In the ever-increasing race to protect against contract risk brought on as a result of the pandemic, some obvious contract clauses are negotiated while others are left untouched. Some of those untouched clauses can wreak havoc on contract risk. In addition, early efforts to negotiate contracts based on the pandemic were geared towards the unforeseeable nature of COVID-19. However, now having lived with Covid for more than a year, parties are going to have considerable difficulty asserting a position that circumstances which were caused by Covid are now unforeseen.
It therefore becomes of paramount importance that anyone reviewing a construction contract for risk examine all the clauses potentially having an impact.
Force Majeure clauses get a lot of attention. However, risk managers need to greatly broaden their horizons in terms of what clauses to review in order to minimize Covid related risk. Besides Force Majeure clauses, risk managers should focus on:
- Price escalation and possible delay related language
- Whether the contract requires performance specifications or proprietary specifications. If the material or equipment specifications are proprietary, risk managers should make sure that the supply chain for that proprietary equipment or material is available.
- Liquidated damages along with any delay analysis. In terms of reviewing schedule clauses, risk managers should pay close attention to the specific language of substantial completion and review how the specific language could be affected by the pandemic.
- Changes clauses in conjunction with the substitution language. The risk associated with a substitution due to the pandemic should be reduced or minimized. In substitutions, the party seeking the substitution often bears a considerable amount of risk for making the substitution request. That risk should be re-distributed.
- “Time is of the essence” clauses. The contract should be reviewed carefully to find all references to time being of the essence and those references should be qualified with pandemic level language.
- Owner suspensions and owner terminations for convenience. Because of the pandemic and interruptions to the supply chain, an owner may elect to suspend or terminate for convenience various portions of the project, or even the project as a whole. That language needs to be carefully considered. In addition, risk managers should review the possibility of inserting language for a contractor suspension based upon the unavailability of material or equipment caused by the pandemic.
- Other sections include the claims section, the waiver of consequential damages, and perhaps most importantly, the indemnity obligations. These sections need to be reviewed carefully and tempered to make consistent with the rest of the contract changes and the risks associated with the pandemic.
No one can foresee precisely what issues will arise in the future but taking a closer review of some of these other clauses will greatly reduce risks on a construction project.