Takeaways

Contractors should expect to experience one or more of the unique factual scenarios that could arise as a proximate cause of COVID-19.
Many government contracts contain force majeure clauses, similar to those in commercial contracts, but contractors should be aware of the limitations inherent in the FAR clauses that address force majeure.
Contractors should proactively determine the contract clauses that may excuse delayed performance and, in some cases, allow for the recovery of additional costs.

On March 13, 2020, President Trump declared that the outbreak of COVID-19 constituted a national emergency. Government contractors will face a number of scenarios—some familiar and some not—as a result of the outbreak. In this client alert, we raise four possible factual scenarios contractors are likely to encounter. We then analyze how contractors facing these scenarios can (1) best protect themselves from liability for schedule delays they may experience, and (2) best position themselves to recover for their attendant cost growth.

Scenario 1: Your contracting officer (CO) may provide explicit direction that frustrates contract performance. For example, your CO may direct that contractor personnel cannot enter a military base, or that key contractor or government personnel cannot travel.

When faced with explicit CO direction like this, the Changes clause (FAR 52.243-1 through -4) may serve as a contractor’s best avenue to obtain both cost and schedule relief. We recommend that contractors in this scenario put the CO on notice that her/his direction has changed or disrupted contract performance. We further suggest that the contractor make a timely request to its CO for a schedule extension. Also, contractors in this scenario should separately account for the cost growth they experience as a result of the CO direction, in case they cannot reach an informal resolution and need to submit a claim for financial relief. Please note that if the government does not adjust the schedule in response to contractor requests, this refusal might constitute constructive acceleration under the applicable Changes clause. Constructive acceleration is another theory that might entitle contractors facing this scenario to recover added costs.

COs also may explicitly direct terminations for convenience, suspensions of work or work stoppages. Under the applicable FAR clauses, contractors that receive such direction are entitled to both cost and schedule relief as long as they can establish the regulatory prerequisites. If a CO issues a termination, stop or suspension of work pursuant to applicable FAR clauses, prudent contractors will develop a plan to cease performance most efficiently, mitigate costs associated with CO order and promptly request adjustment of cost and schedule terms. If the CO grants such a request, contractors should carefully review liability releases that might foreclose additional claims.

Scenario 2: An order issued by a foreign, federal, or state authority other than the CO impacts contract performance. For example, the Department of Transportation may restrict air or sea travel, which may prevent materials from arriving at a work site. Further, a foreign government may restrict travel into a foreign country, which disrupts performance of government contracts performed overseas.

Unfortunately, the Changes clause typically requires direction from the CO, so this scenario may not rise to the level of a change that entitles a contractor to both cost and schedule relief. In limited circumstances, however, “a government agent who lacks contracting authority may nonetheless bind the government in emergency situations.” See Baistar Mech., Inc. v. United States, 128 Fed. Cl. 504, 520-21 (2016) (finding terms of contract did not require CO’s approval to bind government and noting this emergency exception’s limited application and narrow construction). Whether or not that exception applies, contractors should seek approval or ratification from their CO if an authority other than the CO takes action that suspends performance, requires additional work, or otherwise changes a contract requirement. Such ratification would better position contractors to obtain cost and schedule relief under the governing Changes clause.

FAR 52.249-14 (Excusable Delays) excuses a contractor’s default “because of any failure to perform [the] contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor.” That clause includes examples of such causes, including “epidemics” and “quarantine restrictions.” This clause seemingly applies to delays proximately caused by the COVID-19 outbreak. The enumeration of “epidemic,” however, does not make “the occurrence of an epidemic an excusable cause per se.” See Crawford Dev. & Mfg. Co., ASBCA No. 17565, 74-2 BCA ¶ 10,660. Instead, contractors must prove that they incurred actual delays as a proximate cause of an epidemic. Should this clause apply, contractors can earn schedule relief but not cost relief.

Scenario 3: A contractor makes an independent decision to protect its personnel from COVID-19 and, as a result, delays its performance or violates other contract requirements. Conversely, contractors may face the possibility that their employees undergo self-quarantine or a telework program, either of which could negatively impact contract performance.

Should this scenario arise, we recommend that contractors immediately bring the relevant facts to the attention of the CO and explore whether the parties might achieve an equitable contract adjustment or a different business solution. If the CO is unwilling to act equitably, there may be no contractual relief if the elements of excusable delay under FAR 52.249-14 do not apply. Even if those elements do apply, however, relief would be limited to schedule extension, with no cost growth recovery.

We have been exploring the viability of commercial impracticability arguments under this scenario. To establish impracticability, a contractor must show: (1) COVID-19 made performance impracticable; (2) the non-occurrence of the pandemic was a basic assumption upon which the contract was based; (3) the occurrence of the pandemic was not the contractor's fault; and (4) the contractor did not assume the risk of the pandemic occurring. See Spindler Const. Corp., ASBCA No. 55007, 06-2 BCA ¶ 33,376. In our view, impracticability seemingly applies only to contracts entered into following the COVID-19 outbreak but before the understanding of its impact and certainly well before President Trump’s declaration of national emergency.

Scenario 3 could also implicate workplace safety laws such as the Occupational Safety and Health Act (OSHA). OSHA requires employers to furnish to each employee “employment and a place of employment, which are free from recognized hazards that are causing or are likely to cause death or serious physical harm.” 29 U.S.C. § 654(a)(1). These legal requirements should be considered in conjunction with the contractual scenarios discussed above and below. Contractors should continue to monitor the outbreak and determine whether their personnel are at risk of exposure in the workplace and act accordingly. We note that the Occupational Safety and Health Administration recently released Guidance on Preparing Workplaces for COVID-19. Pillsbury’s Employment law group has discussed how employers can mitigate employment law risks as a result of COVID-19, and the firm’s Environmental team has addressed the specifics of OSHA compliance during the coronavirus outbreak.

Scenario 4: A contractor’s subcontractor or vendor fails to perform or deliver due to the COVID-19 outbreak, and this failure affects the contractor’s performance.

Poor subcontractor performance typically is not a defense against default or a justification for schedule relief. If, however, a prime contractor’s failure to perform is caused by a subcontractor’s default, and that default is beyond the control or without the fault or negligence of the subcontractor, prime contractors may be entitled to schedule relief and excused from default under the Excusable Delay clause. COVID-19 impacts likely would qualify as excusable subcontract delays. The Excusable Delay clause, however, would not apply to subcontract impacts if the supplies or services were “obtainable from other sources in sufficient time” for the prime contractor to meet the required delivery schedule. See, e.g., 52.249-8(d). Further, relief may not be available if the CO provided the contractor with a written direction to purchase supplies from another source and the contractor unreasonably failed to comply. See FAR 52.249-14(b)(2). Prudent contractors also should appreciate their potential liability to subcontractors. We have advised our clients to research whether they flowed down FAR Excusable Delay clauses to their subcontractors. If that occurred, then subcontractors could have the same rights as the prime contractor and may be excused from default or delayed performance.

Proactive contractors also will research potential relief under insurance products, such as business interruption insurance and supply chain insurance. Pillsbury’s experienced crisis management professionals are closely monitoring the global threat of COVID-19, drawing on the firm’s capabilities in supply chain management, government contracts, insurance law, cybersecurity, employment law, corporate law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. Further, our Government Contracts team is evaluating the efficacy of theories such as constructive stop work, constructive work suspension and constructive termination, which may entitle contractors to both cost and schedule relief under these scenarios. We look forward to discussing these issues with you.