KANSAS CITY, MO – Delay damages are an element of direct damages. A delayed project can have a severe economic impact on the contractor by way of extended general conditions and home office overhead, overtime, idle labor and equipment costs, escalated labor and material costs, and other impacts. The discussion of delays and of determining whether a party is entitled to damages for those delays typically starts with analyzing whether the delay is excusable or non-excusable.
Excusable Delays are delays that are unforeseeable and beyond the control of the contractor. Non-Excusable Delays are delays that are foreseeable or within the contractor’s control. Obviously, the distinction between these two is significant in that it determines which party is liable for the delay, and dictates whether a contractor is entitled to a time extension and possibly compensation or is exposed to paying the owner compensation for the delay. The contractor is typically required to maintain some form of reliable schedules if the parties desire to hold one another accountable for delays and ultimately determine the party responsible for the delays.
“Delays generally fall into one of three categories: (1) excusable and compensable; (2) excusable but not compensable; and (3) not excusable.” W. Stephen Dale & Kathryn T. Muldoon, A Government Windfall: ASBCA’s Attack on Concurrent Delays as a Basis for Construction Acceleration, Procurement Law, Summer 2009, at 4. As a general rule, in order for a delay to provide the basis for a claim for additional time or money, the delay must impact critical path activities on the project schedule. The term critical path means “the longest path through the network of identified and logically sequenced construction activities that establishes the minimum overall project duration.” 5 Bruner & O’Conner, On Construction Law, § 15:5 (West 2016).
Most well-drafted construction contracts address the critical path concept with detailed terms and specific language on how to deal with time and compensation for critical delays which are material to the timely completion of the project, as discussed in more detail below. Non-Compensable Delays, commonly referred to as excusable and non-compensable, are delays for which the contractor is entitled to a time extension but not entitled to additional monetary compensation. In such cases, both parties assume their own additional costs arising out of the delay.
For example, the contractor absorbs its delay costs for being on the project longer and the owner absorbs its costs associated with the delay. In this case, the owner would grant an excusable/non-compensable time extension to complete the contracted work. These delays are typically addressed in the context of force majeure events and encompass such things as strikes, Acts of God, and other delays that the contractor may not reasonably be able to foresee. Hutton Contracting Co., Inc. v. City of Coffeyville, 487 F.3d 772, 778 (10th Circuit 2007) (applying Kansas law).
Courts typically interpret force majeure clauses in strict accordance with their terms, or at the very least in strict accordance with what the courts determine to be the intent of the parties in drafting such clauses. Courts have traditionally interpreted force majeure clauses by considering the language of the clause itself, to determine the purpose of that clause and whether a particular triggering event is included within the definition of a force majeure event. Kel Kim Corp. v. Cent. Markets, Inc., 519 N.E.2d 295, 296-97 (1987).
“To determine whether a certain event excuses performance, a court should look to the language that the parties specifically bargained for in the contract to determine the parties’ intent, rather than resorting to any traditional definition of the term.” R&B Falcon Drilling Co. v. Am. Expl. Co., 154 F. Supp. 2d 969, 973 (S.D. Tex. 2001). “In other words, when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.” Id. (quoting Sun Operating Ltd. v. Holt, 984 S.W.2d 277, 283 (Tex. App. 1998)).
Courts also generally consider the reasonable expectations of the parties and whether those expectations and the overall performance of the contract have been frustrated by a circumstance beyond either parties’ control. In the construction context, courts specifically consider whether the contractor contributed to or caused the delay or non-performance. If the force majeure clause may be invoked, courts then look to that clause to determine the appropriate relief to be awarded to the parties.
Since 2020, courts have been called upon to determine how COVID-19 and similar natural disasters fit into the framework of the contract’s definition of a force majeure event, in deciding whether the circumstances excused contractual performance. Many courts interpreting a force majeure clause, which included the words “pandemic” or “epidemic” or even “natural disaster,” tended to recognize COVID-19 as an unanticipated “Act of God”, as the virus was clearly not caused by anyone working on the jobsite and could not have been reasonably anticipated.
These courts reasoned that the contractors that were unable to perform their work as a direct result of the pandemic, were entitled to excusable and oftentimes compensable delays. See, e.g., In re Hitz Rest. Grp., 616 B.R. 374 (Bankr. N.D. Ill. 2020). See also JN Contemporary Art LLC v. Phillips Auctioneers LLC, 29 F.4th 118 (2d Cir. 2022) (excusing auctioneer’s performance to auction a work of art based on Executive Orders which shut down all such nonessential businesses).
But some courts concluded that claims of delay resulting from the hardships brought on by the COVID-19 pandemic could not be relied upon to excuse performance under the parties’ contract. See, e.g., American Medical Equipment, Inc. v. United States, 160 Fed. Cl. 344 (Fed. Cl. June 30, 2022) (finding contractor’s non-performance was not caused by excusable delay due to COVID-19 pandemic); Regal Cinemas, Inc. v. Town of Culpeper, No. 3:21-cv-4, 2021 WL 2953679 (W.D. Va. July 14, 2021); Lantino v. Clay LLC, No. 1:18 CV-12247 (SDA), 2020 WL 2239957, *3 (S.D.N.Y. May 8, 2020) (refusing to excuse a party’s performance under a settlement agreement based on arguments of economic hardship due to COVID-19 pandemic).
Merely because an event is unforeseeable or is a triggering event listed in or reasonably contemplated by a force majeure provision, does not automatically excuse a party from performing. Rather the party seeking to excuse its performance based on force majeure must prove that the unanticipated triggering event was the direct cause of the parties’ inability to complete their contractual obligations.
Some courts require proof that the triggering event rendered performance impossible, not just financially difficult or a hardship. 30 Williston on Contracts § 77:31 (4th ed); Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314 (S.D.N.Y. 1985). See also Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 NW 2d 445, 453 (Mich. App. 2015) (declining to invoke the force majeure clause because performance was not found to be impossible, but merely unprofitable due to governmental market manipulation); Napier v. Trace Fork Mining Co., 235 S.W. 766, 766-67 (Ken. 1921) (finding that the influenza epidemic made it extremely difficult for the contractor to complete grading work, but did not render the entirety of the work impossible).
Similarly, some courts have held that when a contract can be performed in either of two alternative ways, the impracticability of one alternative does not excuse the promisor of performance if the other alternative is still practicable. Int’l Minerals & Chemical Corp. v. Llano, Inc., 770 F.2D 879 (10th Cir. 1985).
In the future, delays caused by COVID-19 and other pandemics may be deemed excusable but will most likely be deemed non-compensable given that all contractors should now anticipate that some sort of pandemic or similar force majeure event could impact the work of the project. Contractors might have better results in focusing their arguments on changes in the law, such as temporary orders to stop all work for extended periods of time, triggered by COVID-19 and other pandemics which make the entirety of their work impossible, in seeking to excuse their performance.
Heather F. Shore is a shareholder with Shaffer Lombardo Shuring, PC, Kansas City, Mo. Shore was a presenter/panelist at the 2023 Construction Super Conference.
