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Bulletin | Covid-19

Construction Contracts In Canada

Fasken
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Litigation and Dispute Resolution Bulletin

This bulletin reviews force majeure and other provisions commonly included in construction contracts that may address issues of delay, disruption and relief related to the COVID-19 outbreak. 

It is critical for both owners and contractors to review the project agreement carefully, understand how these provisions work, and provide the required notices to ensure that rights are preserved. 

It is equally important to ensure that any duty to mitigate is met, to the extent possible in the current circumstances, and that impacts are carefully tracked, documented and can be backed up for use in establishing entitlement to a change order, or for use in future disputes should they arise.

The bottom line is that over decades of trial and error, construction contracts have been developed to use industry standard provisions that are well equipped to deal with unanticipated events, even an event as extreme and impactful as COVID-19. 

This bulletin will explain how both force majeure and other common construction contract provisions may apply in respect of the COVID-19 crisis. Due to the extensive use of the Canadian Construction Documents Committee (CCDC) form in Canada, we specifically talk about force majeure and related clauses in CCDC contracts.[1]

Please note that your particular contract may or may not contain such provisions, and the provisions contained in any particular contract may differ considerably from what is described in this bulletin as “typical”. As a result, parties should seek legal advice with respect to their particular contracts and should not rely on the general description of common rights and obligations set out in this bulletin.

Force Majeure

The rapidly evolving COVID-19 pandemic is creating new and unprecedented challenges for the construction industry. For example, on March 23, 2020, the governments of Quebec and Ontario ordered the closure of all “non-essential” businesses for a minimum duration of 3 weeks (Quebec) and 2 weeks (Ontario) in an effort to limit the spread of the virus. These announcements will undoubtedly have significant impacts on all stakeholders of the construction industry. The true scope of these impacts is difficult to predict at the present time.

Most construction agreements have provisions to deal with events that delay or disrupt construction, including change, delay and force majeure provisions. 

The most likely provision that parties will rely on to address impacts of COVID-19 and the closure or suspension of work on construction sites is a force majeure clause. Force majeure clauses are found in most construction contracts. Such clauses generally operate to provide relief to a contracting party when an event beyond the control of either party makes performance impossible.[2] 

The scope of a force majeure clause, when it is triggered, and the relief it provides depends on the specific words of the provision and the contract more generally. It is critical to carefully review a force majeure clause in the context of the contract, and to understand what relief it can provide if it is invoked and whether there are other more preferable contractual tools that may be used.

Most force majeure clauses consist of the following elements:

  1. The Triggering Event: The clause will define what kind of circumstances may give rise to an event of force majeure. Many clauses start with a “basket clause” followed by a list of specific events, such as acts of war, strike, natural disaster, act of god, etc. The “basket clause” will typically be in the form of “any circumstance not within the reasonable control of the affected party”. Clauses that do not include a “basket clause”, and only list specific triggering events, will likely have a more narrow application. Ultimately, whether a force majeure clause covers a pandemic depends on the wording of the particular clause.
  2. The Impact Requirement: The clause will typically specify that the affected party must be impacted by the event, often with express reference to time and cost.The clause will often provide that the event must be beyond the reasonable control of the party and must not be self-inflicted.
  3. The Mitigation Requirement: The clause will generally require the affected party to mitigate the impact of the event, to the extent possible. A party relying on a force majeure clause should ensure that they accurately document mitigation efforts so that they can demonstrate that this duty has been met.
  4. Notice Requirement: The clause will typically require notice of the force majeure event within a certain time after it has commenced. A failure to provide the required notice can result in the loss of the right to claim relief under the clause. Parties claiming force majeure should ensure that they follow the notice requirement. A party should consult the contract to see where and how notices should be sent, and meet any content requirements in the notice provision, such as providing known impacts, details of the event, commencement date, and any other information required under the contract.
  5. Relief: The clause will typically explain what kind of relief the affected party is entitled to if it establishes force majeure applies. It is common for the clause to provide contractors with an extension of time to complete the work. It is also common, but not always the case, that the affected party is not entitled to claim increased costs as a result of the event. In other words, the remedy is often to “stop the clock” by providing an extension of time, not an entitlement to additional compensation if it incurs costs related to the event. This circumstance may prompt an affected party to seek relief under other, less appropriate provisions of the contract that provide relief in the form of both time and cost. This practice, while understandable, should be carefully scrutinized by the party receiving notice of a force majeure event.

