Canadian Contract Protections in a COVID-19 World

The construction industry is critical to the Canadian economy, and in the coming years, the government will continue to invest in broad public infrastructure projects. These projects are most prominent in the transportation, healthcare, and education sectors.

Nevertheless, construction has been hard hit by the COVID-19 pandemic, and starting in spring 2020, territorial, provincial, and federal governments responded to the pandemic by declaring states of emergency. Leaders considered some construction projects to be essential, so they continued as planned. However, others were deemed non-essential and experienced shutdowns.

Suspensions and Shutdowns

Across Canada, non-essential construction projects and activities were forced to close down and suspend work. In addition, many territorial and provincial courts and governments had to cease operations. Most courts have been conducting only the most urgent hearings via telephone and video conferencing. The majority of construction-related legal cases are stalled until courts are back in session.

Due to such court closures, some territorial and provincial governments have suspended statutory limitation periods usually allocated for procedural step actions and timelines. But affected parties need to verify what limitation periods have been revised for their specific territory or province.

Understanding Risk

Owners and contractors allocate and take on risk under the terms of each project’s contract. Most construction contracts in Canada use a stipulated lump sum or fixed price agreement between the project’s owner and the contractor.

The contractor assumes the risk for issues such as schedule, price, and performance of construction work. The owners assume risks for most condition modifications, which may result in change orders. A change order stipulates that the contractor is owed additional compensation beyond the fixed price and/or a time extension is warranted if delays are beyond the contractor’s control or if the scope of the project changes.

Types of Contract Protections during Delays

To address these pandemic-related shutdowns, many construction industry professionals are carefully examining their construction contracts so they can determine what rights they have during the resulting delays. Officials expect that claims for delay and force majeure will increase as contractors face these shutdowns and suspensions. Below are explanations for those and other contingencies:

  • Liability Exclusions—With the elimination of liability clauses, liability may be excluded for some defaults and breach of contract. These provisions are relatively common in Canadian construction contracts and usually cover consequential damages. In most cases, the courts use a literal application of the terms based on the clause’s wording.
  • Liability Caps—Some contracts will allow for a limitation or cap on liability. Such limits are more common in design service agreements (usually involving engineers and architects). They are not so typical in agreements between contractors and owners for domestic construction projects, but they are typical for international projects. These limitations may be tied to the price for services, a percentage of that price, or the level of insurance coverage on a project. Limits are unlikely to be set for losses related to a worker’s injury or death, willful misconduct, and fraud.
  • Force Majeure—Force majeure clauses, which recognize that unforeseeable circumstances prevent parties from fulfilling an obligation, are common in Canadian construction contracts. To be enforceable, the clause’s intention and applicable circumstances must be enumerated and clearly stated. In general, a contractor will often try to expand the coverage of force majeure clauses, while an owner will try to limit the clause’s circumstances. When declaring a force majeure, the claimant must show that performing its obligations was impossible. Some typical force majeure circumstances include fire, work stoppages and labor strikes, political disturbances, acts of God (such as floods, typhoons, landslides, earthquakes), epidemics and pandemics, explosive materials, war, and terrorism. In Canada, some stakeholders have argued that the COVID-19 pandemic is a force majeure event. However, the extent to which it will be enforced may depend on the wording included in each contract.
  • Material Delay Clauses—There are three kinds of material delays to be considered during a construction contract negotiation: those caused by contractors, those caused by owners, and excusable delays (such a force majeure circumstances). The negotiating parties must evaluate how each of these delay types will affect the project schedule, the contract price, and other losses that the delay can cause. As with every contract stipulation, precise wording and expectations are critical.

Communication, Recordkeeping, and Security

For projects that are delayed, stakeholders should review their contracts and make note of what clauses pertain to the current delays. All parties should document the reasons for the delays and complete any required written notices.

Contractors should record any costs incurred by the project suspension and note if those are potentially eligible for reimbursement. All parties should assess if the circumstances causing the project suspension warrant a time extension and then determine a revised completion date.

During the delay, contractors and owners must ensure that worksites are secure and regularly monitored. Any hazardous materials should be safely discarded or stored. Contractors should create a communications plan to keep all parties, including suppliers, updated during the shutdown.

Knowing Your Rights

Whether you are a construction project owner, contractor, or supplier, you must ensure that you understand every stipulation in the contracts you sign. You do not want to assume more risk than necessary, so the details of each delay or liability clause must be phrased in a manner to protect your interests. If you are unsure about the ramifications of your current contracts—or those for future projects—do not hesitate to consult legal counsel. An experienced construction attorney can explain the applicable clauses and help project your company.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

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