The declaration of a COVID-19 pandemic by the World Health Organization on March 11, 2020 and the various provincial declarations of states of emergencies shortly thereafter have had immediate and resounding impacts on the construction industry. Health and safety requirements were revised practically overnight, physical distancing was implemented on site (to the extent possible), and many projects deemed by the government to be non-essential were stopped completely.
Now, provincial governments have begun expanding the types of businesses and construction projects allowed to resume their activities, with the caveat that restrictions may return with a resurgence of the virus.
As the ramp-up to this year’s construction season begins, it is imperative to recognize that COVID-19 is unlikely to be considered a force majeure event for any new contracts or purchase orders currently being negotiated and executed. The virus is now a foreseeable event, notwithstanding that the extent of the virus’ impacts remain unknown.
It is therefore essential that new contracts and purchase orders for upcoming work include provisions that will properly allocate these risks as between the contracting parties. Accordingly, below are five elements to consider while drafting or negotiating new contracts and purchase orders:
1. Review before signing
While parties may feel that contract review is too time consuming, the alternative can be substantially more devastating. Over the past several weeks, many in the construction industry have felt the sting of thoroughly reading their signed contracts, only to find that they have no entitlements to the usual expected remedies and no ability to now renegotiate for the same.
Parties should be reviewing their agreements to ensure that they have a sufficient degree of protection for the more common issues and disputes that typically occur within their scope of work. If the agreements do not have adequate protections, parties should negotiate for terms that provide relief or potential relief before signing the contract.
2. Review force majeure clauses
While COVID-19 may no longer qualify as a force majeure event, it is still important to review the contract’s force majeure clause to ensure that it is part of the contract terms and that the provisions are sufficiently broad to cover a party for a wide range of unforeseen circumstances, including future epidemics, pandemics, and government mandated shutdowns or restrictions on operations.
It is also important to assess whether any notice requirements for claiming a force majeure event would be reasonable if such an event occurred, and to understand the types of relief the party will or will not receive pursuant to this force majeure clause.
3. Relief clauses
Although COVID-19 may no longer qualify as a force majeure event, parties can include COVID-19 relief clauses specifying the circumstances in which a party would be entitled to relief and the type of relief available. At a minimum, this relief should include an extension of contract time equal to any delay caused by COVID-19 related issues.
Parties must also carefully consider the triggering event for any relief clause as the party seeking the relief will not have any entitlement to the same until the event occurs. For example, where parties use a provincial declaration of emergency as the triggering event for relief, and there is a re-emergence of the virus that results in stricter physical distancing measures, a project shutdown, a municipal declaration of emergency, but no provincial declaration of emergency – there will be no entitlement for relief pursuant to those contractual provisions.
Furthermore, if the provincial declaration of emergency is the triggering event for relief and is in effect at the time the contract is signed, parties should have a clear and mutual understanding as to whether the provincial declaration of emergency then in effect is sufficient to entitle the party to rely on the relief provisions as of the commencement of the work, or whether the party will not be entitled to relief until a further provincial declaration of emergency comes into effect. If it is the later, the parties should also discuss what effects, if any, extensions of the current declaration of emergency would have on a party’s right to claim for relief.
One possible method for identifying a triggering event is to use known benchmarks at the time the contract is entered into. Not only would there be an objective standard for the triggering event, but predetermined deviations from the benchmark can also be used to permit multiple levels of relief entitlement. For example, parties may elect to use ‘6-feet social/physical distance’ as their benchmark and include relief provisions stating that changes to the distancing guidelines “greater than 8 feet” would entitle a party to a scheduling extension. Changes “greater than 10 ft.” would entitle the party to both scheduling relief and additional compensation.
4. Work stoppage provisions
While some standard form contracts contain language dealing with the allocation of costs in the event of a workplace shutdown, contracts rarely contain language that contemplates governmental authorities ordering a shutdown for reasons unrelated to the conduct of any project participant.
One of the most significant ramifications of these shutdowns has been the need to allocate the financial burden of the shutdown as between the project participants.
It is now prudent to discuss each party’s responsibilities with respect to terms such as site protection costs, extended equipment rental costs, and other additional costs in the event of future COVID-19 related government ordered shutdowns, or other similar conditions which would have the same effect – and to outline the conditions precedent to receiving any additional compensation as a result of the same.
5. Notice provisions
Many contracts have strict requirements with respect to claims regarding scheduling relief or financial compensation. It is important that the contractual notice requirements regarding such claims clearly state:
- whether notice must be in writing
- the timeline for delivering the notice, together with a statement that the timelines are considered reasonable in the circumstances
- the names and addresses of the party/parties to whom the notice must be delivered
- the method for delivering notice and whether the notice may be delivered electronically
- any particulars required to be included in the notice
Conclusion
Although COVID-19 has caused a substantial degree of uncertainty in the construction industry – both in terms of day-to-day operations and long-term effects – the industry is resilient and adaptable. The construction industry will continue to draw on its growing body of knowledge and experience to make increasingly informed assessments and allocation of potential risks.
By carefully drafting contracts and considering how projects may be affected by COVID-19 or another epidemic, parties can prepare for, and mitigate, many anticipated risks and potential exposure. While there will be no perfect solution for handling these situations, thoughtful drafting and contract review will certainly aid the parties in avoiding future disputes and unforeseen financial consequences.
Lori Goldberg is the General Counsel at the Coco Group of Companies and a Member-At-Large of the CBA Construction and Infrastructure Law Section. The author thanks Darcia Perry, Stanley Naftolin, Len Finegold, and Garrick Ngai for their assistance with this article.