Background

The COVID-19 pandemic has caused significant disruptions to the construction industry as a whole. 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. These disruptions and rising construction costs are critical variables for consideration for owners and contractors building projects under fixed price arrangements.

As the number of construction projects increases throughout the COVID-19 pandemic, rising construction costs are not expected to dissipate any time soon. It is therefore critical for stakeholders in the construction industry entering into fixed price agreements to understand the key contractual provisions that may provide some relief against cost volatility. At the same time, there is no universally applicable solution to rising costs in construction, and case law reinforces this idea by suggesting that the ability to invoke relevant contractual clauses as a result of COVID-19 derives from a fact driven analysis.

Detailed Force Majeure Clauses

The applicability and scope of a force majeure clause is dependent on the explicit language in the relevant contract[1]. A force majeure clause explicitly including “pandemics, epidemics and/or diseases” will likely capture the COVID-19 pandemic, thereby providing some relief to contractors in the face of significant delays due to supply shortages and increased costs. However, 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. In such cases, contractors looking to rely on a force majeure clause will rely on the Court’s interpretation of the surrounding facts of the case and the contract as a whole to determine if relief from the COVID-19 pandemic is available.

In the recent case of Windsor-Essex Catholic District School Board v. 231846 Ontario Limited, 2021 onsc 3040 (“Windsor-Essex”), the Court was asked to determine if the force majeure clause in a lease agreement included (and therefore captured) the COVID-19 pandemic and thus relieved the tenant from its obligation to pay rent. The lease agreement in this case did not stipulate a pandemic, epidemic, or disease as a force majeure event. However, the Court looked at the contract as a whole and applied the ordinary meaning of the terms and found that there was an occurrence of an event outside of the party’s control, being the Government of Ontario’s lockdown restrictions (governmental action) in response to the COVID-19 pandemic, which prevented the landlord from providing the tenant with the leasable area and, therefore, the tenant was released from its obligation to pay rent[2]. It is important to note that the interpretation and application of a force majeure clause is highly dependent on the wording of the contract and the facts of the case. While there may be grounds for recourse through the Courts, as seen in Windsor-Essex, it is advisable that owners and contractors consider force majeure clauses which explicitly include pandemics, epidemics, or diseases, as this could provide relief from volatile costs and unexpected delays, especially in the face of the COVID-19 pandemic.

Material Price Escalation Clauses

In addition to including a detailed force majeure clause, parties to fixed price construction contracts should also consider whether it is appropriate to include a material price escalation clause. A material price escalation clause accounts for the risk of unexpected market fluctuations which are no fault of the contractor, much like the material shortages currently driving up material costs throughout the construction industry.

A material price escalation clause informs the project owner that the bid or contract price is based on current material prices, but is subject to change in the face of an unexpected market fluctuation or shortage. This reduces the contractor’s need to inflate the project costs to account for unexpected fluctuations and, in turn, reduces the risk the project owner will pay for a risk that may never occur.

When considering a market price escalation clause, it is recommended that the percentage change in market price of the applicable materials, or the number of days during which materials are unavailable, is considered and clearly stipulated.

Doctrine of Frustration

In the absence of an applicable force majeure clause, a contractor may be relieved from performing its contractual obligations by arguing that the contract is frustrated by the COVID-19 pandemic. However, it is important to note that the threshold for establishing frustration is very high, as it is a significant remedy. Frustration occurs when the supervening event, absent default of either party, renders performance of the contract impossible because the circumstances in which performance is called for would render it a thing significantly different from what was originally contemplated in the contract[3]. Case law suggests that an increase in prices and market fluctuations are an insufficient basis for invoking the doctrine of frustration.

Construction Contracts Moving Forward

It is important that parties to construction contracts be mindful of the impact of COVID-19: from delays all along the supply chain to the increased project delivery timelines due to the limitations on workplace capacities and shortage of materials. Contracting parties can protect themselves by actively including a detailed force majeure clause in their contracts that specifically refers to pandemics, epidemics, and disease, and/or a material price escalation clause. In the absence of either clause, parties may attempt to rely on the doctrine of frustration, but the reality is that sole reliance on the doctrine of frustration may involve significant litigation costs at a time when judicial treatment of the doctrine arising from the COVID-19 pandemic remains unclear.