For construction contracts and disputes
Industry is facing unprecedented times. The COVID-19 pandemic has forced every stakeholder in the construction pyramid to adapt to new challenges resulting from a shifting landscape of site closures, weakened supply chains and intensive new health and safety requirements. Construction may become more expensive and slower as new procedures are followed, and uncertainties are clouding the industry as the effects of the COVID-19 pandemic continue to evolve – including possible future waves and governmental action.
As a result, obvious and obscure clauses have come to the forefront as parties issue and receive claims for additional money and time linked to the COVID-19 pandemic. This has also forced stakeholders to engage in front-end dialogue on issues such as project structuring, pricing, scheduling, occupational health and safety, changes in law protection, force majeure remedies, suspension rights and termination rights.
What follows are insights on key points that parties may wish to look for in construction contract clauses dealing with the pandemic, as well as potential considerations when addressing existing disputes and those to come. Firms should use this to assist as they navigate concerns, address potential risks to business and ultimately, strategize for the new normal.
Contracting and construction
How is COVID-19 addressed? For contracts finalized pre-COVID-19, the impacts of the pandemic are most commonly captured by the existing force majeure clause. However, it is imperative for parties issuing or addressing pandemic-related claims to identify all of the possible clauses throughout the contract that may be triggered, not just the force majeure clause. For example, governments and public health officials have responded to the pandemic in a number of ways, including by issuing stop-work orders and new health and safety requirements like physical distancing and the use of PPE. This may have contractual implications across a number of different provisions within many standard form contracts used in the industry.
Since the start of the COVID-19 pandemic, there has been a trend in industry towards moving COVID-19 out of the force majeure and other clauses to its own section. This not only makes contracts easier to administer, but helps to clarify that there are no other contractual remedies for COVID-19 impacts except as set out in the COVID-19 clause.
What are the contractual remedies? Generally, from a contractor’s perspective, there are two possible remedies for these types of events: additional time to complete the work and additional compensation for increased costs. However, each has its complications. Regarding time, should a contractor be allowed additional time for all impacts or only those that affected the critical path? Regarding compensation, what types of costs are compensable? Are PPE and additional rental equipment, or additional labour costs for extra cleaning included? What about productivity impacts from performing work in a more physically distanced way and the indirect costs that may flow from the extension to the construction schedule? What about supply chain impacts that can have knock-on effects on other aspects of work, and travel restrictions that may impede the ability of personnel and specialized technical advisors of making site visits?
Contracts in a post-COVID-19 era should, to the extent possible, specify whether some or all of the above are eligible for compensation, and should be clear as to what the known impacts are and whether they are addressed in the baseline construction schedule and contract price, or if they will be addressed as a change order during performance of the work. It’s expected significant care will be taken to ensure clauses provide the intended relief for any anticipated implications. Contracting in a post-COVID-19 world is further complicated by the fact that there are many unknown elements that parties may want to address, such as the possible effects from subsequent waves or new laws or regulations that may come up. In many cases, the parties may want to agree to share the costs or to establish a contingency allowance to deal with unknown (or known, but not yet quantified) pandemic-related risks.
What are the notice requirements? Under a typical force majeure clause, there is usually an obligation to provide prompt notice with particulars and documentation at the time of the claim or to follow when available, as well as specifying what obligations under the contract have been impacted. This presumes that a force majeure event is acute in nature, like a winter storm or a fire. With the COVID-19 pandemic, impacts may be more chronic in nature, possibly extending over the entire life of a project and potentially with changing implications depending on the project phase. A one-time notice may not be sufficient or even appropriate. Instead, parties may need to consider regular reporting and updates on an ongoing basis, which may be more useful, and establishing a protocol under their post-COVID-19 contracts for how relief may be provided.
Contentious issues and disputes
Time to revisit existing disputes? The COVID-19 pandemic has led to temporary court closures across the country. While courts have now expanded the scope of hearings that may proceed remotely, parties can expect delays in seeking relief from a court now and into the foreseeable future. Risk profiles have also shifted in light of the pandemic. Many construction companies already felt the strain of cash flow issues before the pandemic. Parties may take a hard look at existing disputes against this backdrop and may be more open to resolving longstanding disputes and prioritizing getting to completion, as opposed to engaging in behaviour that may delay payment and completion. These forces may create new opportunities for settlement or for re-opening dialogue between parties.
Time to consider post-pandemic disputes? A flood of project disputes relating to delays, cost overruns and other COVID-19-related claims is inevitable. Parties will need, as usual, to prove their claims and demonstrate mitigation efforts. Now more than ever parties should be reviewing current record-keeping practices, addressing gaps and, where possible, introducing innovation and improvements that will carry over to future projects. Given the earlier comments on drafting to address COVID-19, there will likely be more disputes on the characterization of the impacts of COVID-19 and the proper application of contract provisions relating to changes of law, termination for prolonged suspension and stop-work orders, in addition to the usual force majeure clauses. Alternative dispute resolution processes like mediation and arbitration, which were already popular pre-COVID-19, are likely gaining even more traction with parties, given they can largely proceed remotely and likely offer a timelier resolution than the courts.
Time to embrace adjudication? Ontario has yet to see a significant uptake of adjudication. In October, Ontario Dispute Adjudication for Construction Contracts released its first annual report, which highlights that 32 adjudications have been commenced since the adjudication provisions of the Construction Act came into force. This may be because only contracts entered into after Oct. 1, 2019, subject to certain grandfathering rules, are subject to the prompt payment and adjudication regime under the Construction Act. It may also be that there is still a lack of familiarity or comfort with the process. While Ontario has yet to see a significant uptake of adjudication in the province, given how quickly adjudications proceed and the swift response timelines, it may be that more parties are interested in adjudication in a post-COVID-19 era. However, parties should remember that decisions are only interim and dissatisfied parties may pursue future arbitration or litigation – so legal counsel should be involved from the outset.
In addition to being a lawyer, Elliot Smith is a professional engineer. Smith specializes in providing legal advice on all aspects of major infrastructure projects, including project development, procurement, contract negotiation and administration issues. His legal practice has a strong emphasis on the development of power plants, both renewable and conventional, as well as the negotiation of power and capacity purchase agreements.
Lia Bruschetta is a construction and commercial infrastructure litigator with experience litigating, arbitrating and mediating disputes arising out of construction and infrastructure projects for owners and contractors across Canada. Her practice covers all aspects of construction law, including disputes involving contracts and specifications, construction liens, trusts, bond and insurance claims, delay claims, bidding and tendering matters and negligence claims. 