COVID-19 has created an unprecedented crisis in the State of New York and disturbed every aspect of the economy. In particular, the construction industry has recently received a major blow. On March 22, 2020, Governor Andrew Cuomo, announced the suspension of non-essential construction via Executive Order 202.6. On March 27, 2020, the New York Empire State Development Corporation issued guidance on the Executive Order, clarifying what projects would be deemed essential services. These include (as a way of summary):

a. Projects necessary to protect the health and safety of the occupants, including emergency work, restoration of essential services, or work necessary to address any condition requiring immediate corrective action.

b. Projects required to continue to the extent it would be unsafe to allow work to remain undone (such project may continue only until it is safe to shut the site).

c. Essential construction, including utilities; hospitals or health care facilities; transitional and/ or homeless shelters; and affordable housing.

d. Work that is limited to a single worker, who is the sole employee/worker on a job site.

On March 30, 2020, the New York City Department of Buildings issued further guidance for Projects in New York City along the lines of the guidance issued by the State. Failure to comply with this mandate could result in fines up to $10,000.00 per violation. The Executive Order bans the ongoing construction of most construction projects, including condominium, cooperative, office, and other commercial projects.

The temporary construction shutdown will certainly create unanticipated delays, which in turn can trickle down financially and cause the complete closure or abandonment of many construction projects. As a result, now more than any other time, the “force majeure” clause in construction related contracts is particularly relevant. A force majeure clause, which in Latin means “superior force,” is often ignored in construction contracts, and left in its boilerplate form. The force majeure clause provides a general defense to non-performance due to an unforeseen event. These generally include labor strikes and natural disasters such as floods, hurricanes and earthquakes. Unless negotiated, force majeure does not typically apply to events that could have been reasonably anticipated with due diligence, such as extended delays with Department of Buildings filings, inspections and approvals, delays caused by neighboring property owners, as well as extended weather delays. The force majeure clause in construction contracts and related contracts certainly provides some protection, but nonetheless, the outcome may depend on contractual language interpretation. This uncertainty is heightened by the fact that construction insurance policies typically exclude certain force majeure events. With that said, general contractual principles such as “impossibility of performance” or “impracticability” which apply by implication or operation of law may offer the added protection needed. Given the severity of the current situation, it seems unlikely that the courts will strictly enforce the timing provisions of said contracts. Instead, it is likely that they will apply equitable principles to resolve disputes.

It is unclear whether the Executive Order and subsequent guidance applies to on-site pre-development activities and pre-construction activities, such as surveying, appraising, pre-construction surveying, environmental testing, among others. Other off-site activities, such as pre-construction lending, modeling, zoning review, design, and adjacent property license/access agreements negotiations presumably are not covered by the Order and allowed to move forward. For current projects, it is therefore advisable to add a COVID-19 rider which expands the force majeure clause to include “epidemics,” “pandemics,” “health emergencies,” and other related “governmental restrictions.” In addition to the force majeure clause, other closely linked provisions such as the “liquidated damages,” and “termination and or suspension” clauses should also be revised accordingly. The same is advisable for projects currently in negotiation, which can incorporate a “floating” commencement date, not to exceed a certain number of days from contract execution, together with a “cancellation without penalty” provision.

We at RICHTER RESTREPO PLLC are closely monitoring the ongoing crisis and we will provide updates when they become available. Feel free to reach out to us to discuss your construction and development related questions. We wish everyone good health and safety during this difficult time.

Resources:
- Empire State Development, Guidance On Executive Order 202.6. Guidance For Determining Whether A Business Enterprise Is Subject To A Workforce Reduction Under Recent Executive Orders. https://Esd.Ny.Gov/Guidance-Executive-Order-2026 - New York City Department of Buildings. Guidance to owners and contractors regarding enforcement of Essential vs. Nonessential construction in accordance with NYS Governor’s Executive Order 202.6 and subsequent orders, and the Guidance on Executive Order 202.6 published by NYS ESDC Item https://www1.nyc.gov/assets/buildings/pdf/essential_vs_non-essential.pdf

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Published: 04/07/2020