This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.
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March 24, 2020
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COVID-19 and Workplace Slowdowns and Stoppages in Ontario: Contractual Rights, Practical Strategies and a Webinar
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The impact on construction of COVID-19 and our government’s understandable response to it will be significant. As of this March 24, 2020, at midnight, construction workplaces will be shut down in Ontario unless they are essential. The list of essential workplaces, however, is extensive such that many a construction project will be allowed to proceed. There will be project shutdowns and/or slowdowns, work stoppages, unpaid accounts, insolvencies and claims. On-site, where work is allowed to continue, the health and safety of workers must be safeguarded and the willingness of workers and sub-trades to attend site may vary. In addition, the actual wording of the mandatory closure of non-essential workplaces in Ontario will have to be assessed to determine what jobs can or must proceed.
In the end, regardless of whether or not a project is shut down by government order, assessing your risk and developing a plan forward will require an assessment of your contract or subcontract as regards frustration, force majeure, claims, notice, schedule extensions, delay, suspension of work, termination of contract and dispute resolution, all in the context of the mandatory orders and common-law norms applied during and following a global pandemic.
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Developing a plan forward will also require practical practices to be developed to address OHSA issues on site where work continues. You will need to preserve and protect your rights under your contracts or subcontracts. Given the likelihood of COVID-19 related insolvencies, it is also important that liens, insurance and bond claims be preserved and commenced in a timely fashion. Contractual notice periods are not necessarily suspended and claimants will want to preserve liens before lands are transferred.
We will review the basic concepts of frustration as well as the common clauses included in CCDC and OPSS standard form contracts, below. Prior to doing so, we wish to advise that, in conjunction with our friends at Sherrard Kuzz who will speak to employment, labour and OHSA issues, we will be offering a two hour practical, focused and free seminar online to address these issues for contractors and subcontractors on Thursday, March 26 at 9 AM and for Owners and Consultants on Thursday March 26 at 1 pm. To register for the seminar please email us at info@kennaley.ca or go here:
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https://zoom.us/webinar/register/WN_kMQyZj2nQKaaxaXNHj9ilA (contractors/subcontractors)
https://zoom.us/webinar/register/WN_c2S7QRAtSw2MTSSl6ABA_A (owners/consultants)
We can’t recommend strongly enough that you educate yourself on the practical, contractual and risk exposure implications of COVID-19.
Frustration
Whether or not frustration occurs will depend on the circumstances of each case. In law, frustration takes place where an event which is neither addressed under the contract nor attributable to the fault of either party significantly alters the circumstances of performance beyond what either could reasonably have contemplated when they entered into the contract. In those circumstances, both parties are discharged from further meeting their contractual obligations. The doctrine will generally not apply where performance is simply more difficult, onerous or expensive than originally contemplated. For this reason, frustration has also been thought to apply where it is impossible for the underlying contractual obligations to be met.
Of note, if the parties both behave as if the contract has been terminated by the altered circumstances the Courts will be more likely to find frustration. On the other hand, if the parties continue to carry on with efforts to meet their obligations, it will be more difficult to establish frustration.
To reiterate, however, if the contract deals with frustration, the contract will govern. Like virtually every potential dispute in construction, the parties must accordingly look to the contract to determine how risk is allocated between them.
Contractual Provisions
We will briefly review the basic CCDC standard terms that might generally be applicable to the issues surrounding COVID-19. To be clear, of course, a CCDC form may not be used in your circumstance and, in any event, they are frequently amended by supplementary condition. You will need to review the terms of your particular contract or subcontract in each circumstance. The following is generally consistent across CCDC forms.
(i) Delay Due to Force Majeure
Upon delays caused by circumstances beyond the contractor’s control (often referred to as a force majeure), such as labour disputes, strikes, lockouts, fire, adverse weather, etc., the contractor (or design-builder under CCDC-14) will be entitled to a schedule extension (only). It is most likely that COVID-19 and the associated predictable slowdowns meet the requirements of these clauses where it can be shown that delays are actually attributable to the pandemic or its consequences. The contractor will then without question be entitled to a schedule extension for delays caused by COVID-19, so long as it meets its notice obligations under the Contract in that regard.
(ii) Delay Due to a Stop Work Order
The Contracts generally provide that upon delays attributable to a stop work order issued by a court or other public authority the Contractor will be entitled to a schedule extension and additional compensation. This is so long as the delay is not attributable to it, and it meets its notice obligations in that regard. The Contractor generally has a right to terminate if such a delay continues for a period of more than 20 working days. This is without prejudice to any other right the Contractor might have. If the project you are working on involves a non-essential workplace and is shut down, such clauses most likely apply.
Where the order shutting down non-essential workplaces does not apply, it might be argued that, by implication, decisions (such as a municipal decision to close a planning department or the provincial mandate to promote “social distancing” protocols under a state of emergency) amount to a constructive order in that regard. There is precedent for such a “constructive suspension” of the work in American jurisprudence, although in the context of different contractual language. While we don’t believe the present circumstances would necessarily engage the clauses, it is impossible to predict how a Court would interpret them in the circumstances.
(iii) Delay and Termination for Health and Safety Reasons
The Contractor as (most likely) constructor for the purposes of the Occupational Health and Safety Act (“OHSA”) has the obligation to ensure health and safety on site. This includes an obligation to stop work if health and safety are at risk. Employees of the contractor and subcontractors will also have the right to stop work and leave the area of the work if they believe their health and safety are at risk. At law, an investigation into the reasonableness of the refusal to work shall follow, though in COVID-19 circumstances it is uncertain how or when such an investigation would occur or how it might result in a finding that there was actually no risk to the worker. Accordingly, contractual language aside, construction projects will to a great extent be at the mercy of workers who may simply decline to attend on site.