Whether a force majeure clause is triggered depends on a proper interpretation of the particular clause.[3] It is important to recognize that your contract may have a “force majeure” clause that does not even use that phrase. For example, some contracts use the phrase “relief event”. A clause that only lists a narrow set of circumstances may or may not cover a pandemic. A clause with a broadly worded basket clause is more likely to apply to COVID-19. 

In regards to force majeure, the CCDC-2 contract does not refer to a pandemic or epidemic explicitly. Nevertheless, G.C. 6.5.3  contains a “basket clause” which stipulates that if a delay is caused by “any cause beyond the Contractor's control other than one resulting from a default or breach of Contract by the Contractor,” there will be an extension for “such reasonable time as the Consultant may recommend in consultation with the Contractor. The extension of time shall not be less than the time lost as the result of the event causing the delay, unless the Contractor agrees to a shorter extension”. 

G.C. 6.5.3. of CCDC-2 goes on to state that the Contractor is not entitled to “payment for costs incurred by such delays unless such delays result from actions by the Owner, Consultant or anyone employed or engaged by them directly or indirectly”.

Once a notice of force majeure is provided, the affected party should ensure that it meets its duty to mitigate the impacts of the event to the extent possible, and keep records of the mitigation. If the only relief that the affected party is entitled to is an extension of time, then it is critical that the party is able to demonstrate its progress of the work before and up to the occurrence of the event, and the schedule impacts that occurred after the event. 

Change in Law

Many construction contracts include provisions that establish the right of a party to claim for relief in the event that a “change in law” impacts its work under the Contract. In the rapidly evolving context of COVID-19 it is possible that changes of law will occur that trigger such clauses in construction contracts. For example, a legal requirement to quarantine, or limit the number of persons who can gather at a particular site, could trigger such a clause. The decrees adopted by the governments of Quebec and Ontario on March 23, 2020 ordering the closure of all “non-essential businesses” could also be considered “changes in law”. It is important to note that a non-legal direction to quarantine or not gather at site in numbers, will not likely fall under the ambit of “change of law”, depending on the particular language used in the clause.

A change of law provision typically has the following elements:

  1. “Change of Law” defined: The concept of a “change of law” is defined. Typically, the concept is defined as the enactment of a law that establishes requirements that impact the Contractor.
  2. Impact Requirement: A change of law clause will typically require that the impact brought on by the change of law adversely impacts the contractor in terms of time, cost or both.
  3. Entitlement to a Change Order: Typically, there is an entitlement to a change order where the contractor can establish that a change of law has occurred and impacted the contractor. Unlike force majeure, in many contracts a change of law provision will entitle the contractor to both an extension of time and additional costs caused by the change.

For instance, G.C. 10.2.7 of the CCDC-2 contract provides that either party may submit a claim for a change in Contract Price if, “subsequent to the time of bid closing, changes are made to applicable laws, ordinances, rules, regulations, or codes of  authorities having jurisdiction which affect the cost of the Work”.

The critical question that will arise when a contractor raises “change of law” will be whether the change has impacted the contractor’s work under the contract.  If the contract provides a party with entitlement to both time and cost for a change of law, then this kind of clause may be preferred by a contractor over force majeure. The challenge for both owners and contractors in respect of COVID-19 will be to determine whether a particular disruption is truly caused by a change of law or is more properly force majeure

Change Provisions

Force majeure and “change of law” are different species of “change” addressed in most construction contracts. Most construction contracts also contain a general change order provision to deal with owner directed or owner caused changes.  The disruptions that are occurring to construction sites as a result of COVID-19 will not likely fit under the ambit of a typical “owner directed change” provision, but such provisions should be reviewed and considered as part of any due diligence when considering how to address COVID-19 impacts.

