Construction claims and COVID-19
As the economy sputters back to life following the interruption caused by COVID-19, members of the construction industry are surveying the economic havoc wrought by the pandemic and considering how to recoup their losses and move forward. This article explores some of the issues surrounding delay claims and offers guidance to contractors.
Characterizing the claim
Before making a claim for an extension of the contract schedule or a change in the contract price, contractors should review the terms of their construction contracts. For projects using a standard CCDC-2 Stipulated Price Contract, for example, requests for an extension of time and costs for delay will likely fall under general conditions 6.5.2 and 6.5.3 (subject, of course, to any supplementary conditions).
GC 6.5.2 states that if a contractor is delayed in their performance of the work “by a stop work order issued by a court or other public authority,” provided the delay was not due to any act of the contractor or those within their employ, the contractor is entitled to both an extension of time and reimbursement of “reasonable costs” incurred due to delay.
GC 6.5.3, otherwise known as a force majeure clause, entitles the contractor to an extension of time, but it does not entitle the contractor to costs incurred as a result of the delay.
The ability of a contractor to recoup costs of a delay will depend largely on whether the work stoppage is characterized as the result of a “stop work order,” or a force majeure event.
In Ontario, construction projects were temporarily brought to a halt by an emergency order (the Emergency Order) that was passed under the province’s Emergency Management and Civil Protection Act. The Emergency Order required that all non-essential businesses, including construction projects (with certain limited exceptions), suspend operations for the duration of the emergency.
Does the Emergency Order qualify as a “stop work order issued by a court or other public authority?” On its face, the Emergency Order appears to fit within the meaning of GC 6.5.2, but there is little in the way of case law or legislation to provide guidance on this point. The term “stop work order” is not a defined term in the CCDC-2, nor is it defined by Ontario’s Construction Act. The concept of a “stop work order” appears in a number of Ontario statutes, such as the Building Code Act, 1992, the Public Lands Act and the Occupational Health and Safety Act to name a few examples. In those cases, a “stop work order” is essentially an order issued by a public official that a project be shut down until it is brought into compliance with the act under which the order was made. In other words, under a typical “stop work order,” the owner is told the requirements to have the order lifted.
The Emergency Order, by contrast, is completely out of the owner’s hands. No amount of accommodations for social distancing or the provision of personal protective equipment to workers will enable owners to get their projects up and running again. The duration of the Emergency Order is at the sole discretion of the provincial government. If contractors attempt to recoup delay costs under GC 6.5.2, owners will surely ask why they should be responsible for costs incurred as a result of an Emergency Order that was imposed in response to conditions the owners did not create.
From an owner’s standpoint, it makes sense to characterize COVID-19-related delays as a force majeure event. However, that too is fraught with legal risk. GC 6.5.3 provides several examples of force majeure events such as “abnormally adverse weather conditions,” which physically restrict a contractor’s ability to access a project. While the COVID-19 pandemic may be characterized as an “Act of God,” in Ontario, it is the Emergency Order, rather than the virus itself, that has temporarily caused construction to shut down. Indeed, if it were not for the Emergency Order, many contractors would have continued work on their projects with minimal interruption.
Before contractors commit to a characterization of their claim, they should understand the potential consequences of each contractual avenue for recouping their losses and consider obtaining legal advice.
Notice periods
In Ontario, as of the time of this writing, the provincial government had suspended limitation periods set out in any “statute, regulation, rule, by-law or order of the Government of Ontario.” Importantly, this suspension has little or no bearing on notice periods set out in construction contracts. Over the last decade, Ontario courts have been fairly rigid in their interpretation of notice provisions in construction contracts and have required strict compliance with notice provisions even in the absence of evidence that late submission of a claim caused any prejudice to the owner. The primary purpose of requiring contractors to provide timely notice of delay damages is to give owners an opportunity to mitigate the damages before the claim has fully crystalized. Despite some recent case law suggesting that Ontario may be open to a more lenient, contextual approach to giving notice, it is essential that during this period of uncertainty contractors protect their legal rights by scrupulously observing the notice periods set out in their contracts.
At the start of the pandemic, many contractors immediately sent notice letters to owners advising that they were anticipating project delays and would likely incur unexpected costs as a result of the delay. Generalized letters of this nature may not be good enough for claiming a change in contract price within the required notice period. Courts have held that general letters indicating an intention to make a claim are not necessarily claims in writing required by a contract. In other instances, courts have upheld contractual requirements for delivery of details of claims by agreed-upon deadlines. Contractors making claims for changes to the contract price as a result of COVID-19-related delays should ensure that their claims include the amount of detail and form as required by their particular contracts, and set out the grounds upon which the claim is based. If only an earlier general claim notice letter was given, contractors should remember to send a follow-up notice setting out the further details of their claims once they are known.
Conclusion
The construction industry may grapple with the fallout from COVID-19 for months (possibly years) as construction claims are advanced and slowly churn their way through negotiated settlement, mediation, arbitration and the civil court system. The duration and severity of the COVID-19 pandemic is beyond anyone’s control. However, what can be controlled is how parties use the information that is already at their disposal. Read construction contracts, keep accurate and detailed records of delay costs and mitigation efforts, adhere to all contractual notice obligations and maintain open lines of communication with owners, consultants, subcontractors and suppliers. Through vigilance and preparation, parties will be as prepared as possible to limit their damages and successfully complete their projects. 