After COVID-19: Considerations for Future Construction Contracts
Although many of you are likely feeling the economic impacts of COVID-19, the construction industry has actually fared well during this crisis, compared to other industries.
If the COVID-19 crisis has taught us anything, it is which industries are essential and which are not. In many respects the construction industry has been deemed to be an essential service. Nonetheless, in the aftermath of COVID-19, the construction industry will have experienced project shutdowns, work stoppages, unpaid accounts, insolvencies, and claims.
We have been dealing with an unprecedented pandemic situation, one that the drafters of our contracts most likely did not contemplate. The question is: How can you protect your business, whether you’re an owner, contractor, or subcontractor, moving forward?
From a legal perspective, as we embark on the “new world order”, there are many changes in the construction industry that contractors will need to navigate. We anticipate contract amendments/changes, new job site requirements related to managing health and safety, and legal updates to legislation, all in the new age of prompt payment and adjudication.
Here are a few key issues to consider for future contracts, in order to deal with what we now know to be potential consequences of a pandemic:
- Costs associated with a pandemic
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- Requirements to demobilize and remobilize to site, enhanced health and safety requirements and measures, and social distancing resulting in decreased production. Who should bear these costs? This should be addressed at the outset in the contract so that if a pandemic does happen to impact the project, it is clear who is responsible for these additional costs.
- Some form of price acceleration clauses may also be a consideration
- Force Majeure Clauses
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- Generally these clauses are included in contracts to account for circumstances where a party cannot perform the contract due to circumstances beyond its control. A force majeure clause typically absolves a party of liability for its failure to meet contractual obligations as a result of an extenuating circumstance, such as acts of terrorism, war, or adverse weather conditions. While most contracts have a force majeure clause, they often do not expressly refer to a pandemic or outbreak.
- In future contracts the force majeure clause should expressly deal with a pandemic situation. However, you should also ask yourself, does a force majeure clause really provide me with the protection and the compensation I seek? Unless it is your intention to abandon the project, it is unlikely. Reliance on a force majeure clauses also come with mitigation requirements – the affected party must document mitigation efforts and take advantage of all government relief programs, etc. in order to make a claim under the contract in reliance on the force majeure clause. When seeking to limit risk, the contract language must be specific in defining the scope and effect of a force majeure clause.
- Delay & Schedule Extensions
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- For the most part, parties will be looking to delay provisions with a view to extend the project completion time and for compensation for costs associated with the outbreak and the delay.
- Contracts often provide that a contractor is not entitled to payment for costs incurred by delay unless the delays result from actions by the owner, consultant, or anyone employed or engaged by them directly or indirectly. Delays and disruptions occurring at construction sites as a result of COVID-19 likely do not fit into the ambit of owner caused delay in the typical construction contract. This is something to draw your mind to moving forward.
- Parties should also pay close attention to notice provisions for delay.
- Contingency
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- If the owner is not willing to accept risk of delay of increased costs arising from unanticipated circumstances related to the pandemic, and if this risk must be assumed by the contractor as part of the contract price and contract time, the contractor will need to include contingency in its schedule and price to bear the risk.
- Of course, competitive procurement may mitigate against the contractor’s ability to carry large contingencies.
- Change In Law
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- Government emergency orders and directives issued due to COVID-19 will be the subject of legal interpretation in the months to come.
- Future contracts may want to contemplate what will be considered a “change in law” under the contract to establish and more clearly define the right of a party to claim for relief in the event of a “change in law”. Does a provincial order requiring social distancing constitute a “change in law” such that you can rely on the contractual provisions? What about a non-legal direction to quarantine? Depending on the language of the clause, non-legal directions will not likely fall under the ambit of “change in law”.
COVID-19 has presented many unique and unprecedented circumstances that will challenge the construction and legal industry for months to come. While the foregoing points represent a good starting point, each and every project is different and each contract should be reviewed with a view to examining the potential impacts of the current pandemic and the possibility of future pandemics. This review will help to ensure that future contracts create less uncertainty and risk in comparison to the current situations in which we find ourselves.
