Two years ago, the world was taken by surprise by the onset of COVID-19. For the construction industry, that resulted in numerous problems such as fast-changing government health and safety mandates and interruptions to material and component supply chains.
Today the world is in a different place. Delays, interruptions and price increases are no longer the surprise they were in early 2020, even as they affect prior contracts and projects.
Supply chain interruptions remain an issue, affecting costs and delivery, says Mark Johnson, partner in Blake, Cassels & Graydon LLP. Johnson believes the uncertainty of knowing how long delays and interruptions will continue will stretch into the next year and beyond.
“Owners have become less empathetic when dealing with contract breaches pertaining to pandemic-related non-performance,” Sahil Shoor, partner with Gowling WLG, told the Daily Commercial News. “Owners have begun to ask themselves if disruptions are actually due to the virus (ill workers) or due to choices made.”
Shoor believes a change in attitude exhibited by the courts also started last year.
“Throughout 2021, companies saw increasing scepticism from courts that COVID-19 was unforeseeable,” says Shoor. “Even if a court agrees that supply issues are linked to the pandemic or that the parties couldn’t have foreseen a pandemic occurring, courts may be more focused on government shutdowns or orders as the real cause of non-performance, which are broadly seen as foreseeable.”
Given the current ability to foresee delays, interruptions and price increases traceable to COVID, emphasis is being put on obligations within contracts signed before the pandemic. For example, more importance is being placed on notice than ever before.
“It is never too soon to give notice,” says Shoor. “COVID-related supply chain disruptions have led to a myriad of legal claims. One of the best ways to protect yourself is to provide notice of, and mitigate any, disruptions as soon as possible.”
However, notice provisions themselves can be problematic, Shoor says. If specific defined periods of notice are absent in contracts, it could allow the application of the provision to be open to individual interpretation, challenge and potential exploitation. He says that’s a recipe for fostering contractual conflict.
Another way for parties to see their way through delays and interruptions is through negotiation.
“Negotiation ensures that both parties meet their contractual good faith and fair dealing obligations,” says Shoor.
At the same time, negotiations are inter-related with notice provisions.
“Negotiation is an effective mechanism to decide upon a fair and reasonable time period between parties prior to contract execution. This ensures that whatever the parties eventually agree to, the notice time period is correctly understood and followed to avoid any possibility of failure of compliance.”
While disputes centering on force majeure clauses, either with or without specific pandemic provisions, may now receive less empathy from owners as Shoor suggests, other clauses have also had their thresholds raised over the past two years.
Contract frustration is an example.
Frustration is defined by Shoor as, “a situation (that) has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’”
Similarly, he says commercial impracticality is becoming more difficult to establish, even if the parties wish to risk the consequences.
“The party relying on this strategy will have the onus of showing that performance is impossible, impractical, or that the radical change frustrates the original purpose of the agreement. Ultimately, these concepts lead to severe outcomes. The contract ceases to exist and payments may need to be returned. Courts will only apply these concepts in limited circumstances.”
The foreseeability window regarding supply chain issues is closing, if not already closed. Owners are beginning to demand strict adherence to existing contracts. Going forward, all parties must be more mindful when bidding or when executing new contracts given the fuller understanding of what a pandemic means to supply chain management.
This will be discussed next week.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.
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