For example, the CCDC-2 contract covers the owner’s right to make changes though Change Orders and Change Directives in G.C. 6.1. and following.

Owners should be mindful that any directions that they provide to their contractors in respect of COVID-19 matters may be construed as a change directive, and entitle the contractor to time and cost in respect of complying with the directive.

Delay Provisions

Many construction contracts provide relief to contractors for owner caused or excusable delay. These provisions are designed to provide the contractor with relief when their progress is delayed as a result of some act or omission of the owner, and not due to the contractor’s own mismanagement of the contract. Typically, the relief for owner caused delay is an extension of time commensurate with the length of the delay caused by the owner, and any resulting costs incurred by the contractor.

For instance, G.C. 6.5.1 of the CCDC-2 contract provides for both an extension and costs in the case of delays caused by “an action or omission of the Owner, Consultant or anyone employed or engaged by them directly or indirectly”.

Similar to the situation with “changes”, the disruptions that are occurring at construction sites as a result of COVID-19 will not likely fit under the ambit of owner caused delay or excusable delay as defined in a typical construction contract. However, as with “changes”, the delay provisions of the contract should be reviewed and considered as part of any due diligence when considering how to address COVID-19.

Termination for Convenience

Depending on how long the impact of COVID-19 lasts, some owners may wish to walk away from projects that are currently underway, or shelve them until it is feasible to begin work again. An owner in this situation should look to see if the contract contains a “termination for convenience” clause. Such a clause typically allows an owner to terminate or suspend the construction contract at any time upon the provision of reasonable notice. Owners should be aware of the cost consequences of such a termination, which are typically spelled out in the provision that provides for termination for convenience. In many cases, the owner must pay for all work performed to the date of termination, and all reasonable costs incurred as a result of the termination.

In Quebec, art. 2125 C.c.Q., which applies to contracts of enterprise and of services, provides that the client may unilaterally resiliate the contract even though the work or provision of service is already in progress. The contractor is then only entitled to the actual costs and expenses, as well as the value of the work performed, as provided by art. 2129 C.c.Q.. Such compensation does not include loss of profit.[4]

Exclusive and Cumulative Remedies Clauses

Many construction contracts contain either an “exclusive remedies” clause or “cumulative remedies” clause. 

An exclusive remedies clause provides that to the extent rights and remedies are provided in the contract, then such rights and remedies are the exclusive remedy for the subject matter addressed. For example, if a contract has delay provisions and an exclusive remedies clause, then the contractor’s remedy for delay is limited to the relief provided in the delay provisions of the contract. 

A cumulative remedies clause provides that the rights and remedies set out in the contract are cumulative, and not exclusive of any other remedies that either party may be lawfully entitled to. 

The importance of such clauses in the context of COVID-19 is that construction contracts that do not contain exclusive remedies clauses may be subject to other legal remedies such as the doctrine of frustration in common law or benefit from the general concept of force majeure as defined in Quebec civil law.

Doctrine of Frustration in common law

Frustration is a legal rule developed by the courts of the common law provinces. The doctrine of frustration serves to relieve parties to a contract of the burden of further performance of their obligations, when unforeseeable circumstances arise that would make performance of the contract radically different than what was contemplated. Force majeure provisions are essentially a response to this legal rule that are designed to avoid the drastic remedy afforded by frustration. A party who wishes to rely on a legal rule such as frustration should consult legal counsel before doing so.

Force majeure in civil law

The concept of force majeure in Quebec civil law is codified at art. 1470 C.c.Q., with the English version using the term “superior force”.

1470. Toute personne peut se dégager de sa responsabilité pour le préjudice causé à autrui si elle prouve que le préjudice résulte d’une force majeure, à moins qu’elle ne se soit engagée à le réparer.

La force majeure est un événement imprévisible et irrésistible; y est assimilée la cause étrangère qui présente ces mêmes caractères.

