COVID-19 and Mutual Responsibility Clauses in Construction Contracts
Joseph M. Leone, Partner, Drewry Simmons Vornehm, LLP
Posted: July 10, 2020 | Legal
There is a tremendous amount of uncertainty in the construction industry due to the COVID-19 pandemic. Schedules, productivity, safety processes, and seemingly everything else are being affected.
In these difficult times, most contractors are making every effort to work together to solve the problems caused by COVID-19. But what happens when differences arise between project owners, contractors, and subcontractors as to the effect of COVID-19 on a project? One party may want to continue pushing the schedule, another may want to slow down, or, more likely, not be able to keep up with the original schedule because of some reason related to COVID-19. As an agreement between a prime contractor and a subcontractor, a mutual responsibility clause can provide some clarity or — unfortunately, depending on how the subcontract is written —confusion.
Almost all subcontracts have a clause which flows down the prime contractor’s obligations on a project to the subcontractor, as applicable to the subcontractor’s work. Known as a “flow-down” clause, this works in one direction: obligations of the prime contractor “flow-down” to the subcontractor. But a mutual responsibility clause, in essence, works in both directions. The subcontractor is required to perform its obligations consistent with the prime contractor’s obligations to the owner, and the subcontractor is granted the same rights against the prime contractor which the prime contractor has against the owner. Obligations flow down and rights flow up. The rights and obligations flowing through the prime contractor include the obligation to perform the work in accordance with the plans and specifications, the obligation to meet the schedule constraints in the prime agreement, and the right to extensions of time and change orders to the extent the prime contractor obtains the same.
Typical mutual responsibility clauses are contained in both the American Institute of Architects and ConsensusDocs standard form agreements between prime contractors and subcontractors. The ConsensusDocs subcontract form states, “To the extent the terms of the prime agreement apply to the Subcontract Work, then Constructor assumes toward Subcontractor all obligations, rights, duties, and redress that Owner under the prime agreement assumes toward Constructor. In an identical way, Subcontractor hereby assumes toward Constructor all the same obligations, rights, duties, and redress that Constructor assumes toward Owner and Design Professional under the prime contract.” [§ 3.1 Standard Agreement Between Constructor and Subcontractor, ConsensusDocs 750-2011 Rev 10/18 (“CD 750”)]
The AIA standard subcontract agreement contains similar language, “The Contractor and Subcontractor shall be mutually bound by the terms of this Agreement and, to the extent that the provisions ... of the Prime Contract apply to the Work of the Subcontractor, the Contractor shall assume toward the Subcontractor all obligations and responsibilities that the Owner, under such documents, assumes toward the Contractor, and the Subcontractor shall assume toward the Contractor all obligations and responsibilities that the Contractor, under such documents, assumes toward the Owner and the Architect. The Contractor shall have the benefit of all rights, remedies, and redress against the Subcontractor that the Owner, under such documents, has against the Contractor, and the Subcontractor shall have the benefit of all rights, remedies, and redress against the Contractor that the Contractor, under such documents, has against the Owner, insofar as applicable to this Subcontract.” [Article 2 Standard Form of Agreement Between Contractor and Subcontractor, AIA A401-2017 (“AIA A401”)]
Similarly, both the CD 750 and AIA A401 provide that the subcontractor will participate in scheduling the work and will complete the work within the time required by the prime contract. [§ 3.2 and § 5.2, CD 750. § 4.1.2 and § 9.3, AIA 401] Also, similarly, both the CD 750 and AIA A401 allow the subcontractor an extension of time for delays outside of its control to the extent the prime contractor receives an extension from the owner. [§ 5.3, CD 750; Art. 2, AIA A401] With respect to COVID-19 related delays, the request for an extension of time would likely be made pursuant to the force majeure clause. Neither the CD 750 nor AIA A401 contain a specific force majeure clause for the benefit of the subcontractor, but, to the extent a force majeure clause is included in the prime contract, the right to a time extension flows down to the subcontractor.
The application of force majeure clauses to COVID-19-related delays has been addressed in both the ConsensusDocs and AIA standard form prime contracts. Regardless, the terms of both the CD 750 and AIA A401 provide that the prime contractor may pass through a subcontractor’s request for extension of time to the owner for approval and, if granted by the owner, the subcontractor is entitled to the time extension.
But is the prime contractor required to request an extension of time on behalf of a subcontractor who is at risk of being delayed by lack of manpower, supply chain problems, or lost productivity due to COVID-19? Most often, prime contractors will pass through the subcontractor’s force majeure time extension request as a matter of course, particularly when the prime contractor is experiencing similar effects. However, there are situations where the prime contractor may not want to do so because of its relationship with the owner. This could occur in situations where an owner provides multiple repeat contracts to the prime contractor, when important future contracts are at stake with that owner, or where the prime contractor is a captured constructor, such as the construction arm of a developer. The general principle is that a prime contractor is not liable to a subcontractor for damages caused by circumstances outside of the prime contractor’s control. [Bruner and O’Connor § 15:24] Therefore, any obligation on the part of the prime contractor to submit the subcontractor’s request for extension of time arises out of the language in the subcontract.
