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Law360 (April 6, 2021, 2:45 PM EDT) --
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Garrett Gibson |
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Matthew Rawlinson |
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Kelsey Machado |
In addition to the unimaginable human toll, decades of industrial and commercial transformation were compressed into a span of a few months. Many contract provisions were not squarely designed to address the unforeseen challenges of a global pandemic and the resulting effects on global commerce, office and project shutdowns, supply-chain interruptions and business travel.
But now that the world has lived through a global pandemic, there is little excuse not to revisit and reimagine contract provisions to account for the next one. Hindsight is 20/20, but here we are presented with a unique opportunity to apply lessons learned to prospective agreements.
This article identifies key contract provisions that caused consternation, frustration and litigation during the COVID-19 pandemic and suggests possible alternative provisions in future contracts.
Cost and Risk Allocation Provisions
At almost every level, COVID-19 rendered business operations more expensive.
This was particularly true on construction projects, many of which were allowed to proceed or reopen early as essential operations.
Once construction projects began reopening and parties began resuming contract performance, there were often disputes about the cost burdens and risk allocation arising from COVID-19: cost associated with purchasing and maintaining personal protective equipment, expenses with hiring COVID-19 enforcement monitors, paying for signage and cleaning materials, and responsibility for delays arising from worksite infections, exposure, sanitation and additional governmental inspections.
Rarely did contracts address, or even contemplate, responsibility for the cost of these, at the time, unforeseen issues.
For future construction contracts, consider including the following provisions:
- Squarely address and allocate risk for pandemic costs and identify the specific categories of costs associated with a pandemic. Consider adding a matrix as a contract addendum identifying each party's responsibilities for pandemic costs.
- On a construction project, consider adding an owner allowance for the cost, which can be managed by the performing party. The amount of the allowance can be dependent on the length of the pandemic and add a cost savings provision to incentivize efficient use of the allowance.
Force Majeure
The internet is full of articles written by attorneys prognosticating on the impact of force majeure clauses during COVID-19 because many force majeure clauses did not squarely capture global pandemics, leading to ambiguous outcomes.
Ambiguous force majeure clauses only delay resolution and create fact issues in litigation. In an effort to avoid this, future force majeure provisions should contemplate the following:
- "Pandemic" is not always clearly defined. Expressly include or exclude a pandemic based on a particular governmental agency's declaration, i.e., the World Health Organization, the U.S. Centers for Disease Control and Prevention, or state or local health authorities. Specifically include or exclude terminology with appropriate definitions to avoid any ambiguity. For example, consider whether the force majeure clause will cover pandemics, epidemics, endemics, all of these, none of these or only a portion.
- Address whether future waves of COVID-19 variants or strains may be claimed as a force majeure. After all, now that we are living with COVID-19 and aware of its ability to mutate into differing variants and strains, are future waves really unforeseeable events?
- Make the length of the pandemic certain and subject to definite deadlines and address the level of impact on performance — e.g., whether performance must be impossible, impracticable or simply more difficult.
- Directly address whether the consequences of a pandemic can form the basis of a force majeure event, i.e., whether travel restrictions and shutdown orders are events of force majeure caused by a pandemic.
In-Person Provisions
Reconsider contract provisions that call for any in-person provisions. For example, construction contracts commonly permit the owner to conduct an in-person audit of the general contractor's books and records. But that provision has little teeth when the general contractor can bar the owner's auditor from entry based on reasonable COVID-19 concerns.
These provisions need to be reimagined to allow for a virtual review of the books and records in the event that an in-person review is not possible. To the extent there are costs associated with this accommodation, consider which party bears the responsibility.
Dispute Resolution Clauses
COVID-19 has made quickly litigated disputes all but impossible. Although the judiciary has worked to adapt videoconference technology to keep the wheels of justice in motion, even the best technology has not allowed for the continuation of jury trials.
In every jurisdiction there is a yearslong backlog of cases awaiting jury trial. For parties who want to stall litigation, COVID-19 has provided the perfect excuse to drag out mediations, discovery and final resolution.
In future contracts, we recommend prospectively negotiating and agreeing to an end-to-end virtual dispute resolution in the event of a pandemic.
- Agree to virtual senior officer pre-resolution meetings. Contracts often call for in-person meetings of senior officers as a condition precedent to initiating litigation. Allow for such meetings to occur by videoconference or teleconference to avoid delays by a failure to travel and meet in person occurring because of a pandemic.
- Many contracts mandate prelitigation mediation. Agree to a virtual mediation process ahead of time to avoid the hassles of negotiating this after a dispute has arisen.
- Litigation can completely stall if one party refuses to proceed with virtual witness depositions. Agree to hold virtual depositions and flesh out a protocol for the exchange of exhibits, the location of the court reporter and who can be present with the witness during the deposition.
- With juries unavailable even virtually, the most expeditious and sure means of getting to a final hearing is to agree to a virtual arbitration hearing. The parties should include a provision allowing for a virtual arbitration in the event that a jury trial is impracticable because of a pandemic. As with depositions, the parties should prospectively negotiate the logistics and mechanics of a virtual arbitration hearing.
Matthew C. Rawlinson is a partner, and Kelsey M. Machado and Garrett A. Gibson are associates, at Eversheds Sutherland.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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