There have been some interesting recent court decisions handed down that will certainly have lasting impact for contractors and subcontractors.
Construction Contracts and Force Majeure
The vast majority of construction contracts contain provisions allocating responsibility for impacts and delays. Nearly 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?
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 and the contractor would still have been required to quarantine under New York’s COVID-19 protocols and therefore would have suffered the same damages. Moreover, the government argued that the risk of costs relating to a pandemic or quarantine under a fixed-price contract rested
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.
Case 2: Contractor, Covid, and Poor Performance
Central Company 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.
Among a number of problems, Central did not have an approved progress schedule and none of its design documents were approved by the contract’s completion date. After 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. Moreover, the contractor did not show that its subcontractor’s positive COVID tests were an insurmountable obstacle to the contractor's work.
These two cases involve federal contracts. 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. 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.
One Year Limitations For Defects
Washington Supreme Court Ruling related to one-year limitations for construction defects. Originally published by the Seattle Daily Journal of Commerce on November 3, 2022. In a 5-4 decision, the Washington Supreme Court recently ruled in Tadych v. Noble Ridge Construction, Inc. that a contract provision providing a one-year limitation period for filing a construction defect lawsuit was “unconscionable” and therefore unenforceable.
The court’s ruling revives a lawsuit filed by two homeowners against their homebuilder for alleged construction defects in their Seattle home. The case also calls into question the enforceability of other contractual time limitations on claims, which are common in construction contracts. Two lower courts had sided with the contractor but the Supreme Court reversed and remanded the case for trial, reasoning that the one-year limitation provision is “substantively unconscionable” because it “unduly benefits the contractor at the expense of the homeowner’s right to bring a legitimate claim” that would otherwise be allowed under the six-year statutory limitation and repose period provided by the Revised Code of Washington. The court stated the new rule as follows: “A contract provision becomes substantively unconscionable when it eliminates otherwise established statutory rights and is one sided, benefiting the contract drafter, is also not prominently set out in the contract, is not negotiated or bargained for, and provides no benefit to the affected party.”
Reality Test Case Involving Labor Broker
In February, the Michigan Court of Appeals issued its unpublished opinion in Etheridge v. JJ Curran Crane Co. This case involved a labor broker and the Exclusive Remedy provision of the Michigan Workers’ Disability Compensation Act.
In the Etheridge case, the Michigan Court of Appeals’ analysis focused on determining whether an employment relationship existed between Ferraro and Blake according to the Economic Reality Test’s four factors:
Whether Ferraro had control of Blake’s job functions;
Whether Ferraro or JJ Curran paid Blake wages related to the project;
Whether Ferraro had the right to hire, fire and discipline Blake; and
Whether the performance of Blake’s duties was an integral part of Ferraro’s business of accomplishing the seawall construction project.
Considering all four of the Economic Reality Test factors, the Court determined that Blake was a Ferraro employee. As a result, it found that Etheridge’s civil lawsuit against JJ Curran was not proper because Blake was not considered to be an employee of JJ Curran on the date of injury. Etheridge’s recourse was limited to workers’ compensation benefits through his own employer, Ferraro.
A strong relationship and trust between owners, contractors, and subcontractors will benefit all parties. It is important to look for opportunities to deepen the relationship with key strategic partners.