Potential Impacts Of COVID-19 On Construction Contracts

In recent months, COVID-19 has grown into a significant health crisis. On March 11, 2020, the World Health Organization (WHO) officially designated the outbreak of COVID-19 as a pandemic. On March 17, 2020, the government of Ontario declared a state of emergency under the Emergency Management and Civil Protection Act (EMCPA), While the state of emergency officially ended on July 24, 2020 with the introduction of the Reopening Ontario Act, many orders made under the EMCPA remain in effect at time of writing.

In light of these unprecedented challenges, increasing public health interventions are being deployed in response of COVID-19. Among the preventative measures followed are the complete or partial shutdown of construction in different Canadian provinces. Under such circumstances, it becomes critical for project stakeholders to determine how such pandemic event can be addressed under their existing contracts to safeguard themselves against potential losses. In this article, JTE Claims Consultants Ltd. sheds the light on COVID-19 outbreak and its potential impacts on construction contracts, with key recommendations for project stakeholders.

Is COVID-19 pandemic a force majeure event?

In general, construction projects are prone to unexpected events beyond the control of involved parties causing delays and/or disruptions. Such events are commonly referred to as force majeure events. Natural disasters (or other “acts of God”), fires, flood, war, labour disputes, strikes, and lockouts are a few examples of that.

On the face of the declaration from WHO and the government of Ontario’s action, the outbreak of COVID-19 is without a doubt unforeseeable and could therefore be considered a force majeure event. However, this is subject to the contract which the parties have signed.

How can COVID-19 be addressed under construction contracts?

Dealing with COVID-19 as a force majeure event is not straightforward. Some construction contracts may explicitly include force majeure clauses which allocate risks and losses to relevant parties, as opposed to other contracts such as CCDC2, which do not include explicit force majeure clauses. Under CCDC contracts, COVID-19 may be captured in a broader category of “emergency” or “any cause beyond the Contractor’s control”.

However, merely recognizing the COVID-19 outbreak as a force majeure event may not automatically allow the contractor to claim relief for losses (delays and/or disruptions) under the contract. Effectively, any party seeking to declare a COVID-19 outbreak or an event relating to the outbreak as force majeure must prove that the event complies with criteria stipulated in the contract.

In cases where the contractor pre-emptively shut down the site without any mandatory instructions, such stop of work may or may not be construed as a force majeure event. Whereas, when site closures are in response to government issuing mandatory orders, the contractor may have the right to terminate the contract after giving notice. As per GC 7.2.2 of CCDC2, if “the Work is stopped for a period of 20 Working Days or more under the order of a court or other public authority … the Contractor may… terminate the Contract by giving the Owner Notice in Writing to that effect”.

If the contract does not include force majeure clauses, stakeholders may be recommended to rely on the doctrine of frustration under the common law. Doctrine of frustration is applied where “a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes a thing radically different from that which was undertaken by the contract”.

Careful examination of contract clauses is critical to identifying the suitable approach for handling COVID-19 outbreak and determining whether it constitutes the entitlement for an excusable delay and subsequent disruptions. Under all interpretations of contract clauses, it is the responsibility of the claimant party to establish all necessary elements of entitlement under the contract.

What are the potential impacts of COVID-19 on construction projects?

It is without a doubt that the outbreak of COVID-19 is causing serious implications for economies and businesses worldwide. Considering this, construction projects have experienced and will continue to experience adverse impacts that challenge their completion. Among such impacts are:

1. Loss of productivity resulting from factors such as:
   • Following preventative measures under the Occupational Health and Safety Act, government announcements, and safety guidelines and best practices. Among such measures are the 2m physical distancing requirements, staggering of work schedules, compartmentalization of sites, screening at entry of sites, limited sharing of tools, continuous sanitization, self-isolation, etc.
   • Affected learning curve of workers due to the disruption of work.
   • Potential change in the sequence of work to account for shortage and/or delays of materials and manpower.
   • Disrupted communications between project stakeholders with meetings being held through teleconferencing or videoconferencing.
2. Delays of work progress resulting from factors such as:
• Supply chain disruption affecting the manufacturing and delivery of materials.
• Restricted site visits by project personnel.
• The full or partial closure of construction sites.
• Payment and financing issues due to business shutdown and uncertainty in completing projects
• Travel restrictions and self-isolation periods imposing problems on project personnel and migrant workers.

