Applicability of Suspension and Termination Contract Clauses for COVID‑19 Impacts in the Construction Industry

This blog post is the sixth in a series of eight that summarize the potential impacts of the COVID-19 pandemic on the construction industry, including the potential applicability of typical contract clauses to the impacts, best practices for mitigation of the impacts, and recommendations for avoiding claims related to COVID-19 in future contracts.

This blog post summarizes information published in articles and blog posts by various attorneys and law firms, and the intent is to provide a brief summary that may be beneficial to owners and contractors. This post is not written by attorneys and does not constitute legal advice.

Several authors discuss the potential applicability of various contract clauses to COVID-19 impacts in the construction industry. Suspension of work and termination for convenience clauses have both been cited as being potentially applicable to COVID-19 impacts as discussed below.

In “Dealing with the Construction Impacts of COVID-19,” American Bar Association Newsletters, Spring 2020, Michael A. Stover, Cynthia E. Rodgers-Waire, and Thomas J. Moran of Wright, Constable & Skeen write that owners may elect to suspend work on a project until COVID-19 impacts have passed, while in other cases they may be required to suspend work by local governmental shutdown orders. Stover et al. summarize the implications of an owner’s suspension for convenience in various standard construction contracts as follows:

• The American Institute of Architects (AIA) contract document A201 contains typical language for suspension by the owner for convenience at §14.3, which states that both contract time and cost shall be adjusted for increases caused by the suspension;
• ConsensusDocs §11.1.1 references a contractor’s right to cost and time adjustments for increases due to an owner’s suspension of the work;
• For U.S. federal contracts, FAR 52.242-14 provides that a contractor is entitled to price adjustments for increased costs if the government suspends the project for an unreasonable amount of time and the contractor is not responsible for any concurrent delay; and
• Other, non-standard contracts may entitle the contractor to a price adjustment if work is suspended for longer than a specified time duration.

Additionally, Stover et al. indicate that suspension clauses may also allow either party to terminate the contract if a suspension lasts longer than a specified time duration.

Further, Stover et al. discuss termination for convenience by the owner as a potential in hospitality and retail sectors that were hardest hit by the impacts of COVID-19, such as governmental shutdown orders. They indicate that the termination clause of the particular contracts will govern with respect to a contractor’s rights to compensation for work not performed including profits. From a surety standpoint, Stover et al. note that while termination for convenience eliminates risk of any performance bond claims due to delays, risk associated with payment bonds may remain pending termination claim settlements with vendors. Stover et al. also point out that the U.S. Office of Management and Budget (OMB) provided guidance to federal agencies that they should look for other solutions, including termination for convenience, if completion by the contractor is not possible due to COVID-19 impacts, and that these actions should not negatively affect a contractor’s performance rating.

In “How Should the Impact of the COVID-19 Outbreak Be Managed on Projects under FIDIC and NEC?,” 31 March 2020, Rebecca Shorter, Charles Nairac, Dr. Markus Burianski, Dr. Dimitar Kondev, and Yasmine El Achkar of White & Case write that in extreme cases of prevention of work and force majeure, parties may wish to consider termination. Shorter et al. cite that under the International Federation of Consulting Engineers (FIDIC) contracts, either party can terminate the contract “‘if the execution of substantially all the Works in progress is prevented’ due to the force majeure event for a continuous period of 84 days or for multiple periods that total more than 140 days.” They indicate that upon termination, the contractor will be paid for completed work but cannot recover profit on incomplete work, and the owner cannot recover costs associated with hiring a replacement contractor.

Additionally, Shorter et al. cite that under the New Engineering Contract (NEC) clause 91.7, the owner may terminate the contract when an event of Prevention (clause 19.1) is “‘forecast to delay Completion of the whole of the works by more than thirteen weeks.’” They indicate that in such a case, if the contractor wants to avoid termination, it must mitigate the delay or accelerate remaining works to ensure that completion is not delayed by more than 13 weeks. In the event of such a termination, the authors explain that the contractor will be paid for completed work but cannot recover profit on incomplete work, and the owner cannot recover costs associated with hiring a replacement contractor. Shorter et al. further note that the impact of governing law is relevant when considering termination because both the FIDIC and NEC forms refer to potential reliance on governing law for termination.

In “COVID-19’s Impact on Construction: Is There a Remedy? – Time Extension, Force Majeure, or More?,” The National Law Review, 3 April 2020, William J. Shaughnessy, William E. Underwood, and Chris Cazenave of Jones Walker LLP state that under AIA from article 14.1.1.2 (“Termination or Suspension of the Contract”), the contractor has the right to terminate the contract if the work is stopped for 30 consecutive days, by no fault of the contractor, for “an act of government, such as declaration of a national emergency, that requires all work to be stopped,” which may include a public health order that prohibits construction. Shaughnessy et al. write that if the contractor invokes its right to terminate, the AIA form provides that the contractor is entitled to recover payment for work performed as well as overhead and profit on remaining work and termination costs. Conversely, Shaughnessy et al. cite that an owner may choose to suspend (AIA article 14.3) or terminate (AIA article 14.4) work for convenience. Shaughnessy et al. write that in the event of an owner suspension for convenience, the contractor would be entitled to a price adjustment, while in the event of an owner termination for convenience, the contractor would be entitled to be paid for work executed as well as any termination costs incurred.

Additionally, Shaughnessy et al. write that under ConsensusDocs, both parties have rights similar to those under the AIA form. Shaughnessy et al. indicate that the ConsensusDocs 200 Standard Agreement article 11.5 provides for termination by the contractor in the case of “national emergency or other governmental act,” in which case the contractor is entitled to be paid for completed work, proven losses, and overhead and profit on work not performed. Further, the authors indicate that article 11.4 provides for termination for convenience by the owner, in which case the contractor would be entitled to payment for completed work, termination costs, and potentially a premium if previously agreed.

As detailed above, several authors discuss the potential applicability of suspension and termination contract clauses to COVID-19 impacts in the construction industry. The authors note the requirements for and potential financial implications of suspension and termination for convenience under various standard contracts. As always, fully understanding the specifics of the contract and documenting the impacts contemporaneously are key for supporting (or defending against) potential claims.

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