In the last month, it was reported that the Armed Services Board of Contract Appeals decided that the public contractor was not able to recuperate $100k in construction expenses that were incurred as a result of the government’s decision to shut down a base in Tennessee because of COVID-19.
APTIM Federal Services, LLC (ASBCA No. 62982) was a contractor that was seeking to recover $99,076 of operational expenses incurred under the construction contract over two months in 2020. The commanding officer of Arnold Air Force Base closed the base as a way to limit the spread of COVID-19. The contractor also requested an extension of 59 days during the time that the project was not accessible.
The government argued that, under the Sovereign Acts Doctrine, actions taken by the United States in its sovereign capacity protected the country from liability under the contract for the acts it took, including the activities during the COVID-19 pandemic. The judge who ruled on administrative law agreed:
In this case, the contractor was barred from Arnold Air Force Base equally with other contractors as a result of the commander of the base in the pursuit of a bigger public health threat that could have threatened national security. This excluded contractor made the performance of each contract’s obligations in the time frame in question.
The judge found a lot of similarities between the COVID-19 shutdown and the decision to dismiss the case in Conner Bros. Constr. Co., Inc. v. Geren, 550 F.3d 1368 (Fed. Cir. 2008), in which a federal contractor sought compensation after being evicted from an army base for 41 consecutive days after the terrorist attacks of 9/11. In the instance, the judge ruled that the actions of the government did not aim at removing the rights of contractors under contracts and instead were aimed “at larger national security interests,” which was legal.
This ATIM decision specifically refers to this Sovereign Acts defense, which ended up denying the contractor’s claim for additional compensation. However, the decision is a clear indication that a stoppage in work caused by COVID-19 could be the case for an extension of time.
How can a homebuilder stay clear of the trap set by Damico’s Court In Damico? One possible solution is that the homebuilder adds to every subcontract an arbitration clause that permits the homebuyer to request an arbitration with a subcontractor, as well as being a joinder in arbitration with the builder. Another possibility is to follow the well-known legal principle known as KISS (Keep It Simple Stupid.) The authors of arbitration clauses might prefer for the agreement to remain simple, for instance, extending beyond the bare minimum language required to make sure that arbitration is applicable to any dispute and allow the national arbitration organization to determine the rules and not introduce any procedural barriers that a judge could be able to interpret as unfair in any way to the customer. Of course, you must make certain that an arbitrator, and not the court, decides the validity of a clause or not.
There are more lessons to learn from Damico as well, and homebuilders are likely to be facing a fresh round of repercussions on their contracts when the courts and lawyers begin to apply the same principles to not only the homebuilding industry but also consumer transactions as a whole.