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Legal Notes: Future claims related to COVID distortions lie in wait

John Bleasby
Legal Notes: Future claims related to COVID distortions lie in wait

A global review of the construction industry conducted by leading dispute resolution consultants HKA suggests a surge of COVID-related disputes may be waiting in the wings.

The company’s fourth annual report, titled Operating in Uncertain Times, analyzed 1,400 projects in 94 countries. It concluded COVID has, “compounded underlying industry weaknesses, intensifying the risk of claims and disputes as the industry is rebounding and governments across the world press ahead with ambitious infrastructure and development plans.”

The report identified the main areas of disputes as: changes in scope, conflicting interpretation of contracts, design failures and subcontractor mismanagement.

“These have been distorted by COVID-19 as the pandemic restricted access to sites and labour, constricted cash flow, and exposed the limitations of contract provisions on force majeure and changes in law,” the report says.

HKA notes although only one in six projects that commenced during the pandemic had generated claims related to COVID, many more “are in the pipeline.”

Webnesh Haile of Singleton Urquhart Reynolds Vogel’s construction and infrastructure group has observed a similar trend.

“Many contractors have put owners on notice for potential claims, particularly given the strict notice deadlines found in many construction contracts,” Haile told the Daily Commercial News. “However, many have not yet submitted particulars of their claims given the ongoing uncertainty caused by the pandemic. Conversely, owners are concerned that contractor problems, such as design deficiencies, poor scheduling or subcontractor mismanagement will be subsumed in COVID claims and not properly accounted for.”

Many pending claims anticipated in the HKA report can be traced back to supply chain interruptions and the resultant cost and late delivery effects.

Riccardo Del Vecchio, Dražen Bulat and Sabrina Lau of Miller Thomson LLP write, “Backlogs in supply, commodity pricing, local market disruption, and an increase in demand and labour costs, have all resulted in a significant rise in construction costs and sometimes construction disruptions.”

The search for a legal solution to the delays and cost escalations due to supply chain interruptions often leads to the invocation of force majeure clauses.

However, the Miller Thomson lawyers write, “a force majeure clause that does not refer to pandemics, epidemics, and/or diseases, will likely not be held to include events like the COVID-19 pandemic.”

Product availability and pricing not only can result in delays that can cause scheduling issues but can result in material substitution in order to keep projects running on schedule and on budget.

As cited by the HKA report, this can trigger claims later concerning defects, design failures and subcontractor mismanagement.

How might these be minimized in the future?

Krista Chaytor and Faren Bogach, both partners with WeirFoulds, and Steven Karst, senior contract administrator at Mobilinx, spoke to some of these issues during a recent webinar.

Chaytor said disputes often arise from the outset when contracted scopes are not clear or contain ambiguities. The resultant delays and requests for time extensions can be a common area of dispute.

Bogach emphasized the importance to include project scope detail into the contract. Anything not included would be considered an extra, requiring valuation. The cumulative effect of multiple change orders is also problematic and needs to be addressed contractually, since changes can impact the overall timing of the project.

However, Karst advised against generalities that attempt to capture everything.

“Sometimes developing a scope-split matrix outlining what the subcontractor does, what the general contractor does, and what the owner is responsible for can visually help cut to the chase to determine who is responsible.”

He adds that in the case of lump sum contracts, extras are inevitable. Establishing a unit rate sheet for trades and equipment can help avoid ambiguity in costing.

Going forward, a recent McKinsey Global report notes the construction industry is taking steps to better prepare, beyond seeking legal guidance during contract negotiations. Eighty-eight per cent of surveyed companies made investments in supply-chain analytics in 2020, and 75 per cent have plans to continue doing so beyond 2021.

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com

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