By Michael C. Loulakis and Lauren P. McLaughlin
When the pandemic swept across the globe in 2020, the construction industry, like all business sectors, adapted to the new normal. Some contractors did so more successfully than others. Nevertheless, construction projects had to continue with a new set of challenges such as labor shortages, material escalation, and pandemic-related impacts. When construction costs increased, project executives immediately evaluated their contracts to ascertain ways to recover those losses.
The vast majority of construction contracts contain provisions allocating responsibility for impacts and delays. Provisions addressing delays that are caused by events outside of either party’s control are typically referred to as force majeure clauses. After determining whether a global pandemic falls within a specific clause’s coverage, contractors next look to determine what relief is provided under the clause.
In some cases, contractors may be entitled to time extensions only but no relief in the form of compensation for additional costs attributable to the pandemic and extended performance duration. Other clauses may allow contractors to seek additional compensation for costs that they can prove were caused by the force majeure event. Other contractors seek time extensions and delay-related costs under the traditional “changes” clause. Yet others argue “cardinal change” as a result of the unprecedented event or rely on the doctrines of impossibility or impracticability. These latter two legal theories are premised on the notion that when the costs and burden have increased to such unconscionable degrees, they are not fairly regarded as within the risks contractors assumed under the contracts.
Irrespective of which provisions or theories are used to recover losses, now that we are almost three years beyond the pandemic’s start, cases have begun to trickle out on contractors’ COVID-19 claims. What specific impacts did contractors claim? What contract clauses or theories did they rely upon? Were they successful in proving entitlement to additional compensation and time extensions?
Let’s take a look at four that have come out this year.
Contractor unsuccessful in alleging quarantine regulations impacted work
In JE Dunn Construction Co., the contractor appealed to the Armed Services Board of Contract Appeals, alleging that the U.S. Army Corps of Engineers constructively changed the contract by implementing COVID-19-related restrictions that required all personnel arriving at Fort Drum, New York, from more than 350 miles away to quarantine for 14 days prior to performing work on-site.
The Corps argued that the “sovereign acts” defense barred the contractor’s claim because the restrictions were issued pursuant to the government’s sovereign capacity. The Corps also argued that the contractor would still have been required to quarantine under New York’s COVID-19 protocols and therefore would have suffered the same damages notwithstanding the Fort Drum quarantine requirement. Moreover, the government argued that the risk of costs relating to a pandemic or quarantine under a fixed-price contract rested with the contractor.
In ascertaining who was correct, the board considered that for the sovereign acts defense doctrine to apply, “(1) the government’s act must be public and general and (2) the act must render performance of the contract impossible.” (To determine if an act is public and general, a court must decide whether the act “is specifically directed at nullifying contract rights” and whether the act “applies exclusively to the contractor or more broadly to include other parties not in a contractual relationship to the government.”)
The board denied the contractor’s appeal. In doing so, it determined that the quarantine requirement was implemented to serve a broader governmental objective to control COVID-19 and was not aimed specifically at the contractor. As such, the contractor could not show with enough certainty that it would not have suffered the same damages under New York state’s quarantine protocols. The board agreed with the Corps that the risk of a pandemic or quarantine under a fixed-price contract rests with the contractor.
Contractor fails to prove COVID-19 impacted its (already poor) performance
In Central Company, Central had a contract with the U.S. Air Force to design and build a small squadron storage building and yard at Grissom Air Reserve Base in Indiana.
Central encountered a number of problems and did not have an approved progress schedule. None of its design documents were approved by the contract’s completion date. The Air Force subsequently terminated Central for default. Central challenged the termination on the grounds that COVID-19 impacted its work and the government’s termination did not account for obstacles it faced due to COVID-19.
The Armed Services Board of Contract Appeals rejected Central’s reliance on COVID-19 as an excuse for performance because Central failed to actually link any of its delays to the pandemic. The board noted that Central was already well behind schedule when it began claiming negative impacts from COVID. Even if this weren’t the case, the board reasoned that Central’s outright failure to demonstrate how exactly COVID impacted its work — other than making blanket statements about its impacts — meant the Air Force’s termination for default was proper. Moreover, the contractor did not show that its subcontractor’s positive COVID tests were an insurmountable obstacle to the contractor's work.
