Matters in Law Paralegal Services

What Happens If a Renovation Project Was Due to Start But Is Now Unlawful Due to the Coronavirus?

Contracts

While fact-specific to any particular contract, the outbreak of COVID-19 is likely to have a profound impact on contracts and agreements. Companies or their counterparties may find they are unable to perform under an existing agreement.

Parties to existing contracts that are or may be disrupted by the outbreak should promptly assess their legal rights and obligations, including:

                                 (i) assessing contractual provisions that have been or may be affected; 

                                 (ii) identifying and abiding by any relevant notice requirements;

                                 (iii) analyzing the risks and consequences of a default or breach under the agreement; and

                                 (iv) determining or negotiating alternative means of performance under the contract, where possible.

Parties currently negotiating contractual agreements should proactively consider the impact of COVID-19 and appropriately allocate potential risk in the agreement.

Restrictions on Construction and Renovation Projects Due to Covid-19 May Nullify Various Contracts 

If a Project Is Delayed Because of Coronavirus Can the Contract Be Cancelled?
Can a Contractor Delay a Renovation Contract Because of Covid-19?
If a Customer Wants to Cancel a Contract Because of Covid-19 Must a Deposit Be Refunded?
What Happens If a Renovation Project Was Due to Start But Is Now Unlawful Due to Covid-19?
If a Renovation Contract Gets Cancelled Because of Covid-19 Should the Deposit Be Refunded?

Force Majeure

Companies may be considering whether the COVID-19 outbreak constitutes a force majeure event such that a party is excused from its contractual obligations. Contract parties may consider issuing force majeure notices or may receive such notices to excuse a party’s non-performance. Any declaration of force majeure must be evaluated under the terms of the agreement and analyzed under the law governing the terms of the contract.

Parties should not cease their performance on the basis of a force majeure event without consulting counsel because a mistaken assertion of force majeure or frustration could have serious consequences. Specifically, an incorrect assertion of force majeure or frustration may amount to a breach (or anticipatory breach) of the contract. Business should also be aware that force majeure will generally not excuse nonpayment.

Parties should also consider the consequences including:

Whether the parties’ agreement includes notice obligations before declaring force majeure;
Whether the force majeure event actually made the party’s performance impossible, or just more burdensome;
Whether the impacted party is required to mitigate by using diligent efforts to end the failure or delay and ensure the effects of the force majeure event are minimized;
Whether immediate relief is available for the impacted party;
Whether force majeure-related disputes must be arbitrated; and
Whether force majeure events are covered by the parties’ insurance policies (including general liability, business interruption, contingent business interruption, or other insurance policies), and if so, what conditions must the party meet for its claim to be satisfied.

The last two points are key, as it is common that the occurrence of force majeure is disputed and, accordingly, parties should consider the potential costs of litigation and/or dispute resolution in evaluating whether to declare force majeure.

Parties seeking or faced with the declaration of force majeure should also consider the impact to other agreements and obligations.

Frustration or Impossibility

If a contract is silent on force majeure, it may still be possible to argue that the COVID-19 outbreak has frustrated the contract or that performance of the contract becomes objectively impossible.

The doctrine of frustration may excuse the performance of a contract in situations where the performance of a contract is possible, but no longer provides a party with the benefits that induced them to make the bargain because of intervening unforeseeable events.

A court’s decision regarding whether to excuse a party’s non-performance based on the doctrine of frustration will turn on the foreseeability of the event in question and the purpose of the agreement.Generally, invoking the common law doctrine of frustration of purpose is limited to instances where the event is wholly unforeseeable and renders the contract valueless to a party. Frustration of purpose will not apply when a contract simply becomes less profitable, or even when performance causes one party to sustain a loss.

The doctrine of impossibility excuses a party’s nonperformance when performance becomes objectively impossible because of the destruction of the subject matter of the contract or the means of performance. It is important to note that the test for impossibility is a strict one and courts have only applied this defense in extreme circumstances, where the events in question were truly unforeseeable.

