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.
April 5, 2020
Construction Has Been Ordered Substantially
Shut Down in Ontario:
Who bears the costs of delay, and what might those be?
As of April 4, 2020, at midnight, only a very limited scope of construction projects will be allowed to proceed in Ontario. This, due to an Order passed by the Government of Ontario (the “COVID-19 Order”). In this article we will review the contractual consequences of this province wide, government ordered, shut down.
As we have reiterated before, the starting point is the contract or subcontract between the parties. We will address the issue from the perspective of the Owner/Contractor relationship, although our comments apply to every rung of the construction ladder. Subcontractors and suppliers should consider whether they are governed by the prime contract or other subcontracts above them, in determining what provisions apply to their circumstance.
Is there are “Stop Work Order” Clause in the Contract?
All CCDC standard form contracts (with the exception of the CCDC-5A), as well as the OPSS standard form, provide that if the performance of the work is delayed by a stop work order issued by a court or public authority for which the Contractor or its forces are not responsible, the Contractor is entitled to a schedule extension and additional compensation for its reasonable costs incurred as a result of the delay. This provision raises a number of issues and questions.
First, it might be argued that a stop work order needs to be project specific to engage the CCDC / OPSS type of ‘stop work order’ clauses. The argument would be that where work is ordered stopped due to a pandemic, the force majeure clause dealing with circumstances beyond the Contractor’s control (which generally provides an extension without compensation) should govern. There is, indeed, some logic to the argument. However, a principle of contract interpretation is that where one clause deals with an issue in a general way, while another deals with it specifically, the specific clause will govern. It is impossible to say how a Court might address the issue. Owners will certainly want to consider the argument.
If the COVID-19 Order falls within the scope of a CCDC/OPSS ‘stop work order’ clause, the Contractor will (potentially) be entitled to its reasonable costs incurred as a result of the associated delay. First, however, the Contractor will generally be expected to meet its contractual notice obligations in relation to any claim. If it fails to do so, it will lose its entitlement unless it can establish a right to be relieved of the obligation, which can be difficult to do. We will address how this might occur in another blog article.
It may also be that the Contractor will suffer little or no costs resulting from delay associated with the COVID-19 Order. Much will depend on the status of the work and the extent to which existing activities were on the Contractor’s critical path schedule at the time of the order. It may be that the costs associated with the Order will be limited to demobilization and mobilization and that, beyond this, the project will not be delayed relative to whatever schedule commitments were made at first instance. Furthermore, it may very well be that the Contactor will, on balance, not suffer any losses whatsoever as a consequence of the Order. Prior to the Order, for example, the Contractor may have been obliged to incur substantial COIVD-19 related costs, including those associated with social distancing, increased OHSA requirements and difficulties getting men, women and materials to site. From this perspective, the Order may actually save the Contractor monies such that no losses whatsoever will result from any delay caused by same.
Contractors will have to consider the above in making claims for additional compensation. They will also have to recognize and meet their duty to mitigate by implementing strategies to minimize the impacts, wherever reasonably possible. In addition, Contractors should recognize that the impacts of delay can be difficult to prove. Costs will have to be tracked effectively, and the assistance of counsel and/or claims analysts may be required in that regard.
To return to where we started, the terms of the contract or subcontract in question will have to be reviewed towards determining if and how the risk of the COVID-19 Order has been allocated, if at all, between the parties. CCDC / OPSS contracts may have been amended by supplementary condition and unique forms of contracts may be used. Where the contract has no express clause assigning the risk of a ‘stop work order’, a force majeure clause under the contract or subcontract may govern. If there is no force majeure clause, the parties may be looking at frustration – a doctrine which will terminate the obligations of the parties under the contract or subcontract where its performance has become impossible, virtually impossible or possible only on terms that are so substantially different than what was contemplated that neither party could be said to have agreed to proceed in the circumstances. Please see our prior blog on COVID-19 issues, for a more in-depth discussion of force majeure and frustration.
We will also be discussing the above, and other COVID-19 issues during our popular free weekly webinar series, which we offer along with Keith Burkhardt of Sherrard Kuzz LLP who speaks to OHSA, labour and employment issues. The next webinar is scheduled for this Tuesday April 7, 2020 at 9:00am. For more information or to register for this or subsequent Tuesday morning webinars, please visit ‘webinars’ page. Our past blogs are also available on the website.
Kennaley Construction Law