Contractor’s certified claim denied for COVID-19 base closure
In APTIM Federal Services LLC, CB&I Federal Services LLC, a predecessor in interest to the contractor, entered into a contract with the U.S. Air Force for design-build construction work at Arnold Engineering Development Complex at Arnold Air Force Base in Tennessee. Due to COVID-19, the base’s commander closed the base to all nonoperationally urgent personnel. The contractor was not deemed operationally urgent and thus was unable to access the base during this period. The contractor submitted a certified claim for administrative costs incurred during the roughly two months during which it was not able to access the job site. The commanding officer denied the claim, recognizing that this was a firm fixed-price contract that “places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss.”
The contractor appealed to the Armed Services Board of Contract Appeals for denial of its claim for operational costs incurred during the roughly two-month period. The government responded by invoking the sovereign act, and the board denied the appeal.
Again, the test for the sovereign acts doctrine is that the government’s act must be public and general and the act must render performance of the contract impossible. The board held that “the sovereign acts doctrine is an affirmative defense that is an inherent part of every government contract” and that “the object of the sovereign acts defense is to place the government as contractor on par with a private contractor in the same circumstances.”
The board denied the contractor’s appeal, holding that the contractor was excluded from the base equally along with many other contractors by an act of the base commander in response to the larger public health danger and that this exclusion made the performance of each party’s contractual obligations impossible during the time period at issue. Thus, both prongs of the sovereign acts defense were present.
Contractor unsuccessfully argues excusable delay due to COVID-19
Two recent sister cases before the Civilian Board of Contract Appeals further addressed why COVID-19 may not be treated favorably for contractors facing terminations for default. In ORSA Technologies I and ORSA Technologies II, various Veterans Affairs Network Contracting Offices issued separate requests for quotes seeking contractors to provide nitrile gloves they may have had “on hand” when marketplace shortages arose during the COVID-19 pandemic in early 2021.
The VA Network Contracting Offices in San Antonio and Murfreesboro, Tennessee, both selected ORSA for award, and both offices emphasized the importance of carrying out the contracts. Nevertheless, ORSA was unable to deliver suitable gloves by the contractual deadlines (despite even being allowed to substitute products in one case) and was terminated for default in both contracts.
ORSA sought to overturn the default terminations by reason of excusable delay. The board rejected this argument, pointing to the clear directions in the RFQs that stated that the gloves be “on hand,” “in-stock,” and “available for immediate delivery” when ORSA was awarded the contracts.
The board held that ORSA could not now complain of excusable delay when, at the outset of the contract, ORSA had misstated its compliance with contract requirements and was unprepared to deliver the requested gloves. Additionally, the board found that the shortages ORSA experienced causing it to fail to deliver the gloves were entirely foreseeable. The reason the government was requesting contractors deliver “on-hand” gloves in the first place was in response to COVID-19-induced shortages in the marketplace. The board concluded that because the shortage began before the contract was awarded (and one of the contracts was subsequently modified to allow substitute products), it was not an unforeseeable risk beyond ORSA’s control.
While the illustrative cases all depict a contractor success rate of zero in pursuing COVID-19-related claims, one can see there are several common threads with these decisions. All involve federal contracts resolved by Board of Contract Appeals decisions, and two involve the sovereign acts doctrine.
It is not yet known whether the success rate is just as low in the private sector or in state procurement disputes at the state and federal court level. However, from a review of recent case law, the common law doctrines of impossibility and impracticability do not appear to provide much relief for contractors on private projects either, as courts have been reluctant to apply them to the pandemic; the same appears to apply to labor shortages.
Nevertheless, these cases demonstrate why it is important for contractors to recognize that COVID-19 will not be a panacea for job-related performance issues and will not provide a reliable excuse for all delays contractors may face on their contracts.
For delays to be deemed excusable under Federal Acquisition Regulations, contractors will need to specifically identify exactly how COVID-19 has impacted their work. Moreover, the fact that contractors experienced delays related to COVID-19 may still not be enough. If delays were foreseeable when contracts were formed, especially in those executed after the pandemic and market shortages began, boards and, we suspect, courts will be less likely to treat them as excusable, even if related to these issues.