August 1, 2020
Contracts and Covid-19BY ROBERT KENNALEY
The impact of Covid-19 on construction has been significant. Construction workplaces were shut down. There were (and will be) work slowdowns, work stoppages, unpaid accounts, insolvencies and claims. In addition, of course, it is not over. The risks associated with Covid-19 and similar viruses will be with us for years to come. Going forward, the health and safety of workers must be safeguarded and the willingness of workers and sub-trades to attend sites may vary. There is also the potential for a second wave.
Existing standard contract forms have not addressed these risks. Everyone involved in construction should consider contractual language to allocate the responsibilities and risks: who is responsible to do and pay for what, and who runs the risk (and financial impacts) of Covid-19-related delays. More particularly, assessing your risk and developing a plan going forward should involve an assessment of your contract or subcontract forms in relation to frustration, force majeure, claims, notice, schedule extensions, delay, suspension of work, termination of contract and dispute resolution. Below, we will briefly review the basic concepts of frustration as well as the common clauses included in Canadian Construction Documents Committee (CCDC) standard form contracts.
In law, frustration takes place where an event which is neither addressed under the contract nor attributable to the fault of either party significantly alters the circumstances of performance beyond what either could reasonably have contemplated when they entered into the contract. In those circumstances, both parties are discharged from further meeting their contractual obligations. Whether or not frustration occurs will depend on the circumstances of each case. However, the doctrine will generally not apply where performance is simply more difficult, onerous or expensive than originally contemplated. For this reason, frustration has been thought to apply where it is impossible for the underlying contractual obligations to be met.
We will now briefly review some of the basic CCDC standard terms that might generally be applicable to the issues surrounding Covid-19. To be clear, a CCDC form may not be used in your circumstance. You will need to review the terms of your particular contract or subcontract in each case. The following is generally consistent across CCDC forms, however, and are commonly used.
Delay due to force majeureUpon delays caused by circumstances beyond the contractor’s control (often referred to as a force majeure), such as labour disputes, strikes, lockouts, fire, adverse weather, etc., the contractor (or design-builder under CCDC-14) will be entitled to a schedule extension (only). It is most likely that Covid-19 and the associated predictable slowdowns meet the requirements of these clauses. The contractor will then be entitled to a schedule extension for delays caused by Covid-19, so long as it meets its notice obligations under the Contract in that regard.
Delay due to a stop work orderThe Contracts generally provide that, upon delays attributable to a stop work order issued by a court or other public authority, the Contractor will be entitled to a schedule extension and additional compensation (so long as the Order is not attributable to the Contractor and the Contractor meets its notice obligations in that regard). These stop work order clauses can be particularly problematic in the Covid-19 context, and parties should be careful as to how they apply.
Delay and termination for health and safety reasonsThe Contractor will generally be responsible for occupational health and safety on site. This includes an obligation to stop work if health and safety are at risk. Employees of the contractor and subcontractors will also generally have the right to stop work and leave the area of the work if they believe their health and safety are at risk. Accordingly, contractual language aside, construction projects will to a great extent be at the mercy of workers who may simply decline to attend on site. Parties need to assess and allocate who bears the risk if workers and trades refused to attend a site.
Suspension and termination for breach of contractUnder CCDC language, both parties generally have the right to suspend or terminate on five days’ Notice if the other fails to comply with the requirements of the Contract to a substantial degree and then fails to either correct the default or come up with a reasonable plan to do so within that notice period. The Owner will generally be able to take over the work and on-site equipment and be entitled to back charge the Contractor for the full cost of completing the work.
Claims for additional compensationNotice is generally required in relation to extension requests and in relation to claims for additional compensation. Backup to any claim for compensation is also required to be submitted. In each case, the notices or provision of backup are required within a “reasonable time,” however these timeframes are often particularized by way of a more robust Supplementary Condition, requiring Notice within specified timeframes, the provision of backup within specific timeframes and a waiver of claims if notice is not provided. Canadian Courts have been somewhat diligent in enforcing such clauses, so parties are well advised to understand the notice requirements, and abide by them.
Dispute resolutionCCDC documents include dispute resolution clauses which (depending on the form) mandate stepped processes involving negotiation and potential mediation or arbitration. Notices and responses are generally required throughout the process, from the time a claim is made or the consultant makes a decision. Timeframes are generally set out in the clauses, and/or in Supplementary Conditions. Again, our Courts have been somewhat diligent in enforcing such clauses, and parties should accordingly do everything they can to ensure that the notices are given and timeframes are met.
There are two additional points we would like to make. First, given the likelihood of Covid-19-related insolvencies, it is important that liens, insurance and bond claims be preserved and commenced in a timely fashion. Second, many jurisdictions are following Ontario’s lead and imposing prompt payment and adjudication on the construction industry. Once implemented, such legislation will impose risks that are (similarly) not addressed in contracts and subcontracts. As we have written elsewhere, they should be.
Robert Kennaley practices construction law in Toronto and Simcoe, Ont. He speaks and writes on construction law issues and can be reached for comment at 416-700-4142 or at firstname.lastname@example.org. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.