Governments throughout the world have issued “shelter in place” orders requiring that residents stay at home except for “essential” purposes. As a result, in the United States, more than a third of Americans have been ordered to stay at home. This, in turn, has had a direct impact on construction projects which have slowed or have been temporarily shuttered altogether, and it will (not may) have an impact on the flow of project funds. So what can project owners and contractors do? We’ve got a few tips.
1. Read Your Contract, Paying Particular Attention to Force Majeure, No Damages for Delay and Notice Provisions
For the most part, with the exception of statutory rights and remedies which we will discuss below, your contract spells out your rights and remedies should the proverbial “S” hit the fan. It is, in other words, the rules you agreed to, and you should know what those rules provide. Three provisions you should look for, and if they’re in your contract, you should review carefully are: (1) Force majeure provisions; (2) No damages for delay provisions; and (3) notice provisions.
Force Majeure Provisions
Latin for “superior force,” a force majeure provision defines circumstances beyond a party’s control that may render contractual performance by that party difficult or impossible to perform. A force majeure provision is, by its nature, defensive. In other words, it is a defense against a higher-tiered party’s claim that a lower-tiered party has failed to perform its obligations under a contract.
Most people think of force majeure events as being “Acts of God,” or, in other words, earthquakes, tornadoes, tsunamis and other naturally occurring events. That’s not always the case though. Force majeure provisions can include any number of “triggering” events including government actions, terrorism, riots and other events that aren’t naturally occurring.
In short, if your contract includes a force majeure provision, you need to read and understand it, so that you know what events trigger the provision. You also need to understand the intricacies of force majeure provisions. For example, few force majeure provisions that I’ve seen include a trigger for plagues or epidemic outbreaks such as the coronavirus, but many include government actions as a “triggering” event. Thus, while the coronavirus itself may not be a “triggering” event, state and local “shelter in place” orders currently in effect would likely constitute a “triggering” event.
No Damages for Delay Provisions
The current crisis is going to cause delays on construction projects, whether because the project itself is temporarily shut down due to “shelter in place” orders at the state or local levels, because of an inability to get workers out to the job site because they are sick or scared, because your work is impacted because other trades are not coming out to the project site, or because of delays in the delivery of or the inability to purchase materials and equipment.
There are many grey areas here, but the impact is the same: Delays on the project. Some contracts, recognizing that there could be delays on the project which no one could have foreseen or controlled, include “no damages for delay” provisions. An example of what a “no damages for delay” provision might look like is the following:
In the event that Subcontractor’s performance of its Work is delayed through no fault of its own, Subcontractor may request an extension of time for performance of its Work, but in no event shall be entitled to any increase in the Contract Price or damages arising from such delay.
In short, a “no damages for delay” provision, while allowing a contractor to seek an extension of the contract time due to delays, prevents a contractor from seeking an increase in the contract price, whether due to the need to pay workers for overtime or hazard pay, for increases in material costs, for extended general conditions, etc.
Most construction contracts include notice provisions setting forth when, under what circumstances, and how notice may be given. Importantly, they often also set forth happens if you don’t give proper notice. In the current situation, notice provisions are extremely important as contractors face delays and time-related costs impacting their ability to meet contractually agreed upon completion dates and ability to perform their work without coming out at a financial loss.
Many notice provisions provide that if notice is not given, or not timely given, that a contractor waives its right to pursue claims in which notice was required. An example of notice provision related to delays and time-related costs is the following:
In the event that Contractor claims that its Work has been impacted through no fault of its own, Contractor may request an extension of the Contract Time and/or increase in the Contract Price by providing written notice to Owner no later than fifteen (15) days of the event giving to the claim. Provided, however, that should Contractor fail to provide timely notice, Contractor waives any right to an extension of the Contract Time or increase in the Contract Price.
In short, notice provisions are extremely important right now. In fact, even if your contract doesn’t include a notice provision requiring that notice be provided of delays and/or time-related costs, my suggestion, is that you consider sending notice anyway. To successfully bring a delay and/or time-related cost impact claim a contractor needs to show that the delay was both compensable and excusable.
2. Understand Your Statutory Payment Rights
In California, there are three primary statutory payment remedies available to those performing work on construction projects: (1) mechanics liens and design professional liens; (2) stop payment notices; and (3) payment bond claims. Who can assert these payment remedies, when they can be asserted, and how they are asserted, varies. You can read more about each of these payment remedies by clicking the links above, but here’s a snapshot:
Who Can Assert These Payment Remedies
Only design professionals, that is, licensed architects, registered engineers, and registered land surveyors, can assert a design professional lien.
Only direct contractors, subcontractors, material suppliers, equipment lessors and laborers may asset mechanics liens.
And, only subcontractors, material suppliers, equipment lessors, and laborers may assert stop payment notices and payment bond claims.
When Can They Be Asserted
Here’s where it gets interesting, most people think that mechanics liens can only asserted after completing their scope of work. For direct contractors who are serving as general contractors that usually means when the entire project is completed. For all others it is when their work is completed.
But, importantly, given the situation we are in, “completion” under Civil Code section 8180 includes, not only completion of the entire project (in the case of general contractors) or completion of a party’s scope of work (in the case of all others), but also “cessation of labor for a continuous period of 60 days.”
Thus, in a situation where project sites may be closed for a prolonged period of time due to the various “shelter in place” orders, if this includes a cessation of labor for a continuous period of 60 days, contractors, subcontractors, material suppliers, equipment lessors and laborers would be able to record a mechanics lien even though the project or their scope of work has not yet been completed.
As to stop payment notices and payment bond claims, there is no requirement that that a subcontractor, material supplier, equipment lessor, or laborer complete its work before serving a stop payment notice or making a payment bond claim.
Similarly, for design professionals, a design professional does not need to complete its work before recording a design professional lien. However, there are three requirements that must be met first: (1) a building permit or other “governmental approval” must have previously been obtained; (2) construction must not yet have commenced; and (3) the design professional must make demand for payment not less than 10 days before recording its design professional lien.
Requirements Prior to Assertion
In order to record a mechanics lien, serve a stop payment notice or make a payment bond claim most claimants, with the exception of direct contractors, but then only if there is no construction lender on the project, must have first served a preliminary notice. More information on each of these statutory payment remedies, as well as forms, can be found in the Blueprints and Toolbox section of our blog.
3. Know How You Can Statutorily Shorten Deadlines
While there are statutory payment remedies available to contractors and others who furnish labor, materials and equipment on a construction project, project owners are not without their own remedies. For projects that are at our near completion, or that are mid-way through construction, a project owner can shorten the deadlines for a claimant to record a mechanics lien, serve a stop payment notice, or make a payment bond claim, by recording a notice of completion or notice of cessation.
Notices of Completion
A notice of completion may be recorded upon the occurrence of any of the following events:
Actual completion of a work of improvement;
Occupation or use by the owner accompanied by cessation of labor;
Cessation of labor for a continuous period of 60 days; or
For public works projects, acceptance by the public entity.
A notice of completion may be recorded on or before 15 days after completion of a work of improvement.
Notices of Cessation
A notice of cessation can be recorded if there has been a cessation of labor for period of 30 days.
When statutorily permitted, by recording a notice of completion or notice of cessation, a project owner may shorten the time period for potential claimants to record mechanics liens, serve stop payment notices and make payment bond claims, by shortening the time to make such claims by as much as two-thirds.
Stay safe everyone. And if you’re really bored at home you can do something like this: