Legal bulletin: Construction contracts and COVID-19

Photo credit: Heal & Co. LLP

(Note: The COVID-19 response is developing in real time. Since the original publication of the bulletin below, the Ontario government issued an order defining certain construction projects as “essential businesses.” You must read the order relating to your particular province or locality, as there are regional variations in the designations of ‘essential businesses.’)

COVID-19 was declared a pandemic by the World Health Organization (WHO) on Mar. 11 and an emergency nationally in Canada shortly thereafter.

The impact of this pernicious pandemic has affected us in our homes, in our businesses and across many industries, including construction. This is a time for leadership and collaboration, to mitigate social and economic impacts, as we fight off the effects of this pandemic.

To limit the contagion, governments have taken up action, including locking down cities and borders, restricting non-essential travel, imposing quarantines and effecting various business closures, in accordance with the best medical advice available. For the construction industry, this global interruption in operation will inevitably mean a shortage of materials and labour and consequent delay in the completion of contracts already underway or in the planning stages. Already, we are seeing slowdown notices.

This bulletin raises some of the key legal considerations in managing the rapidly evolving impacts of the COVID-19 pandemic on the construction industry. It also urges all of us to take a collective deep breath, pause and work together to continue economic activities vital to the health of our nation.

Pull out your contract and read it

The specific wording of each contract should guide how delays from the impact of the pandemic should be managed. As such, a review of the contract is recommended as a first step.

The impacts of COVID-19 may be classified as an excusable delay, a delay falling under the category of a force majeure event or, depending on the circumstances, a compensable delay event.

An excusable delay is not the fault of any party and may or may not be compensable, but allows a party to extend the time for completion. Expenses incurred as a result of excusable delays are also generally not lienable, unless they meet the new 2018 extended definition of “price,” which now expressly includes certain direct costs caused by extended supply durations.

Excusable or compensable delays may include “acts of municipal and government authorities, acts of God or Force Majeure, delays … arising from unforeseen events caused beyond the control and without the fault or negligence of the contractor, subcontractor or suppliers.”

Read the terms of the governmental directives

Within the context of the COVID-19 pandemic, acts of municipal and government authorities may include mandatory orders effecting widespread lockdowns. Note that “shelter in place” orders contain exceptions for “essential businesses.”

A force majeure event, generally, is beyond the control of the contracting parties. A force majeure clause in a contract may excuse parties from non-performance and protect them from the consequences of late or delayed performance (not from price increases which make completing the contract more expensive). To rely on such a clause, the event must have been unforeseen and not an allocated risk at the time of contract formation.

It should be noted force majeure clauses are not all worded the same. With respect to the COVID-19 pandemic, most force majeure clauses will not literally include the words “epidemic” or “pandemic,” but “unavoidable labour shortages” or similar wording may be sufficient to trigger force majeure.

Parties should also pay attention to contract notice provisions. Under the CCDC-2 Stipulated Price Contract, a delay requires the contractor to give prompt notice of a delay claim, i.e. within 10 working days of the commencement of the delay, to rely on an extension under the contract.

Many contracts state a delay must affect the critical path activity to warrant an extension. Consequently, it is important to check the contract wording and take steps accordingly.

The ultimate delay: contract frustration

The doctrine of frustration applies where there is a supervening event that causes the performance of the contract to become something radically different from that which was undertaken by the contract.

Simply put, it applies when performance is impossible. “Impossible” is a high threshold; and even if it is met, parties are still under a duty to mitigate.

The doctrine of frustration, when successfully applied, relieves parties of their bargain because a supervening event has occurred without the fault of the contracting parties. It is still likely too early to conclude the pandemic or even the acts of government have completely frustrated contractual performance. We are all better off regarding the current economic situation as “hitting the pause button,” but should also recognize a pause should not mean economic activities cannot resume.

As with the application of force majeure, the timing of entering the contract is an important consideration. “A contract is not frustrated if the supervening event was contemplated by the parties at the time of contracting and was provided for or deliberately chosen not to be provided for in the contract.”

Record keeping

On Mar. 13, the China Council for the Promotion of International trade issued more than 4,000 force majeure certificates, covering a total contract value of 330.8 billion yuan, which is more than $66 billion.

To show the impact of the COVID-19 pandemic in Canada, particularized and contemporaneous records detailing effects on performance of a construction contract may provide a measure of protection to construction industry participants who may wish to advance delay claims or resist them.

There should be a monitoring system to record all effects in project areas, governmental actions (such as quarantines, travel bans or “shelter in place” orders) and any supply shortages due to the COVID-19 pandemic.

The party seeking to be excused from performance under the contract has the burden to prove entitlement to excused performance.

Duty to mitigate

Regardless of a force majeure event, frustration or excusable delay, parties are under an obligation to take all reasonable steps to recover any losses or prevent additional losses.

Duty to act in good faith

Each day, we hear of new COVID-19 cases around the world and new government measures aimed at preventing deaths and allowing health-care facilities to cope with the increasing number of patients. No one can speculate with any real accuracy on the magnitude of the impact of the pandemic. Crisis management is time-sensitive and parties may wish to enter a formal “standstill” agreement, which may suspend administrative obligations and promote co-operation in solving problems, rather than fighting about the allocation of risk.

Such an agreement may not be necessary to comply with the duty to act in good faith, but may assist in showing parties have made their best efforts to act in good faith.

Conclusion

From a legal contract management perspective, some appropriate steps to consider in the context of this COVID-19 pandemic are to check the contract for wording that deals with delays and the already agreed upon consequences of particular delay events, outside the control of one or more of the parties.

The next steps are to look for notice provisions regarding any delay provisions in the contract and record and comply with notice provisions. Develop internal protocols aimed at accurate and contemporaneous documentation of the impact of the COVID-19 pandemic on your business.

Keep the lines of communication open with your construction counterparts and, if possible, proactively engage in efforts to seek agreement on collaborative efforts to mitigate the impacts of the pandemic to the greatest degree reasonable and practicable in your particular circumstances.

Andrew J. Heal, J.D., L.L.M., is a partner at Heal & Co. LLP.

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