In addition to the common law defenses discussed above, parties can look to relevant statutory law to evaluate whether nonperformance would be excused. For example, under the CPA (Consumer Protection Act), a seller may be excused from timely delivery or non-delivery of goods due to (i) unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting; or (ii) compliance in good faith with an applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Material Adverse Change or Material Adverse Effect

Some commercial agreements contemplate and allocate risk among the parties in the event of a material adverse change (“MAC”) or material adverse effect (“MAE”) to the business. If triggered, a MAC or MAE may allow a party to terminate the agreement or otherwise avoid performance. Companies should consider and abide by any notice requirements associated with a MAC and MAE.

Insurance

Companies should consider whether insurance may cover losses sustained from COVID-19-related disruptions. This coverage may apply to commercial properties that sustain disruptions to their operations, trade disruption for losses related to quarantines or other travel restrictions and closures, or general liability insurance. Businesses should not only assess the insurance policies that may apply, but consider providing notice under such policies at this time.

Contracts and Deposits

Restrictions on construction and renovation projects due to Covid-19 may nullify various contracts. Contractors may be required to refund deposits. Contractors may be entitled to payment for partial services such as design, among other things. 

Questions About Contracts Affected By Covid-19:

If a Project Is Delayed Because of Coronavirus Can the Contract Be Cancelled?
Can a Contractor Delay a Renovation Contract Because of Covid19?
If a Customer Wants to Cancel a Contract Because of Covid19 Must a Deposit Be Refunded?
What Happens If a Renovation Project Was Due to Start But Is Now Unlawful Due to Covid19?
If a Renovation Contract Gets Cancelled Because of Covid19 Should the Deposit Be Refunded?

Some of the common current concerns affecting the contracting trades include:

Whether a contractor must return a deposit when now unable to perform a contract;
Whether a customer must pay for services partially completed while waiting out the crisis;
Whether a contractor can impose rescheduling of the project to a much later date;
Whether the statutory twenty-eight (28) day payment requirement remains applicable; and
Whether a customer can demand that work gets done even if doing so puts employees at risk.

These are just a few of the potential legal issues that contractors and customers will be dealing with:

Mandated Shutdowns

Effective at 11:59 pm, on Saturday, April 4 2020, per O. Reg. 119/20 to section 7.0.2(4) the Emergency Management and Civil Protection Act, R.S.O. 1990, c. E.9, many businesses are required to close including various contractors.  The closure requires ceasing of any public operations at the physical location of the business as well as ceasing of any off-site services.

Construction

The only construction work permitted to continue includes:

Construction projects and services associated with the healthcare sector, including new facilities, expansions, renovations and conversion of spaces that could be repurposed for health care space.

Construction projects and services required to ensure safe and reliable operations of, or to provide new capacity in, critical provincial infrastructure, including transit, transportation, energy and justice sectors beyond the day-to-day maintenance.

Critical industrial construction activities required for,

                    -the maintenance and operations of petrochemical plants and refineries,

                    -significant industrial petrochemical projects where preliminary work has already commenced,

                    -industrial construction and modifications to existing industrial structures limited solely to work necessary for the production, maintenance, and/or

                      enhancement of Personal Protective Equipment, medical devices (such as ventilators), and other identified products directly related to combatting the

                      COVID-19 pandemic.

Residential construction projects where,

                     -a footing permit has been granted for single family, semi-detached and townhomes,

                     - an above grade structural permit has been granted for condominiums, mixed use and other buildings, or

                     - the project involves renovations to residential properties and construction work was started before April 4, 2020.

Construction and maintenance activities necessary to temporarily close construction sites that have paused or are not active and to ensure ongoing public safety.

Maintenance

The only maintenance work permitted to continue includes:

Maintenance, repair and property management services strictly necessary to manage and maintain the safety, security, sanitation and essential operation of institutional, commercial, industrial and residential properties and buildings.

These closures and cessation requirements including restrictions applicable to the contracting trades and therefore affecting many construction and renovation projects, especially the common and typical springtime projects contemplated within the contracts of small contractors.  Projects such as landscaping, pool installation, basement renovations, building of decks and fences, roofing, painting, among other things, must now be put on hold.  In many cases, some customers who entered into such contracts may prefer to terminate the agreement rather than postpone the project.

