Important clauses in construction contracts in light of COVID-19

The arrival of the full effects of COVID-19 to North America has provided a sobering reminder of why certain provisions are included in construction contracts. These provisions may not be ones that parties would focus on in ordinary times (as discussed in our last article); however, these are not ordinary times. This article discusses the force majeure, pay when paid and termination provisions commonly seen in construction contracts and provides some insight into what they can mean for your project when faced with the effects of the current pandemic.

1. Force majeure

Most construction contracts have a force majeure clause. Force majeure clauses were discussed generally in our Miller Thomson post “Coronavirus (COVID-19): Implications on performance under commercial contracts”, as well as the related considerations of Impossibility and Frustration.

A force majeure clause in a construction contract may provide that the obligations of the owner or contractor or both are suspended during the period of a certain event or, as such clauses often state, an event beyond the party’s control.

Force majeure can only be declared for the circumstances specified by each specific contract. If your contract contains a force majeure clause, whether it will apply to the COVID-19 pandemic depends on the express terms contained in the contract. Words to look for include “epidemic”, “pandemic”, “disease”, “government intervention”, “act of government” or references to “economic” or “market” conditions. If none of these express terms are present, it is possible that a broad term like “any cause beyond the Contractor’s control” may cover the effects of the current pandemic. In all cases, whether the force majeure provisions apply will depend on the impact the condition has on the party required to perform.

In addition to considering whether a force majeure has occurred, the notice requirements and relief provided by the provisions also warrant specific comment.

Notice

Regarding notice, if a party is considering invoking the force majeure provisions under a contract, it must ensure it complies with the applicable notice provisions. Generally, the contract will provide that the affected party must notify the other party within a specified period of time of the commencement of the force majeure event. The notice may also be required to contain certain facts, such as setting out why a certain event has made performance impossible, and be served on the other party or party representative in a specified manner.

Relief

Invoking the force majeure provision, if otherwise applicable, may not provide compensation for the costs incurred as a result of the event. The provision may provide an extension of time to complete the work under the contract only or may also contemplate adjusting the contractor’s fee as a result of the delay. It is important to review the specific provisions of the contract to see what relief is contemplated.

Let’s look at some standard form construction contracts by way of example:

In CCDC 2, a stipulated price contract, the force majeure provision is contained in GC 6.5.3. This provision allows for a reasonable extension of time for delays beyond the contractor’s control but does not allow for termination of the contract due to a force majeure event. It also requires the contractor to provide notice to the owner within 10 working days of the commencement of the delay. Under GC 6.5.3, the contractor is not entitled to any additional costs incurred by such delay.

CCA 1, a stipulated price contract, mirrors the provisions of CCDC 2. However, the notice is required to be delivered within seven working days of the commencement of the delay.

CCDC 3, a cost plus contract, has the same provisions as above, a 10-day notice requirement, but allows the contractor’s fee to be adjusted as a result of the delay.

Even if you have a standard form contract, two other important considerations to keep in mind are:

1. standard form contracts often have supplemental conditions; it is important to review these conditions and determine if they have adjusted the standard provisions; and
2. subcontracts often incorporate the prime contract in their terms. If this is the case for your project, it is important to review the prime contract (including any supplemental conditions) and any order of precedent provisions to see if the prime contract has an applicable force majeure

A final consideration is that companies relying on force majeure to temporarily relieve them from performance may also have a requirement to mitigate the effects of the force majeure event. If you see something that may be an issue for your work on the project, consider what steps you can take to ensure your work can continue; for example, are you able to use a different subcontractor or supplier?

2. Pay when paid

In times of economic uncertainty, it may be relevant to look at your contract to see if there is a “pay when paid” provision. Pay when paid provisions in construction contracts typically exist where there are layers of subcontractors working on a project. A “pay when paid” clause often states that a contractor does not have an obligation to pay a subcontractor until the contractor is paid by the owner of the project.

However, the wording of these provisions is important because “pay when paid” provisions can be drafted in a number of ways. The provision may provide alternatives for when payment is due other than when the contractor has received payment. For example, some “pay when paid” provisions may state that payment is due the earlier of when the contractor is paid, the contract is terminated or the project is stopped. In this example, there are two other times when payments may become due other than when the contractor has been paid that could apply if the construction site is shut down.

3. Termination

If a site is shut down by an owner, government authority or otherwise due to the pandemic, contractual rights to terminate the contract may come into play.

For example, in a CCDC 2 contract, GC 7.2.2 gives the contractor the right to terminate the contract if the work is suspended or delayed for a period of 20 working days under an order of a court or other public authority, provided the order was not issued as a result of an act or fault of the contractor or its subcontractors. The contractor can terminate in such instance by giving notice to the owner of its intention to do so. If the contractor terminates under this clause, it is entitled to be paid for work performed, including a reasonable profit, and for damages sustained as a result of the termination. CCA 1 contains substantially the same provisions as above.

In a CCDC 3 contract, GC 7.1 provides that the owner can terminate the contract for certain stated reasons, including contractor bankruptcy; however, under GC 7.1.7, an owner may also terminate “if conditions arise which make it necessary.” If the contract is terminated under GC 7.1.7, the owner has an obligation to pay the contractor for all work performed up to the termination date, termination or suspension costs and a reasonable amount for anticipated loss of profit. The contractor also has the right to terminate the contract if the work is suspended for 20 working days under an order from a court or other public authority (GC 7.2.2). If the contractor terminates for this reason, it is entitled to the same compensation as if the owner had terminated pursuant to GC 7.1.7 (GC 7.2.5).

As an alternative to termination, your contract may have other provisions that may provide guidance in the event of project delay. For example, in a CCDC 2 contract, GC 6.5.2 contemplates that if a contractor is delayed by a stop-work order issued by a court or other public authority, the contract time is to be extended and the contractor is to be reimbursed by the owner for reasonable costs incurred as a result of the delay.

You should review the provisions of your contract to determine what your rights are in case of a government mandated shutdown, termination by the owner or termination by a contractor or subcontractor due to the effects of COVID-19.

The construction industry is facing unprecedented circumstances right now. If you believe your ability to perform a contract is or will soon be affected by the pandemic, or if you would like some guidance regarding options that may be available to you, contact a member of our construction group here at Miller Thomson LLP.

Take care and stay safe.

 

Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.