Construction contracts impacted now and into post-COVID world

Wouldn’t it be wonderful to think that the COVID pandemic was a one-time event? However, in a world increasingly integrated through personal travel and international supply chains, it remains entirely possible that we will be confronted with a new pandemic in the future.

Therefore, it is vital that the industry look beyond this current period. Project parties joined together by contract must address potential pandemic events as one of several key considerations when drawing up their agreements.

“The impact of COVID-19 on the construction industry has been widespread and has resulted in numerous issues including increased material and labour costs, work delays, global supply chain shortages, and government regulation,” Sahil Shoor, partner with Gowling WLP, told the Daily Commercial News. “This has affected how construction contracts are being negotiated. In particular, parties are seeking to rebalance risk

allocation and avoid excessive risk as it relates to these new issues.”

Yet as Rob Kennaley of Kennaley Construction Law points out, “the words ‘pandemic’ and ‘epidemic’ do not show up in the CCDC or CCA standard form contracts that have been in use in Canada for decades.” He agrees that the risks associated with a COVID-like occurrence are too great and significant to go unaddressed or left to chance.

In many cases, viral pandemics are not even included in the list of “force majeure” events in construction contracts either, writes Trent Cotney, CEO of Cotney Attorneys & Consultants. In the past, he says these were reserved for “floods, tornadoes, hurricanes, earthquakes, landslides, wildfires and other ‘Acts of God’, as well as human-caused emergencies such as terrorism, war, riots, strikes and explosions.”

Yet COVID has taught us that a pandemic can have the same impact in terms of material supply delays and work stoppages. These need to be properly dealt with, particularly

as they affect compensation. For that reason, Shoor recommends the inclusion of a pandemic-specific clause.

Shoor explains that although contractors can now be expected to take steps that anticipate supply chain interruptions, “the cost of mitigation efforts will generally be allowed

by contractors in the fixed price and GMP (Guaranteed Maximum Price) amounts.”

Some contractors will include such mitigation costs as allowance items, or provide for a cost reduction if the restrictions underlying the increases are lifted sooner than the date of substantial completion.

Delay costs resulting in claims for additional procurement costs can also involve the work force. Shoor uses the example of delays caused by workplace lockdowns or when site personnel test positive.

Furthermore, there can be changes in laws during a pandemic that can slow or halt project work.

“Changes in applicable law provisions in construction contracts may be used to limit the impact of governmental orders that place restrictions on the global supply chain and on the

actual construction on the construction project”, says Shoor. “Changes in applicable law provisions, however, do not eliminate the challenge presented with best or expected practices

around COVID-19 avoidance and mitigation which is not legally binding in nature.”

Responsibility for any added costs associated with these adjustments does not have to be entirely one-way. While payment adjustments can be made to deal with uncertainties in the labour and supply chain, Shoor says parties may

also contractually limit any added costs assigned to the owner resulting from unforeseen events. For example, it could be agreed that costs beyond certain limits would be covered by contractors, or that owners be required to pay a

percentage of the difference between the actual cost and the maximum price.

Matters could develop to the point that one party or the other wishes to partially or completely suspend work for a

period of time. Allowing this offers flexibility and responsiveness to the situation at hand. However, any suspension of construction work will likely result in increased costs associated with restarting again, plus costs for labour, security, additional safety measures, or construction permit extensions. Shoor says that, “Contractual terms specifying consequences for the suspension of work instructed by a specific party, whether the owner and/or the contractor, can be included to dilute the impact of suspension provisions.”

Similar considerations can be given to allow the outright termination of a contract, giving the owner the right and

opportunity to review the economic viability of continuing the project at all.

At the end of day, Kennaley points out that contracted parties should keep their expectations reasonable, taking into

account limits to what an owner or contractor can or should do to penalize a failure to perform in the face of COVID or a similar event.

He cites Mr. Justice Koehnen’s remarks from the 2021 case, Crosslinx v. Ontario Infrastructure, held before a Ontario Commercial Court.

“The purpose of an obligation to substantially complete a project by a given date is to incentivize constructors to keep the project moving forward and to impose a financial penalty if they do not do so… Imposing financial penalties for delays caused by the pandemic does not further the purpose

of including a substantial completion date in the contract. It merely penalizes a contractor who may be working with

heroic efficiency to complete the project in a timely manner even though it is impossible to do so because of circumstances beyond the contractor’s control. Imposing financial penalties on contractors for failing to meet a substantial completion date in those circumstances only incentivizes them to cut corners and imperil public health and safety.

“In the circumstances I do not think it appropriate to adopt an interpretation of a contractual provision that runs contrary to its purpose and that incentivizes constructors to

imperil public health.”