Avoid Contract Default When COVID-19 Strikes

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Design firms have two major challenges as COVID-19, or the coronavirus, continues to spread. The primary challenge is keeping employees as safe as possible. But the other challenge is strictly financial: what happens when a design firm cannot provide services because of the epidemic or government constraints in response to the pandemic?

Look at Your Contracts

Addressing contractual service obligations, firms should understand how the virus could have significant impacts on design and construction projects. Projects could be delayed and result not only in delayed fees, but in claims by clients, contractors, and others. Some professional services agreements have a “force majeure” provision that allows excusable project delays; few such provisions address the issue of massive illnesses or government actions that affect the ability of firms to perform contracted services.

AIA document B101-2017, Standard Form of Agreement Between Owner and Architect, does not specify what creates an unusual project delay outside the control of the architecture firm, unlike AIA construction contracts. So there is no contractual basis for the architect to seek time extensions based on the unavailability of staff or government intervention in the normal business operations of the firm. Similarly, EJCDC document E-500, Agreement Between Owner and Engineer for Professional Services, while providing for extra compensation if the engineer has to provide additional or extended services arising from “emergencies or acts of God endangering the Work,” states nothing that would allow the engineering firm to delay services because of staffing disruptions or government restrictions.

Without the ability to extend the time for services, design firms are left with few options. Firms might consider the following:

  • Discuss with current clients the possibility of project delays caused by COVID-19 exposures, travel restrictions, or quarantines and possible procedures to authorize additional time, temporary staffing, or the transfer of contracted service obligations to a substitute firm.
  • Negotiate force majeure provisions in future contracts that acknowledge that massive illnesses or resulting government advisories or restrictions from such illnesses provide the basis for an excusable delay in contract performance.
  • Structure cooperative arrangements with similar firms in other geographic areas in which each firm commits to supporting the other by providing professional services if one firm is restricted from completing a contract because of staffing inadequacies or government restrictions.
Protect Your Employees

As employers, professional services firms have to provide their employees with appropriate protection while they carry out their duties on behalf of the firm. It is the law, and it is a vital business continuation procedure.

Educate Your Employees

If employees understand the risks associated with COVID-19, they are more likely to comply with safety rules. Firms should provide their workforce of notice regarding potential exposure. But firms should not identify diagnosed individuals by name or provide other identifying information; doing so could expose confidential employee health information. Under federal, state, and local laws, infectious diseases may constitute disabilities, and thereby confer protected status. Firms should, however, address in detail the steps taken to mitigate exposure to COVID-19, including environmental cleaning and other preventative measures.

Monitor Available Reliable Information

Firms and their employees could be misled by tweets, sound-bites, and other misinformation. Firms should continue to monitor reliable guidance provided by the U.S. Centers for Disease Control and Prevention (CDC) and local public health agencies. Understanding how COVID-19 is transmitted and what steps can be taken to protect diagnosed or exposed employees is essential. Firms should use the information to educate employees on prevention and symptoms and should be prepared to answer employee concerns regarding workplace safety. The following are guides which may be helpful to firms:

Professional service firms are often fragile financial entities depending on a steady cash flow from a productive staff working on projects for reasonable clients. COVID-19 could change all three of those conditions. Now is the time to prepare your firm, your employees, and your clients for the possible disruptions caused by a pandemic.

 

 

NOTE: Some of the content for this advisory originated from our Victor US blog and was shared on social media. This advisory is also publicly available on our COVID-19
Resources page and Victor Canada website.
The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. Victor
makes no representations or warranties, expressed or implied, concerning the accuracy of information contained herein. The information is not intended to be taken as
advice with respect to any individual situation and cannot be relied upon as such, nor does it play any role in a determination on issues of coverage. Statements concerning
legal matters should be understood to be general observations based solely on our experience as a managing general agent and should not be relied upon as legal advice,
which we are not authorized to provide. Insureds should consult their insurance and legal advisors with respect to individual coverage issues.
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