Design and construction in the shadow of COVID-19

The spreading of COVID-19 has created a broad range of business and legal implications affecting development and construction projects for hotels. Although each project and project agreement is unique, this brief guide for owners and developers identifies common language found in hospitality design and construction contracts that may apply to COVID-19-related claims, summarizes where to look for those provisions, and provides general analysis as to how that contract language may apply.

Contributed by Bruce C. Smith, senior partner and head of Morris Manning & Martin LLP’s construction law practice, and by Vianney Lopez and JD Howard, associates.

What is the first step for any owner or developer?

The first step is to gather and organize relevant contracts for each project currently underway, such as contracts with architects, interior designers, engineers, consultants and contractors. These each should be reviewed and evaluated together in order to evaluate COVID-19’s cumulative effect upon the project and to see if COVID-19-associated impacts are covered under any remedy-granting contract provisions and, if so, to what relief the impacted party may be entitled.

It’s important to note that some standard contract provisions may be triggered by COVID-19 including force majeure provisions, project shutdowns due to government orders, and the contracting parties’ suspension and termination rights.

Other delay-related provisions that may apply in these contracts include provisions addressing claims for increased cost of the work due to labor shortages, limited availability of materials and equipment, and price escalation.

So you’ve reviewed these provisions. What next?

Determine the process for the affected party to file a claim, including how much notice must be given to the owner or developer before asserting the claim and whether claims are waived if proper notice is not given.

Next, you should look to see what remedies may be available if applicable contract provisions are triggered. In the event a COVID-19-related delay or government shutdown interrupts or delays completion of a project, you should ask these questions:

  • Is the contractor entitled to an adjustment in the contract time, an adjustment in the contract sum, or both?
  • Is there a liquidated damages provision that provides recourse for the owner or developer in the event the contractor fails to achieve substantial completion as required in the contract?

If so, those contract provisions must be analyzed together as the contractor will be exempt from liquidated damages during any period of excusable delay. Depending on the contract type, a construction contingency fund may be included in the contract sum.

You should review any restrictions for its use as the contingency funds may be available and allow the contractor to offset some of the increased costs of construction resulting from COVID-19. You will also need to evaluate remedies that may be available in the event the project suffers COVID-19 or other delay-related damages. For instance, you will want to determine if there a complete waiver of consequential damages. If not, you may be able to recover damages for lost room and event, as well as food and beverage, revenues and income.

What do we know?

Clients should keep in mind that the existence of COVID-19 in itself is usually not enough to trigger remedy-granting provisions in hospitality design or construction contracts. COVID-19 must affect the project by causing a critical delay to the work, a shortage in available labor, impact the price of materials, or contribute to a COVID-19-related governmental shutdown (such as the recent events in Boston, where city inspectors and permit officials were prohibited from conducting inspections/walk-throughs of projects). Therefore, it is important to review delay and force majeure provisions with the actual cause of the delay in mind, which typically will require more than just the existence of COVID-19.

Additionally, COVID-19 may not trigger relief under many jurisdiction’s interpretation of what constitutes an act of God.An event deemed an act of God is routinely interpreted to be an unforeseen natural phenomenon or disaster like an earthquake, the sudden onset of a tornado, the opening of a giant sinkhole, a tsunami or tidal wave, etc.

What can hospitality owners and developers do at this time?

As the global community continues to grapple with COVID-19 and its impacts continue to evolve each day, its full effects on hospitality construction projects remain uncertain. Applicable governmental authorities are still determining if and when construction projects can proceed in the midst of the COVID-19 crisis. Hospitality owner and developer clients who cannot obtain a certain timetable for continuity of their construction project may want to consider exercising their contractual right to suspend the project or terminate for convenience in order to avoid project delay and interruption claims.