COVID-19: Construction Delay and Productivity Loss During an Outbreak: Who Bears the Risks?

Construction owners and contractors face a multitude of challenges as they navigate through largely uncharted territory with their projects experiencing highly unique and mounting risks from the effects of COVID-19.

Currently, most construction activities have been designated essential or allowable business services in Saskatchewan, Manitoba, Alberta and British Columbia.  However, this situation is liable to change due to the rapidly-evolving nature of the public health crisis. In the interim, owners and contractors must adapt their services and workplaces in accord with the orders and recommendations of public health directives.

As construction continues under these conditions, project participants must deal with a host of specific COVID-19-related challenges: supplier delivery issues, worker absenteeism due to illness, delayed issuance of permits, travel restrictions, and lost time or inefficiencies due to the need to practice social distancing on the job site are just a few of the issues that may have prolific cost and schedule consequences. In this uncertain environment, the potential for legal disputes is likely increased as contracting parties seek to resolve who must pay for these increased costs.

The problem may be particularly acute for parties whose existing contracts were entered into before the emergence of an outbreak was considered to be a likely prospect or where boiler-plate provisions simply do not reflect the risks parties actually intended to assume in these extraordinary circumstances. To recover for resulting project delays or increased labour costs, parties may turn to a number of standard contractual provisions and doctrines that may or may not successfully apply.

The Doctrine of Frustration

The doctrine of frustration may be invoked when a situation such as an outbreak has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract”, Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58. In this situation, the parties may be relieved from further performance of the contract.

Frustration may not apply, however, if the prospect of an outbreak was or ought to have been reasonably contemplated by the parties at the time of entering into the agreement. Therefore, if a party enters into an agreement fully aware of the increased risks associated with delayed issuance of permits due to COVID-19, then the occurrence of such a risk is not an event that can be said to have frustrated the contract.  In the future, contracts entered into in “hotspot” zones or areas with a history of outbreaks may be a relevant consideration in determining whether such a doctrine will apply.

Force Majeure

Standard construction contracts often contain a clause that may serve to excuse one or both of the parties from performance, to suspend performance, or to claim an extension of time for performance of a contractual obligation upon the happening of a specified event or events beyond a party’s control. This is often referred to as a force majeure clause.

In the Supreme Court of Canada decision in Atlantic Paper Stock Ltd. v St. Anne-Nackawic Pulp & Paper Co. (1975), [1976] 1 SCR 580, the Court described a force majeure event as occurring when “a supervening, sometimes supernatural event, beyond control of either party, makes performance impossible.” The Supreme Court of Canada described the common thread of these clauses to be “that of the unexpected, something beyond reasonable human foresight and skill.”  As such, a force majeure clause does not apply to normal business risks, nor can it be used to “reallocate bargained for contractual risks”, Wal-Mart Canada Corp. v. Gerard Developments Ltd., 2010 ABCA 149.

Typical force majeure clauses apply to events such as strikes, lockouts, fires, extreme weather conditions or other events beyond the contractor’s reasonable control. Whether an outbreak situation may also be captured by a force majeure clause largely depends on the wording of the specific clause in question and whether the circumstances of the outbreak can be said to be truly “unexpected” and “beyond reasonable human foresight and skill.” For example, what level of infection does an illness have to reach within an area before it can be said to constitute a force majeure event?  If during a pandemic a contract was entered into when the number of confirmed cases of local infection was still relatively low, can it be said to be truly unexpected if public health directives subsequently restrict the manner in which labour crews can perform their work under the contract?

A related challenge is that in the absence of express wording to the contrary, force majeure clauses do no not generally apply to circumstances where performance is not impossible and that merely affect the profitability of a contract or the difficulty with which it is performed. In Domtar Inc. v Univar Canada Ltd., 2011 BCSC 1776, for example, market changes that rendered the supply of caustic soda – a chemical essential to pulp production – more expensive than what was stipulated in the contract price did not constitute a force majeure event. The mere fact that performance of the contract became more impractical or expensive did not justify reliance on the force majeure clause.

Loss of Productivity Claims

As in other construction claim contexts, a loss of productivity claim during an outbreak cannot simply be made whenever the contractor has become less productive — it must be causally linked to some owner-caused event or an event for which the owner has expressly agreed to assume contractual risk.

One example where this may occur is where the contract requires the timely delivery of owner-supplied equipment or drawings which have since become delayed or are found to be defective, disrupting the contractor’s schedule and forcing it to perform its work out of sequence and in a less-efficient manner. The prospect of claims arising in these circumstances may become elevated in the context of a pandemic, where many supply agreements are subject to increased delays and equipment delivery issues of their own.

Escalation Clauses

Typically present in larger-scale construction contracts, a contracting party may have recourse to an escalation clause, which can be a powerful tool to mitigate fluctuations in the cost of fuel, raw materials or labour rates over the duration of a project. Escalation clauses often provide a prescribed formula to adjust the contract price where the costs of certain inputs have undergone a sharp increase beyond normal market fluctuations. Whether or not such a clause can be invoked depends on the specific wording of the provision in question and the market changes that it covers. However, if successfully employed , it can be an important way to protect a contractor against sudden and unexpected cost increases, while at the same time protecting owners against over-inflated bids.

Complying with Notice and Reporting Obligations

Most standard form construction contracts contain strict notice and other schedule or cost reporting obligations on the part of the contractor, which are often a condition precedent to bringing a claim. In the context of an outbreak, such requirements are liable to be overlooked. In many cases, however, the owner has no independent access to the contractor’s progress records or other subcontractor information other than what the contractor chooses to share. Unless the contractor advises otherwise, the owner might be contractually entitled to assume that any potential problems the contractor is facing have been successfully mitigated. The purpose of giving proper notice is to make the owner sufficiently aware of disruptive events as soon as they occur so that it has a chance to properly consider its options and to decide what, if any, protective steps should be taken. Respecting notice provisions are therefore generally beneficial for all project participants. It not only preserves a contractor’s rights to make a claim but maximizes the chances that any delays or disruptions are identified early and resolved through applicable contract procedures before they get worse. Waiting until the end of a project to bring a global impact claim can potentially be fatal to a contractor’s entitlement to compensation or an extension of time.

Keeping Proper Records

It is still incumbent on the party bringing a claim to demonstrate that any delays and/or increased costs were in fact caused by an excusable or compensable event and not the result of other factors within that party’s control that it has failed to mitigate. It is therefore crucial that parties keep proper records to substantiate their claims. Issues should be documented as soon as they occur while a ‘wait and see’ approach should generally be discouraged.

Being Proactive and Seeking Advice

As industry participants enter into this period of uncertainty, sound drafting and project claims management will become more, not less important. MLT Aikins LLP’s construction team has the experience and expertise you need to successfully and efficiently resolve all construction disputes or challenges that your organization may face in response to COVID-19.

For more information about force majeure clauses to help you navigate your contracts, read our Q&A Regarding Force Majeure Clauses blog.

Additional information can also be found in our COVID-19 and Excusing Non-Performance of Contractual Obligations blog post,

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.