Within the ConsensusDocs family of documents, the answer is very likely in the affirmative; however, within the AIA family of documents, the answer is less clear. CD 750 contains four clauses which, when read together, most likely require the prime contractor to attempt to obtain an extension of time on behalf of the subcontractor. The first, of course, is the mutual responsibility clause identified above. [§ 3.1, CD 750]
Next, § 5.3.1 specifically contemplates that the subcontractor is entitled to an extension of time if one is granted to the prime contractor. [§ 5.3.1, CD 750] More importantly, the CD 750 contains a truncated version of a pass-through agreement, “At Subcontractor’s request and expense to the extent agreed upon in writing, Constructor agrees to permit Subcontractor to prosecute a claim in the name of Constructor for the use and benefit of Subcontractor in the manner provided in the Subcontract Documents for like claims by Constructor upon Owner.” [§ 5.3.2, CD 750]
The only qualifying language in that section is “to the extent agreed upon in writing,” which implies a condition that the Constructor agree to prosecute the Subcontractor’s claim. Finally, one of the initial terms in the ConsensusDocs subcontract form which establishes a general course of dealing between the prime contractor and the subcontractor states, “[e]ach Party agrees to act on the basis of mutual trust, good faith, and fair dealing [and] [t]he Parties shall each endeavor to promote harmony and cooperation, and perform in an economical and timely manner.” [§ 2.1, CD 750] Those clauses, taken together, seem to take most discretion away from the Constructor in determining whether to pursue the Subcontractor’s claim. Therefore, provided the claim being made by the Subcontractor is a reasonable claim made in good faith, the Constructor, most likely, is obligated to pursue it. The AIA standard language, on the other hand, is not as affirmative. AIA A401 contains a similar clause to the CD 750 which requires the subcontractor to submit claims within the time period required by the prime contract.
“§ 5.3 The Subcontractor shall make all claims promptly to the Contractor for additional cost, extensions of time and damages for delays or other causes in accordance with the Subcontract Documents. A claim which will affect or become part of a claim which the Contractor is required to make under the Prime Contract within a specified time period or in a specified manner shall be made in sufficient time to permit the Contractor to satisfy the requirements of the Prime Contract. Such claims shall be received by the Contractor not less than two working days preceding the time by which the Contractor’s claim must be made. Failure of the Subcontractor to make such a timely claim shall bind the Subcontractor to the same consequences as those to which the Contractor is bound.” [§ 5.3, AIA A401]
The AIA standard form subcontract also requires the prime contractor to make available all of the information related to the subcontractor’s portion of a claim made by the prime contractor against the owner, “§ 3.3.7 If the Contractor asserts or defends a claim against the Owner that relates to the Work of the Subcontractor, the Contractor shall promptly make available to the Subcontractor all information relating to the portion of the claim that relates to the Work of the Subcontractor.” [§ 3.3.7, AIA A401]
Finally, the AIA A401 contemplates that the subcontractor’s entitlement to an extension of time is conditioned on the prime contractor providing its written consent to the request after the claim has been made. “No extension of time will be valid without the Contractor’s written consent after claim made by the Subcontractor in accordance with Section 5.3.” [§ 9.5, AIA A401]
Section 3.3.7 begins, “f Contractor asserts ... ,” which implies discretion on the part of the prime contractor. [§ 3.3.7 AIA A401] More importantly, Section 9.5 states that the subcontractor’s extension of time is not valid unless the prime contractor provides “written consent” to the claim which appears to make the prime contractor’s consent a condition to the subcontractor’s right to an extension of time. [§ 9.5 AIA A401]
Reading Sections 3.3.7 and 9.5 together suggests that the prime contractor has the discretion to submit the subcontractor’s request for extension of time to the owner or not to submit it. In those states which do not imply an obligation of good faith and fair dealing among parties to a contract, such as Indiana, a prime contractor may not have the obligation to pass through a subcontractor’s request for extension of time.
The important thing to remember is that, whether the prime contractor is required to prosecute a subcontractor’s delay claim related to COVID-19 delays, it is highly dependent on the specific language in the applicable contracts. It is important to understand the effects of these clauses when negotiating or entering into subcontract agreements. It is also important to understand the relationships of the parties when considering the risks involved with certain contract terms. This is especially true in the situation where an entity has contracted with a general contractor which is actually a related entity to the project owner. In those situations, extra effort on the front end in negotiating the terms in a subcontract is often time well spent.
If you have questions about mutual responsibility clauses, contact your DSV attorney or Joseph M. Leone at [email protected].
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.