hurricane will generally also have an opportunity to obtain some recovery under their contract’s force majeure clause (for instance,A201 § 8.3.1, FAR 52.249-14—Excusable Delays). Indeed, these clauses exist specifically in order to protect parties from losses which result from these kinds of events and others beyond one’s control. Of course, in practice, these clauses allow only for time extensions to address the delays tied to these events, rather than any monetary relief.
But depending on the language of the variant of this clause and the particular facts, a contractor may be able to use such a clause to address a broad range of the hurricane’s impacts, including both any direct effects and government action. As usual, though, it is up to contractors to make sure that they comply first with any requirements set out in their contract’s variant of the clause.
A few things to keep in mind
Simply put, each individual construction contract is likely to have numerous clauses that may allow a contractor recovery for the impacts of a hurricane disaster, should one arise. But they each come with their own rules and their own limitations to keep in mind. As such, while contractors and sureties need to be aware of all of these contractual tools at their (or their principal’s) disposal, they must also remember the fact that the most critical tool of all is basic preparation and planning in advance. And to do that, there is no better time to start than now.
Find Out More
For more information, access these NASBP Virtual Seminars: Force Majeure: Navigating the Impacts of the Coronavirus Pandemic on Contract Performance Obligations; 10 Steps to Preparedness; Killer Construction Clauses Redux: Bond Producers Beware!; The Top 5 Construction Risk Transfer Challenges and Solutions That Every Surety Professional and Their Clients Should Know. Access more NASBP Virtual Seminars at https://learn.nasbp.org. Access free NASBP Podcasts on this topic at https://letsgetsurety.org/episodes.
Alexander Gorelik is an Associate at the Washington, DC office of the law firm of Smith, Currie & Hancock LLP. He advises construction companies on various government contracting issues and regulations, often using his prior experience as a Contracting Officer for the Department of Defense. Gorelik is a member of the bars of Maryland and the District of Columbia. He can be reached at [email protected] or 202.735.2446.
