Impacts stemming from COVID-19 are felt in every aspect of life. The surety industry is no different. Different types of surety bonds will be affected in different ways. Understanding the indirect effects of how COVID-19 affects the contract surety industry can help surety carriers, surety producers, and contractors mitigate risks and soften the blow.
Numerous articles have popped up outlining how Force Majeure clauses may be utilized for project delays leading to potential surety claims related to the COVID-19 pandemic. Force Majeure is a contract clause that excuses the performance of a construction contract due to uncontrollable events. Not all construction contracts will contain a Force Majeure clause covering COVID-19 or viruses. The most common performance and payment bond form from the American Institute of Architects outlines delays and extensions of time in their Performance and Payment bond form (AIA Document A201-2007) in Article 8, section 3.1.
Force Majeure is not a “cure-all” that sureties and contractors can rely on to keep from being responsible for bond claims resulting from completion date delays due to COVID-19 impacts. Force Majeure clauses may not exist in all performance and payment bond form language. It’s also possible that contract amendments removing force majeure clauses may have been removed if mutually agreed upon prior to signing a contract. There’s also Burden of Proof that comes into play where it must be proven that is impacts from COVID-19 have made completing the project impossible, not impractical or unprofitable.
Alternative Solutions Outside of Force Majeure
There are several options beyond Force Majeure. First, open communication between all parties, including the project owner, general contractor, suppliers, vendors, subcontractors, and sureties is essential. Always consider renegotiations and change orders when it comes to the initial parties involved. Next, there is the Good Faith Attempt to Perform and other regulations that can be used, below:
- The Doctrine of Impossibility/Impracticability – 30 Williston on Contracts § 77:31 (4th ed.) that states:
“A contracting party has no duty to perform an obligation in the agreement if performance is rendered impossible or impracticable, through no fault of its own, because of a fact that existed at the time when a contract was made and about which this party neither knew nor had reason to know, and the nonexistence of which was a basic assumption of the parties’ agreement.”
- Default under Federal Contracts – FAR § 52.249‐10‐ Default that reads:
“(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if ‐ (1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and…”
- Excusable delays involving federal contracts – FAR § 52.249‐14 states:
“(a) Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor. Default includes failure to make progress in the work so as to endanger performance….”
Construction is currently considered an essential business by the majority of states, as this industry is a driving force in the economic health of our country. This does not apply to all states and local jurisdictions, and may change from day to day. Construction is even considered an exemption under the California Executive Order N-33-20. Being deemed an essential business exempt from executive stay-at-home orders does not shield the construction industry from the impacts of COVID-19. If a bonded project comes to a halt, sureties may face claims due to delayed completion of projects. Now is the time to be proactive and have those difficult conversations.