By Nathan Sutherland
The spread of COVID-19, and governments’ efforts to stop it, are causing significant disruption to the economy and many parts of the construction industry. In this update we will highlight some steps that contractors can take to manage this disruption, with a focus on contractual rights and obligations.
REVIEW OF COVID-19 RELATED RESTRICTIONS
The Province’s requirements regarding “social distancing” and self-isolation are contained in the Order of the Medical Officer of Health, found here. Importantly, not all restrictions apply to businesses in the construction industry:
- The Order does not specifically provide for the closure of construction sites, unlike for other businesses like restaurants;
- Any business not specifically required to close can continue to operate as long as it is able to implement “social distancing” by practicing the “two meter” rule.
- Businesses that can implement the two metre rule can have more than five people at a worksite / workplace at a time.
- If a business cannot practice “social distancing” by implementing the “two meter” rule, then it must limit the number of clients / customers on site to five or fewer at a time.
In addition, the Order specifically exempts from social distancing requirements various “municipal entities and their contractors”. The municipal entities include those involved in road maintenance and repair and other forms of construction work.
The Construction Association of Nova Scotia has been posting updates regarding the restrictions applicable to the construction industry along with responses to various FAQ here.
MANAGING DISRUPTION DURING THE PANDEMIC
Due to exemptions in the health Order, some contractors may be able to proceed with project work. However, most will be affected to some degree: supply chains, project financing, labour availability, and other aspects may all be affected (for a series of blog posts about employer / employee issues related to COVID-19, check here.)
Here are some recommendations to manage some of the disruptions that we believe are inevitable in the face of the COVID-19 outbreak.
Re-read The Contract
Many contracts get signed without being reviewed as closely as they should. The bid stage is the “honeymoon” phase of the project. Contractors tend to be reluctant to speak out about potential issues for fear of damaging the contractual relationship at the very start. Now is the time to go back to the contract to review the clauses that you may not have reviewed closely at the outset, or to refresh yourself on those clauses you may have forgotten about. You will read the contract with a new perspective.
Provide Notice of Impacts
Most CCDC contracts provide that where the contractor (or design-builder, or subcontractor, etc.) is delayed by causes outside the contractor’s control, the schedule will be extended accordingly. However, they also provide the contractor must give notice of the cause of the delay, usually within 10 working days of the cause of the event causing delay (see e.g. GC 6.5.3 and 6.5.4 of the CCDC 14 Stipulated Price Design-Build Contract). This step will be particularly important for contracts with liquidated damages provisions.
Keep Detailed Records
Many contracts specifically require contractors to maintain detailed records and require that those records be available for inspection by the owner, its consultant(s), or a general contractor / construction manager. However, even if this is not an express requirement, contractors should be particularly proactive about maintaining detailed records during the pandemic and documenting changes during this period. These records will be critical evidence if disputes arise during the current time of disruption.
When Faced with Suspension of Work
Many contracts, including some CCDC contracts, provide for the right of a party to suspend work in certain circumstances (usually the owner or a general contractor). In the context of the pandemic many contractors are not looking to terminate – they want to continue to perform the work when the pandemic abates. However, parties may be faced with owners or other contracting parties “above” them in the contracting chain seeking to suspend work for periods of time.
A suspension of work will only be permitted on the terms provided under the contract. If the contract permits work to be suspended, it will usually also speak to any necessary adjustments to contract time and/or price. If the contract does not permit the suspension of work, an imposed suspension will amount to a delay, a change in the contract time, or a breach of the contract. At worst it may amount to repudiation of the contract by the party imposing the suspension of work.
Will the Pandemic-Related Restrictions Justify Termination?
Some standard form building contracts are terminable where a court order or an order from another public authority causes a delay of a certain period. For instance, GC 7.3.2 of the CCDC 14 Stipulated Price Design-Build Contract provides that “If the Design Services or Work are suspended or otherwise delayed for a period of more than 20 Working Days under an order of a court or other public authority… the Design-Builder may… terminate the Contract…”
Further, some contracts (though typically not standard form construction contracts), contain “force majeure” clauses that permit the contract to be terminated on the occurrence of certain extreme or unforeseen events. These are discussed further below.
If there is no specific contractual clause that permits termination due to delays or a force majeure event, restrictions related to the coronavirus pandemic could in some cases discharge the contract due to frustration.
A contract will not be frustrated where performance is simply more difficult or more onerous to one party. The doctrine of frustration will only apply where a “supervening event” that could not reasonably have been anticipated by either party makes performance of the contract “a thing radically different from that which was undertaken” by the parties.
Whether current coronavirus-related restrictions could result in the discharge of a contract due to frustration will depend entirely on how a party’s ability to perform its contractual obligations are affected.
Force Majeure Clauses
Most standard form construction contracts do not contain “force majeure” clauses; however, contractors may encounter suppliers who seek to invoke these clauses in supply agreements as a result of transport restrictions or other effects from the pandemic.
“Force majeure” clauses typically allow parties to avoid contractual obligations when an unusual event beyond the control of either party makes performance impossible. The Supreme Court of Canada has stated that “The common thread is that of the unexpected, something beyond reasonable human foresight and skill”.
The current global coronavirus pandemic is certainly unexpected and will have a severe impact on certain contracting parties. However, force majeure clauses can vary significantly and every clause must be interpreted according to the specific words used. Many such clauses will only excuse performance if the party seeking to rely on it shows it could not overcome the effects of the force majeure event even by exercising due diligence, or by making efforts to mitigate the effects.
For further information, contact us at (902) 423-7777, toll-free at 1-800-565-4529, or [email protected].
* This information is not legal advice. The answers to these questions will vary, depending on the circumstances of each case. Consult legal counsel for information and advice relevant to your individual circumstances.