Industry Perspectives Op-Ed: COVID-19 and force majeure clause

The COVID-19 virus, a first of its kind pandemic in generations, has thrown the global economy into a tailspin. In the construction industry, it is estimated that the after effects of the COVID-19 induced slowdowns and shutdowns will be seen for months, potentially years, to come.

One of the keywords which we have heard frequently is that of a force majeure clause in the context of construction projects, and contracts. A force majeure clause likely carries the same gravity for all the stakeholders in a construction project but the navigation of this clause will likely be different for every stakeholder. In the current situation, a loss of productivity due to the pandemic, and a shutdown of construction sites are all inter-related. Nevertheless, using this series of events for the force majeure clause is akin to traversing uncharted waters, which are growing murkier by the day owing to fears of an immediate economic slowdown.

“Typically, the contractual definition of a force majeure event includes a laundry list of items which are not anticipated as of the date of the contract, are beyond the party’s control, are not caused directly or indirectly by the fault or negligence of the party seeking relief, and which prevent or delay the affected party from performing its contractual obligation(s),” stated Osler lawyers Elliot A. Smith, Danna Donald and Jagriti Singh, in a piece exploring whether or not the coronavirus is a force majeure event.

It is entirely reasonable to expect that this type of unprecedented event will cause significant variations to the project elements of scope, time, and cost for any project. Almost all construction projects are now being impacted by government-imposed restrictions, labour shortages, broken supply chains, to name but a few of the impediments. However, as force majeure clauses have rarely been applied for pandemic events, there has been a mounting speculation as to whether the force majeure clause in a contract does in fact encompass such events.

The CCDC family of contracts, which is widely utilized in Canada, emphasize that it is vital to keep communication between stakeholders timely, clear and meaningful, and in accordance with specific submission and reporting requirements as mentioned in the contract. For example, as per CCDC 2 (2008), contractors must notify the owners and contract administrators as soon as possible; “No extension shall be made for delay unless Notice in Writing of the cause of delay is given to the Consultant not later than 10 Working Days after the commencement of the delay.”

To safeguard their organizations’ best interests in light of this pandemic, it may be paramount for all stakeholders to carefully examine their contracts; ensure that they engage in timely communication; and provide appropriate supporting documentation which satisfies contract requirements. It is advisable for stakeholders to refer to previously submitted project information and keep an eye for project information which is being created as the event unfolds. Such information may include:

Daily Site Logs
Time Sheets
Project Schedules
Monthly Reports
Meeting Minutes
Project Budget
Cost Tracker for Additional Site Expenses
Cost Tracker for Additional Overhead Expenses
Communication Log

The following sample checklist can be utilized for communication, and to extend Notice from the prime contractors to owners, as well as from the subcontractors to prime contractors.

Checklist for Communication/Notice

Subject: “Notice for Force Majeure Event — COVID-19 Pandemic and State of Emergency”
Cause: Force Majeure Event — COVID-19 Pandemic and State of Emergency
Mention the effective start date of the event. It’ll help draw the line in the sand for future claim (excusable delay | compensable delay | loss of efficiency), if any.
Contract Reference — The relevant Contract section or specification which provides the entitlement for identifying the event as a force majeure event.
Scope Variation — A basic description of how the event has impacted or is likely to impact Scope.
Time Variation — Existing, or likely impact on Time (Project Schedule). If an accurate assessment is not possible at the time of extending Notice, mention TBD (To Be Determined) as a placeholder.
Cost Variation — Existing, or likely impact on Cost (Project Budget). If an accurate assessment is not possible at the time of extending Notice, mention TBD (To Be Determined) as a placeholder.

As mentioned in this checklist, scope, time, and cost of a project will inevitably experience variation (or suffer extension, impacts, or increase) by the pandemic, and outlining such variations can readily serve to facilitate open, timely, and clear communication lines among the project stakeholders.

Aditya Arya is founder and managing director at Stoneboy Inc. Ashleigh Horgan is director at Stoneboy Inc. Send comments or Industry Perspectives Op-ed ideas to editor@dailycommercialnews.com.