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15/04/20

Should contractors choose to cease works due to the current Coronavirus pandemic? A Canadian Perspective

SHOULD CONTRACTORS CHOOSE TO CEASE WORKS DUE TO THE CURRENT CORONAVIRUS PANDEMIC

Due to the Covid-19 pandemic affecting the economy and politics of most countries worldwide. Canadian provinces and territories are swiftly implementing a number of changes. There are two main types of administrative interventions that are currently being developed; social and health related in order to curb the spread of the disease and allow optimisation of health care organisations, and the economic aspect, in order to minimise the inevitable recession.

The situation is extremely uncertain and governmental advice on the subject is continually updated.

 As of the time of writing, many ‘non-essential’ business activities around the world have temporarily (or regrettably, permanently) ceased. This is either as a result of direct mandate from governments for example; hair salons, restaurants and gyms, or as a voluntary reaction to the events unfolding around the world. Many organisations are simply unable to operate due to a critical mass of the workforce being too sick to attend work or are in isolation. 

Many governments have directed, either mandatorily or in an advisory nature, that large swathes of the worldwide population ‘stay home’ and isolate in order to reduce and slow down transmission of the virus such that hospitals and healthcare systems do not become overwhelmed. With India now placed under ‘lockdown’, it has been estimated that a quarter of the population of the planet is currently living in extremely constrained circumstances in comparison to that of just a few weeks ago or in some cases, just a few days ago.

International and North American governments’ advice includes the implementation of remote work where possible. The transfer to home-working for large sections of the workforce is relatively easy with widespread internet coverage. However, the construction of buildings, highways, heavy civil engineering and process and industrial facilities cannot be accomplished from the comfort of a home-office.

Much construction work in Canada, particularly on remote sites, has been reduced to skeleton-crews, leaving on-site only sufficient workers to either maintain the current status or endeavour to make progress with the limited resources available while at the same time reducing risk of infections to a minimum. The impact to progress is considerable whether from manpower constraints, or indeed, delivery of materials. With very few flights, warehouses operating at reduced capacity (and even being closed or quarantined) and limited trucking, rail and shipping options, securing materials to maintain progress is a major concern. 

Another key consideration is whether construction work is considered ‘essential’ or not, in nature. Canadian provinces and territories have taken differing paths on this issue and it is constantly evolving (e.g. recently Ontario declared all industrial construction non-essential). In other countries, such as the USA for example, construction and engineering projects are currently continuing in most states with the exception of the large cities of Boston and San Francisco. We do not see the situation improving in the short-term however, with more cities and states being required to ‘shutdown’. 

In Italy, a major epicentre so far of the coronavirus outbreak, construction sites are not required to stop work. The UK continues to classify construction operations as an ‘essential’ activity, despite reported public disapproval. The importance of the construction sector, worldwide, to economic prosperity, especially in these uncertain times should not be undervalued and remains a key driver to continue working.

Material shortage is becoming an issue. Our global offices are already receiving enquiries from contractors experiencing difficulties procuring specialist items (for example bridge bearings from Spain or electrical switchgear components from Italy) and of an increase in prices. The Chinese themselves are suffering their own supply-side problems.

The requirement or decision to cease operations of a particular project can therefore arise for a number of reasons; direct government intervention, labour, staff and material shortages, health and safety motives in conjunction with any pre-existing legislation on communicable diseases or even as a discretionary instruction to suspend from the employer/owner/purchaser, as the case may be.

When considering the liability aspect of the ultimate choice to stop construction work, any contracting organisation would normally be reticent to totally suspend operations without a direct governmental decree or a contractually valid reason. They may be contractually unable to totally cease operations unilaterally and, of course, should be vigilant to give the correct (and timely) notices if they are instructed or compelled to stop or suspend work.

Many articles and much guidance has and will be written on the contractual processes and procedures that ought to be adhered to in order for the contractor or the owner to maintain their rights to compensation for any undue costs and losses they might incur due to the effects of coronavirus pandemic. For instance, discussions will arise detailing the possible implementation of force majeure and what may be construed as force majeure in many contracts. Interestingly, English law has no concept of force majeure as a component of its common law legal system, although it is frequently included as a contractual term — this is noteworthy due to the amount of contracts worldwide prescribing that English law is the governing law.

The CCDC suite of contracts includes language related to delays not caused by the Owner or the Contractor, but in two different manners.  GC 6.5.2 provides for reimbursement by the Owner for reasonable costs.  GC 6.5.3 provides only for additional time to complete the work, but no additional compensation to the contractor.  Which clause applies in the current pandemic situation will likely be the subject of considerable discussion in the coming months.

CCDC 2 (2008) – GC 6.5 - Delays

We note that contractors may find they have some recourse to their insurers. 

In general terms though, the range of forms of contracts used in the Canada, together with the widespread amendments of these and the prevalence of bespoke agreements, many with an unbalanced allocation of risk, mean there is obviously no ‘one size fits all’ approach to navigating through the next few weeks and months.

Contractors should be extremely careful and consider seeking legal advice when taking decisions to slow down or cease activities; it may be more prudent for example to source other more expensive materials, where they are available, than to cite material shortages as a delay in a later claim. Penalties or delay damages may be significant in respect of some projects therefore it may be more prudent to attempt to accelerate, than to slow down or suspend where no clear contractual right exists, and thereby attracting claims for breach of contract. Always bearing in mind of course the general obligation to mitigate losses of the other party to the extent that is reasonable in the circumstances and jurisdiction.

Contractors may find themselves ‘suspended’ in accordance with the contract terms and may then have an option of terminating after a given time-period, which may be a more attractive scenario to the contractor. Consideration should be given, and legal advice obtained, to ensure such termination would not be ‘repudiatory’, thereby making the contractor liable for the other party’s costs and losses.

Practical measures for affected contractors will as always, require that schedules are accurately updated and contemporaneous records scrupulously kept.

In the interests of avoiding formal dispute proceedings it is strongly suggested that holistic reviews are undertaken organisation-wide to identify where risk and exposure may occur and attempts should be made to come to pragmatic agreements with counter-parties where possible, even by agreement outside of the contract terms and conditions.

In the event of an owner disagreeing with a contractor’s claims and despite the parties’ best endeavours to avoid disputes, ultimately matters may end up in the courts or in arbitration. The claimant at this point would need to articulate the best case it has, often relying on the records established at the time that the contentious events occurred.

No legal advice is implied or explicit in the above, and in light of the uncertain and sometimes unexpected fast-moving nature of events, appropriate expert advice should always be sought.

For any support or any further advice in connection with the contents of this article please feel free to give us a call (1 587 434 9892) or email us at canada@driver-group.com.

This article is intended to provide guidance only and does not represent legal advice.  The Covid-19 situation is constantly evolving, and every contract is different.  Please ensure that you check your contract terms carefully.

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