Construction is now an essential workplace, and although all
work is allowed to start or continue, it is not business as usual.
The continuing local and global effects of the COVID-19 pandemic
create ongoing challenges for construction sites regarding health
and safety, logistics, delays, and disruptions to supply chains.
Given the current environment, it may be difficult or impossible to
obtain necessary materials and equipment on time or at pre-COVID-19
prices. This can result in unanticipated delays and cost increases
which parties to construction projects may be unable to absorb due
to tight project schedules and profit margins.
Properly resolving supply chain issues-whether from the
perspective of an owner, contractor, subcontractor, or a
supplier-will often require a two-pronged approach focusing on both
the legal entitlements and obligations of the parties, as well as a
consideration of some more practical steps. There is no “one
size fits all” approach that will apply to every supply chain
issue, but regardless of your role on a construction project, the
ideas discussed below represent some helpful starting points which
may assist in the resolution of supply chain disruptions.
Review your Contracts
A good starting point for any potential dispute on a
construction project, including supply chain issues, is to refer
back to the terms of the contracts for the project or supply. For
construction issues, the contract is often paramount, so most
construction disputes eventually will require reference to the
terms of your agreements even if matters do not progress to
litigation. In fact, having a clear sense of both your rights and
obligations under your contracts can often serve as the best way to
avoid being dragged into time-consuming and costly litigation.
Bearing this in mind, in the event of a potential supply chain
disruption, parties should consider reviewing their contracts with
a particular focus on the following types of provisions:
- Force majeure
clauses: As we previously discussed in more detail here, a force majeure clause may relieve a
party from performance of some or all of its obligations under a
contract upon the occurrence of an unforeseeable event outside of
the control of the parties. To rely on a force majeure clause, a
party should be prepared to establish a causal link between the
unforeseen event and the inability to perform the contractual
obligations. In the current circumstances, parties will want to pay
particular attention to whether their force majeure clause includes
wording extending its application to disease, pandemic, epidemic,
or other similar events. However, force majeure clauses do not
excuse parties from the consequences of their own actions and they
do not entitle parties to refuse to perform their obligations upon
the occurrence of reasonably foreseeable events. - Indemnification
provisions: Indemnification clauses can be used to
allocate risks from one party to another on the basis of an
agreement between the parties. As they relate to supplier
contracts, indemnification provisions can be used to pre-emptively
determine who bears the risk for price increases or the cost of
delays resulting from the unavailability of equipment and
materials. Parties should review their construction contracts and
supply agreements to determine if the risk of supply chain issues
has been allocated to a specific party or parties, or to determine
if other risk allocation tools have been used. - Notice Provisions:
Where a party responsible for supplying materials or equipment
becomes aware of a potential delay in delivery or increase in price
for equipment or materials, the contract may require the party to
give notice within a specific time and in a specific form. As we
have previously discussed in more detail here, claims clauses in contracts often have
specific procedural and substantive requirements and a claim for
increased compensation or extension of time may be denied if the
requirements are not met.
In addition to the above, owners, contractors, and suppliers
should review supply contracts for continued feasibility in light
of delays caused by COVID-19. Many ongoing construction projects
have experienced delays due to the virus and, as such, particular
caution should be paid to the current validity of price
commitments. It is typical for supplier contract pricing to be
contingent on supplying materials within a particular timeframe and
originally-agreed prices may have become unfeasible due to changes
in availability and market pricing. All aspects of the construction
contract framework, including purchase orders, proposals, general
conditions, and specific or supplementary conditions should be
reviewed to determine if the parties have agreed to a process for
resolving issues caused by delays or price changes.
When reviewing supply agreements, it is important to be aware of
the relationship between contract documents. For example, depending
on the specific terms agreed to, the terms of a purchase order may
exclude prior proposals, quotations, or communications between the
parties, or may incorporate other documents or terms and
conditions. These relationships are especially important to keep in
mind where one document says yes while the other says no. Special
care must be given to understanding the unique circumstances of
each specific agreement before decisions are made.
Consider the Doctrine of Frustration
If your construction contract does not contain a force majeure
provision, parties may consider the potential applicability of the
legal doctrine of frustration to supply chain issues caused by
COVID-19. Put simply, frustration is a general principle governing
construction contracts which may be invoked when contractual
obligations become impossible to perform through no fault of either
party. Where frustration applies, the consequences are severe. Both
parties are discharged from further performance of the contract
with no further obligations to one another.
The law imposes a high bar on frustration with a standard of
impossibility of performance. It is unlikely that
increased costs of supply or difficulty meeting supply deadlines
would be sufficient. It may be possible to establish that a supply
agreement is frustrated if, for example, the material to be
supplied can only be sourced from one country, but the government
has suspended trade with that country due to COVID-19. Even in this
example, if the material can be sourced from an alternate location,
frustration likely would not apply even if supply became more
expensive or would be delayed as a result.
Relying on the doctrine of frustration always comes with the
risk that the other party to the contract will view the termination
as improper and claim damages to compensate for increased costs or
delays incurred in finding a replacement. As such, claiming
frustration always comes with the risk of a court award of damages
for improper termination, in addition to litigation costs.
In contracts between large, sophisticated companies which do not
contain a force majeure clause or any other language dealing with
COVID-19 related issues, courts may interpret these absences as
intentional-which is to say that the courts may consider that the
parties agreed to have the supplier supply materials no matter
what.
Although fairly simple in concept, specific applications of the
doctrine of frustration can be quite complex and each unique set of
circumstances must be independently considered with legal advice
before the doctrine is relied on. It is not sufficient to simply
point to the state of emergency or the epidemic itself and purport
to rely on frustration on that basis.
Plan to take Practical Steps
Aside from contractual or legal arguments, proactive owners,
contractors, subcontractors, and suppliers should give
consideration to a number of practical realties of construction
work during the COVID-19 epidemic and its aftermath. This will
include reviewing essential project timelines and milestones to
determine what levels of delay and costs can be absorbed before
critical issues begin to accrue. Working backwards from this point,
owners and contractors will need to take steps to ensure that
potential supply chain disruptions are pre-emptively addressed to
avoid reaching critical levels of delay or untenable and unbudgeted
materials costs.
This may require reaching out to key suppliers (and as an owner
or general contractor, all sub-contractors) to determine what their
actual ability to deliver materials is and potentially re-working
planned project workflows and schedules to accord with the
availability of materials. Additionally, planning for increased
prices in materials may require parties to discuss increased supply
budgets or the possibility of change orders and additional purchase
orders to allow material costs to better reflect the realities of
market pricing.
Alternatively, for projects which still have some flexibility
with respect to choice of suppliers, owners and contractors should
make efforts to diversify suppliers. This will limit the potential
impacts of a localized outbreak of the virus which shuts down a
crucial supplier and will allow projects to proceed notwithstanding
the issues of any one supplier or region. Diversification should be
considered a particularly important tool for projects which rely on
critical or unique components to progress. By taking these steps
before issues arise, proactive owners and contractors can mitigate
the impact of potential delays caused by supply chain issues by
reorganizing plans around the reality of current supply chain
conditions.
Suppliers, similarly, will want to review their actual
capabilities and provide notice of any anticipated logistical or
production related issues. Providing prompt notice of anticipated
issues will not only help maintain relationships with owners and
contractors, but may allow for disruptions to be planned around and
resolved without resort to costly litigation. Just as is the case
for owners and contractors, suppliers’ construction contracts
too may contain applicable force majeure provisions or notice
requirements.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
