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                                                                                                                            April 26, 2020

Legislative Relief from the Economic Impact of COVID-19:  Should Contracts and Subcontracts Be Amended by Legislation?

Rob Kennaley

Kennaley Construction Law April 26, 2020

 

Our federal and provincial governments are engaging various strategies to both contain the spread of COVID-19 and manage the economic impacts of the virus.  One strategy engaged in relation to the former has been the legislative imposition of contractual terms and conditions.  These have altered the way parties had previously allocated risks between them, in an effort to curb the spread of the virus.  In this article we will explore the potential for this method to be used going forward, most particularly as a means to address the economic impacts of COVID-19. 

 

The power of our governments to alter contractual terms and conditions, of course, cannot be debated.  Many statutes do so, including by way of a short-list of Ontario examples that impact the construction industry:  the Sale of Goods Act, the Consumer’s Protection Act, the Ontario New Home Warranties Plan Act, the Insurance Act, the Employment Standards Act, the Occupational Health and Safety Act and (of course) the Construction Act. 

 

Historically, such legislation has been generally applied to contracts going forward, from no earlier than the date the legislation is passed but usually from some date in the future.  This approach allows parties to prepare for, and manage, the risks associated with the changes.  In the COVID-19 context, however, our governments have imposed legislative changes to existing contracts, altering risk profiles already negotiated between parties.  In Ontario this is most evident through orders which have empowered certain employers to impose “work deployment measures” to address critical and essential care needs.  Those empowered to deploy such measures include municipalities, hospitals, boards of health, retirement and long-term care homes, health and social service providers and mental health, addictions, domestic violence agencies, among others. 

 

Consistently, the orders authorize the employers to take any reasonably necessary steps to respond to and prevent the COVID-19 pandemic, notwithstanding the provisions of any other statute, regulation, order, policy, arrangement or agreement (including any collective agreement).  By virtue of the orders, the specified employers can re-deploy staff, change work schedules and assignments, defer or cancel vacations, absences or other leaves and assign bargaining unit work to non-unit employees, contractors or volunteers.  The orders thus amend the negotiated terms and conditions of existing employment and labour contracts. 

 

In the context of the COVID-19 state of emergency, the measures make sense.  One might wonder, however, how far our governments might reasonably go in retroactively altering the negotiated terms of a contract to address the economic impact of COVID-19.  Such steps may, indeed, be worthwhile or necessary in society in general and in the construction industry in particular.

 

In the U.S., a number of states are already leading the way in this regard.  Louisiana, Massachusetts, New Jersey, New York, Ohio, Pennsylvania and South Carolina have each proposed legislation that would require insurers to pay out on claims for COVID-19 related losses even if the policies do not provide for such coverage.  In some cases, coverage is deemed to be provided under business interruption insurance policies, notwithstanding an expressed pandemic exclusion clause.  In others, property insurance policies are retroactively amended by legislation to remove the requirement for physical damage from the definition of “property damage”, thereby opening the door to valid claims that would have otherwise been properly denied. 

These U.S. proposals share a number of common features.  First, they are generally applied retroactively and are focused on providing relief to small businesses.  Second (and perhaps significantly when we consider the potential for a wider use of the mechanism) they are financed through the creation of a fund into which all, or many, insurers will contribute (much in the way automobile insurers in Ontario pay into a fund to provide coverage for uninsured motorist claims).

We anticipate that proposals such as these will be at least considered in Canada.  It certainly makes sense to utilize whatever reasonable remedies might be available to assist (particularly small) businesses with the potentially fatal consequences of having to shut their doors for extended periods of time.  The further question becomes, however:  to what extent might our federal or provincial governments consider further altering contractual rights and remedies in an effort to relieve against the economic impacts of COVID-19?  Towards answering this question, the U.S. insurance proposals do not necessarily provide a basis for a more universal approach.  This, because these proposals can be readily supported by the insurance industry itself though a fund that will ultimately be paid through premiums.  What, we must ask, about legislative solutions that might not be so easily funded? 

 

In Ontario, for example, there have been numerous calls for legislation to limit a landlord’s ability to evict a tenant for arrears of rent payable during the state of emergency.  To date, however, no legislation has been passed in this regard.  This, in part (as we understand it) because doing so would put landlords in a difficult financial position.  

 

As regards the construction industry, a number of proposals which would alter the remedies and obligations of parties to a contract have already been put forward.  A number of construction and trade associations, for example, have asked for legislation which would relieve contractors and subcontractors from the otherwise harsh consequences of how increased health and safety costs and the impacts of delay have been allocated in their contracts and subcontracts.  Owners, on the other hand, have asked for relief from the obligation to compensate contractors for delays suffered due to a “stop work order” (which might be payable under standard form CCDC2 and OPSS contracts), from a contractor’s ability to terminate a contract on the basis of such an order and from their increased and extended financial carrying costs (which would otherwise be payable under their financing agreements).

 

In the end, these types of proposals will, and should be, at least considered.  How they might be structured and funded so as to not prefer one contracting party over another is the crux of the issue.  That having been said, given the size and importance of the construction industry, creative means to fund such legislative remedies might be critical to avoiding substantial insolvencies, job losses and downturns in one of the most important sectors in our economy. 

 

Rob Kennaley

Kennaley Construction Law