No precedents put construction in ‘uncharted waters’ on force majeure clauses, coronavirus
By David Kennedy
By David Kennedy
The Canadian construction industry is entering “unchartered waters” as provincial governments declare states of emergency and Ottawa closes the country’s borders to all but vital supplies to limit the spread of COVID-19, or coronavirus.
Currently, job sites remain active, but the evolving battle against the virus and wide net of protective measures cast against it could force work stoppages. Even if sites remain open, coronavirus will take a heavy toll on the industry.
“The COVID-19 outbreak will continue to impact all levels of the supply chain, including the availability and prices of materials, manufacturing, logistics, and manpower,” Howard Wise and Max Mandel at law firm Goodmans LLP wrote in a March 16 update.
“To a large degree, we are navigating uncharted waters,” the pair added.
The role force majeure clauses may play in the impending fallout from the virus is among the uncertainties.
A vital component in project risk allocation, most construction contracts include a force majeure clause that relieves a party of its liability due to a natural disaster or a so-called act of God. Still, no previous Canadian judicial decisions have taken serious outbreaks or epidemics into account when considering force majeure, Wise and Mandel noted.
With no direct precedents to build off of, the lawyers said they expect courts to look instead to Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Co. Ltd. — a 1975 Supreme Court of Canada decision that described force majeure events as when “…a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”
Evolving government “social distancing” policies and rules limiting the size of gatherings may determine the number of companies that can fall back on force majeure clauses.
“A vibrant construction site often includes more than fifty people, and sometimes hundreds,” Wise and Mandel said. “It is possible these scenarios may broaden the scope of what may constitute a force majeure event. If borders are closed to goods or supply-chain disruptions, these too could potentially amount to force majeure events.”
Whether a specific contract specifically cites pandemics or diseases among its list of “triggers” for force majeure, is another point of contention. Some contacts do, Wise and Mandel noted, but many others do not. They pointed to Canadian Construction Documents Committee (CCDC) 2 stipulated price contract as one notable example. The contract lists labour disputes, strikes, lock-outs, fire and abnormally adverse weather conditions — as well as any “cause beyond the contractor’s control.”
“COVID-19 may still be captured in a broader category such as ’emergency’ or ‘any cause beyond the Contractor’s control,’ but that classification may be open to challenge by an adverse party,” Wise and Mandel said.
Elliot Smith, Danna Donald, Jagriti Singh of Osler, Hoskin & Harcourt LLP agreed that coronavirus “could potentially still qualify” as force majeure in these situations. In an update March 5, the team also pointed to the CCDC 2 stipulated price contract as having the type of open-ended language that could cover the outbreak.
Still, that may not be the final word on the topic.
“Even if COVID-19 does satisfy the contractual definition of an event of force majeure, it is important to also confirm whether any contractual exclusions might apply to the circumstances and if any other contractual requirements have been met,” the Osler team wrote. “For example, contracts sometimes have restrictions on a party claiming force majeure for something that is impacting its subcontractors or suppliers, but not directly impacting the party.”
Smith, Donald and Singh also advised any parties entering into new agreements after December 2019 to think over how to address COVID-19 in new contracts. Events “reasonably foreseeable at the time the contract was entered into” typically lead to the exclusion from force majeure, they note. Given the current situation, it would be difficult to argue in new contracts that fallout from the virus was not “foreseeable.”
While the situation across the country remains in flux, for now, both sets of legal experts advise contractors and owners to carefully review their contract documents to help assess risk and plan their next course of action.
David Kennedy is the editor of On-Site magazine.
Follow this link for a list of events cancelled or postponed due to the virus.
The Canadian Construction Association has also compiled a number of resources on the topic. You can access that here.