Canada’s construction sector should brace itself for significant supply-chain interruptions caused by the coronavirus outbreak, experts assembled by the Canadian Construction Association (CCA) recently warned.
Not only will supplies be disrupted, the trio of experts in the Feb. 18 informational webinar explained, but stakeholders should also prepare themselves for other ramifications such as higher costs, the collapse of strategic partnerships, logistics breakdowns and possible legal squabbles as parties debate whether contracts may provide “force majeure” relief.
“No-one is buying anything or producing anything in China right now,” said Peter Kapler, senior vice-president and national director of performance security with Aon.
As for construction supply-chain problems, he said, “It’s not a matter of if but when.”
Kapler laid out the rapid spread of the coronavirus from its initial detection by the Chinese Center for Disease Control on Dec. 21, 2019 to Jan. 23, when the city of Wuhan was quarantined.
On Jan. 30 the World Health Organization declared a “global health emergency” and by Feb. 17, the global case count was 73,435 cases.
Wuhan is known for producing metal products, mechanical equipment and solar panels as well as electrical and electronics manufacturing. Cheri Hanes, a construction risk engineer with AXA XL, said there were 164 manufacturing facilities in Wuhan creating products often used by the global construction industry, including 13 plants that directly manufacture construction materials.
Overall, Canada imports $48.5 billion in goods from China annually, with over $500 million in each of the electrical and electronics, plastics, iron and steel, glass and prefab building sectors.
It’s not only that materials will be unavailable, it’s that materials will be unaffordable,
— Cheri Hanes
In short, said Hanes, constructors around the world are realizing right now how closely they are tied to China for supplies.
“Problems are going to reverberate quickly through supply chains,” she said.
Hanes urged Canadian firms to immediately conduct a supply chain audit. Rather than narrowly focusing on the city of Wuhan, she said, their sights should be trained on all of China and beyond, including any third parties their suppliers and partners deal with. The audit should look to identify possible shortages of raw materials in addition to finished products and prepare for costs to soar, with the timetable for distress most likely extending well after the outbreak becomes contained.
“It’s not only that materials will be unavailable, it’s that materials will be unaffordable,” said Hanes, adding the effects could be “catastrophic” to a balance sheet.
“There may be some serious after-effects.”
Canadians should start to work with all parties to identify vulnerabilities end to end in the supply chain, Hanes said. Owners, contractors, subs and suppliers should all be talking transparently and making accommodations in these extraordinary circumstances.
“A big room approach is needed,” she said.
Supply chain Plan B’s should be developed and risk registers recalibrated, she said. Can alternate capacity be built up? Constructors should recognize there will be a “next time” and given that the world is more interconnected than ever before, they should plan to build a more resilient supply chain that can sustain the impacts of more frequent disruptions.
“All of this is deep work but it’s worth it,” said Hanes.
Risk engineering may be the opposite of value engineering, “but that money may be very well spent,” she added.
“A learning organization doesn’t just snap back, it learns and grows.”
The third contributor to the panel was Andrea Lee, partner with Glaholt Bowles, who explained that many contracts include force majeure clauses that release parties from performance of contractual obligations when unexpected events occur that will make performance more onerous than expected.
Typical criteria include an event that is beyond the control of a claiming party, when the event prevents or delays contract performance, when the event was not due to negligence or fault of the claiming party, and when the claiming party has exercised reasonable diligence to overcome the specified force majeure event.
Examples are “acts of god” such as landslides or earthquakes, and acts of terrorism.
CCDC contracts include such unforeseen events and call for the contract performance time to be extended for a “reasonable” period— typically for the duration of the event — to be determined though consultations.
Lee presented case law offering helpful interpretation of the doctrine but noted no Canadian legal judgment has ever had to consider force majeure in the case of a serious outbreak or epidemic. Courts considering the matter in future would probably look at the Atlantic Paper Stock decision (1976), which established criteria such as a determination whether the change is so radical that it strikes at the root of the contract, and whether the parties, through the exercise of reasonable skill, can find work-arounds.
“Keeping track of all the evidence that might have to be used down the road, I think that is important” in showing reasonable efforts were made to find alternative solutions, Lee said.
In the end, Lee agreed with both Kapler and Hanes that parties should attempt to maintain relationships during a crisis and find practical solutions.
“Parties should think about how to work together,” said Lee. “Legal principles meet a real-world approach.”
Kapler had the last word: “It is a big-room issue, and a lot of communication is required from all parties on a going-forward basis. There is a big role for the CCA to play.”
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