1470. A person may free himself from his liability for injury caused to another by proving that the injury results from superior force, unless he has undertaken to make reparation for it.

Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics.

 

This codified concept applies where there is no contractual definition of “force majeure”, or may be used by the courts to interpret an incomplete contractual definition. Pursuant to paragraph 2 of art. 1470 C.c.Q., to constitute force majeure, an event must be both unforeseeable and irresistible.

Unforeseeability means that the parties could not have, at the time of the conclusion of the contract, foreseen the occurrence of the event. This does not mean that the event cannot have ever occurred previously. The standard is whether a reasonable person in the same situation could have foreseen the event.[5]

Irresistibility consists in the impossibility for a reasonable debtor to take reasonable measures to avoid the occurrence. In addition, case-law and the commentators agree that irresistibility also means that the harm-causing event must render absolutely impossible the performance of the debtor’s obligations. The irresistibility condition is not met when the performance of the debtor’s obligation simply becomes more difficult, perilous or onerous.[6]

Where the debtor is freed from an obligation by a force majeure or superior force event (art. 1693 C.c.Q.), the creditor is entitled to a corresponding restitution (art. 1694 C.c.Q).

In considering whether COVID-19 can constitute a force majeure or superior force under the C.c.Q. provisions, it should be noted that the Quebec courts ruled that the H1N1 epidemic constituted a force majeure in cases concerning the obligations of airlines and travel agents in relation to the outbreak of the disease in Mexico.[7]

Conclusion

All parties to construction contracts should carefully review their rights and obligations in light of the extraordinary circumstances that have been brought on by COVID-19. COVID-19 is a unique and unprecedented circumstance that will challenge the industry and legal practitioners for months to come. Parties should ensure that they follow their contracts by providing required notices, tracking costs and time impacts, and ensuring that they are making reasonable mitigation efforts.  Parties who do not follow the procedures and requirements of their contracts will only increase the extraordinary risk that all industry participants are facing as a result of COVID-19.



[1] The Canadian Construction Documents Committee (CCDC), a national joint committee, has adopted several standard form contracts which are widely used by various stakeholders in the construction industry across the country. This Bulletin will mainly refer to the CCDC-2, i.e. the Stipulated Price  Contract for examples of relevant clauses, but several other form contracts, such as the CCDC-3, the Cost Plus Contract, and the CCDC- 14, the Design-Build Stipulated Price Contract, contain similar provisions. In referring to the CCDC form contracts, it is important to remember that parties often agree on Supplemental Conditions to modify or adapt the general conditions.

[2] 2011 BCSC 1776, para. 76, D. Lluelles  and  B Moore, Droit des obligations, 3e édition, 2018, L'impossibilité d'exécution, EYB2018THM244, par. 2744-2745.

[3] 2011 BCSC 1776, para. 78, D. Lluelles and B. Moore, Droit des obligations, 3e édition, 2018, L'impossibilité d'exécution, EYB2018THM244, par. 2744-2745.

[4] Pelouse agrostis turf Inc. c. Club de golf Balmoral, 2003 CanLII 2728 (QC CA), IE Liquidation inc. c. Litostroj Hydro inc., 2019 QCCS 1978

[5] J.-L.Baudouin, P.-G. Jobin et N. Vézina, Les obligations, 7th ed. 2013, Motifs légaux d’exonération, EYB2013OBL128, par. 845,  D. Lluelles and B. Moore, Droit des obligations, 3e édition, 2018, L'impossibilité d'exécution, EYB2018THM244, par. 2733.

[6] J.-L.Baudouin, P.-G. Jobin et N. Vézina, Les obligations, 7th ed. 2013, Motifs légaux d’exonération, EYB2013OBL128, par. 846,  D. Lluelles and B. Moore, Droit des obligations, 3e édition, 2018, L'impossibilité d'exécution, EYB2018THM244, par. 2734.

[7]  Lebrun c. Voyages à rabais (9129-2367 Québec inc.), 2010 QCCQ 1877, Béland c. Voyage Charterama Trois-Rivières ltée, 2010 QCCQ 2842.

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