(iv) Suspension and Termination for Breach of Contract
Both parties generally have the right to suspend or terminate on 5 days’ Notice if the other fails to comply with the requirements of the Contract to a substantial degree and fails to either correct the default or come up with a reasonable plan to do so within that notice period. The owner will generally be able to take over the work and on-site equipment and be entitled to back charge the Contractor for the full cost of completing the work.
(v) Suspension and Termination for Bankruptcy or Insolvency, etc.
Both parties have the right to suspend or terminate if the other party is adjudged bankrupt, makes an assignment in bankruptcy or has a receiver appointed over its assets.
(vi) Termination of Design-Services under CCDC-14
The owner may suspend the Design Services (defined as “the professional design and related services required by the Contract Documents”) under CCDC-14 for any reason at any time before the Work commences on site. If the suspension lasts less than 20 days, the contractor will be entitled to pursue additional compensation for the suspension. If the suspension continues for more than 20 days and the parties cannot negotiate terms to continue, the contract is deemed to be terminated and the contractor shall be paid for the Design Services paid to date, including reasonable profit.
(vii) Claims for Additional Compensation
Notice is generally required in relation to extension requests and in relation to claims for additional compensation. Backup to any claim for compensation is also required to be submitted. In each case the notices / provision of backup are required within a “reasonable time”, however these time frames are often particularized by way of a more robust Supplementary Condition, requiring Notice within specified timeframes, the provision of backup within specific timeframes and a waiver of claims if notice is not provided. Our Courts have been somewhat diligent in enforcing such clauses, however it is it is unclear to what extent COVID-19 will be applied to forgive failures to meet such obligations.
(viii) Implied Contractual Obligations
Both parties, of course, have an obligation to take steps to mitigate its costs in relation to compensation claims. The extent to which they can do this will depend on each circumstance, of course. Each will also have an implied obligation to conduct themselves with honesty under the application of an overarching principal of good faith, given somewhat recent Supreme Court of Canada case law.
(ix) Dispute Resolution
CCDC documents include dispute resolution clauses which (depending on the form) mandate stepped processes involving negotiation and potential mediation or arbitration along with
Notice and or responses are generally required throughout the process, from the time a claim is made or the consultant makes a decision. Time frames are generally set out in the clauses, and/or in Supplementary Conditions. Again, our Courts have been somewhat diligent in enforcing such clauses, and parties should accordingly do everything they can to ensure that the notices are given and timeframes are met. Again, however, it is unclear to what extent COVID-19 will be applied to forgive failures to meet such obligations.
Supplementary Conditions and Other Contractual Forms
As above, the CCDC forms may not be used. Where they are used, they might be drastically changed by way of Supplementary Condition. Subcontractors may work under the CCA-1 standard form, which will incorporate the prime contract so as to apply the same rules as the prime. Again, however, these may be changed by supplementary condition and, of course, different forms of subcontracts may be used. The above, accordingly, is offered to provide guidance as to what types of clauses might be used in your circumstance. In each circumstance, the parties to contracts and subcontracts should review the forms of their particular contract documents to determine how the risks of frustration, force majeure, claims, notice, schedule extensions, delay, suspension of work, termination of contract and dispute resolution are to be allocated.
One potential clause that is not included in the CCDC forms is the termination for convenience clause. These are often added by supplementary condition, however, and may be utilized and important in the context of COVID-19. Owners might elect to terminate projects so as to avoid the delays and costs associated with same. Care should be taken to read these clauses carefully as they will generally determine the extent to which the contractor will be entitled to compensation (including potentially lost profits) in the event of termination.
On-Site Practices Where Work is to Continue
The constructor must have a health and safety policy in place for the project which all persons on site must follow. In addition, the subcontractors themselves will in most cases (depending on their size) be required to have and follow their own formal health and safety policies. There no question that, if work is to proceed on site, COVID-19 specific policies will have to be developed. Although we do not wish to speak (at all) to what is required, these might include testing for fever and other symptoms before allowing access, comprehensive cleaning protocols (for both persons and surfaces) and steps to ensure distancing on site, such as separating contractors and subcontractors into distanced work areas and ensuring that individual workers are able to and do engage distancing within those areas.
Preserving Rights and Claims
Given the potential for COVID-19 related insolvencies up and down the construction ladder, all parties should do their best to preserve their positions and claims, by reading and understanding the requirements under the contract in that regard and, also, by not allowing limitation periods to expire. An Order has been issued in Ontario to suspend statutory limitation periods, however this does not appear to suspend contractual limitation periods. Thus, insurance and bond claims should be pursued and issued on time. In addition, although the timeframe within which a lien claimant must preserve a claim for lien may be extended by the Order, those with lien rights should understand that if they do not preserve a lien against a premises (when they have such a right) they will not have security in those lands such that they may be mortgaged or sold without regard to their claims.
In the end, diligence in construction is required in the face of COVID-19, from site practices, to reading and understanding your options, rights and obligations under your contracts and subcontracts and from an OHSA and labour perspective, to strategic planning for what comes next and to preserving your positions and claims wherever possible.
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Rob Kennaley
Kennaley Construction Law