How can project stakeholders be prepared for the impacts of COVID-19?

As the government has started to take actions for the containment of COVID-19, such as 2m physical distancing, further adverse impacts on projects are anticipated. Under this uncertainty, it is prudent that all stakeholders collaborate and plan for potential threats. Below are strategic decision-making recommendations for owners and contractors which take the imposed challenges into consideration.

For Owners:

1. Contract administration:
   • Identify responsibilities and risks under the contractual clauses for force majeure clauses, suspension and termination etc. and set a mitigation plan accordingly.
   • Check whether the contractor’s actions can trigger claims under bonds. If so, identify corresponding requirements.
2. Cash flow: Understand the cash flow challenges in light of COVID-19 and check how they can be addressed to mitigate potential risks.
3. Communication: Maintain proper communication with consultants and contractors to monitor the progress of projects and set collective mitigation plans.

For Contractors:

1. Health and safety:
   • Immediately implement best hygiene practices on site, which includes enforcing hand washing requirements and holding project meetings by conference call.
   • Continuously monitor public health announcements and orders from government agencies and regulators.
   • Continuously monitor the worksite to ensure that the minimum physical distancing requirements are followed.
2. Contract administration:
• Follow the timeline of providing notification as per the contract so that future claims are not undermined due to insufficient notification.
• Identify responsibilities and risks of the suspension or termination of subcontracts and set a mitigation plan accordingly.
3. Schedule:
   • Re-sequence and re-organize the workflow and update the schedule to account for impacts of imposed restrictions and subsequent productivity losses.
   • Consider the impact of weather on the activity durations when re-scheduling the work.
   • Include material deliveries as separate activities to easily track and account for possible delays resulting from supply chain disruptions.
   • Take appropriate actions to mitigate delays to activities on the critical path.
4. Insurance: Check the existing insurance policies (builder’s risk and business interruption policies) to verify any available coverage for force majeure related impacts.
5. Communication:
   • Collect emergency contact information for reporting possible illnesses.
   • Develop a proactive communicate strategy and coordinate with the entire project team on an established regular basis.
   • Contact suppliers and members of the workforce to ascertain the status of current and future deliveries and determine any anticipated stoppages or reductions in manpower to plan for contingencies.
6. Record keeping:
   • Document the impacts of the outbreak and segregate related changes, delays and other impacts.
   • Record every action, notice, updated schedule, important milestone, identified risk to the critical path, and all meeting minutes related to COVID-19 discussion, etc.
   • Keep track of incremental and abnormal costs due to COVID-19 even if not covered under insurance programs. Such costs may include cleaning and premise disinfecting costs, crisis management costs, loss of productivity costs as overtime pay or standby costs, order cancellations, and lost profits.
7. Remote execution of tasks: Explore the potential of incorporating remotely operated equipment and tasks. This would not only speed up the execution of work, but also facilitate the adherence with the physical distancing requirements on site.

How can JTE Claims Consultants Ltd. assist projects in light of COVID-19?

During this unpredictable and far-reaching outbreak, it is recommended that project parties utilize experienced claims consultants and legal counsels. JTE Claims Consultants Ltd. offers forensic engineering, management consulting and commercial advisory services to the construction and infrastructure industry. We specialize in construction claims, dispute prevention and resolution services, surety and contract management. We are well-versed in the COVID-19 situation and its potential impacts on construction contracts. Please get in touch to see how we can help you navigate these challenging times.