Statutes that may apply include:

                      The Consumer Protection Act, 2002, S.O. 2002, Chapter 30, Schedule A;
                       The Construction Act, R.S.O. 1990, c. C.30;
                       The Emergency Management and Civil Protection Act, R.S.O. 1990, c. E.9; 
                       The Frustrated Contracts Act, R.S.O. 1990, c. F.34;
                       The Occupational Health and Safety Act, R.S.O. 1990, c. O.1; and


An example of unlawfulness is the prohibition against residential renovation work unless the project commenced prior to April 4 2020; and therefore any project with a contract scheduled to start after April 4 2020, and for the two weeks of the prohibition (or longer if the prohibition is extended) may now be a frustrated contract made impossible due to restriction by government order.  Due to these circumstances, contracts, or at least certain terms within contracts, may now be unlawful and thereby impossible to properly perform thereby frustrating the contract per the Frustrated Contracts Act.

Employment Disruptions

Another concern that could unexpectedly make a project impossible to complete as contractually agreed involves the right of employees to reasonably decline to work in unsafe conditions as per Occupational Health and Safety Act protections.  It appears possible that a contractor, where such a contractor is currently legally permitted to operate, with good intentions to deliver as agreed, could become unable to perform because of workers who are unwilling to work due to workplace safety concerns.  Where the safety concern is the coronavirus, the inability to perform may be legally viewed as becoming impossible due to the coronavirus as an unexpected circumstance outside the control of the parties to the contract and thereby triggering of the Frustrated Contracts Act.

Consumer Protection

When agreements relating to construction and renovation projects are entered into between a business and consumer and the agreement includes a work start date other than the date the agreement was entered into, such is known as a 'future performance contract' per the Consumer Protection Act, 2002, S.O. 2002, Chapter 30, Schedule A.  Per section 26 of the Consumer Protection Act, when a business, such as a contractor, fails to start work within thirty (30) days of the stated start date, the consumer has the right to cancel the contract.  Specifically it is stated that:

26 (1) A consumer may cancel a future performance agreement at any time before delivery under the agreement or the commencement of performance under the agreement if the supplier,

(a) does not make delivery within 30 days after the delivery date specified in the agreement or an amended delivery date agreed to by the consumer in writing; or

(b) does not begin performance of his, her or its obligations within 30 days after the commencement date specified in the agreement or an amended commencement date agreed to by the consumer in writing.

Due to the Covid-19 crisis and government ordered shut down of various businesses, many projects, construction or renovation, with start dates previously planned and contractually agreed to begin are now delayed.  Accordingly, per the Consumer Protection Act, it would appear that the consumer holds the right to cancel the agreement; however, per the Order as O. Reg. 73/20 issued on March 17 2020 pursuant to the Emergency Management and Civil Protection Act, the running of certain deadlines, such as limitation periods, are currently suspended.  Specifically, the Order states, in part:

1. Any provision of any statute, regulation, rule, by-law or order of the Government of Ontario establishing any limitation period shall be suspended for the duration of the emergency, and the suspension shall be retroactive to Monday, March 16, 2020.

While it is anticipated that the thirty (30) day limit is unaffected by the Order, and therefore the limit remains applicable, without precedent legal decisions to confirm whether the thirty (30) day limit is, or is other than, a type of limitation period captured by the Order, it may arguable that the thirty (30) day limit is captured by the Order suspending limitations periods.  If so, the consumer protection intended nature of the Consumer Protection Act appears to fail.

Returning of Deposits

Where a contract is frustrated per the Frustrated Contracts Act, or the contract comes to an end due to cancellation per the Consumer Protection Act, or otherwise becomes a nullity, generally, any prepaid deposits must be refunded.  In regards to a frustrated contract, the Frustrated Contracts Act specifically states:

3 (1) The sums paid or payable to a party in pursuance of a contract before the parties were discharged,

(a) in the case of sums paid, are recoverable from the party as money received for the use of the party by whom the sums were paid; and

(b) in the case of sums payable, cease to be payable.

In regards to a contract cancelled by a consumer in accordance to the rights to do so and the cancellation procedures prescribed within the Consumer Protection Act, it is stated:

95 The cancellation of a consumer agreement in accordance with this Act operates to cancel, as if they never existed,

(a) the consumer agreement;

(b) all related agreements;

(c) all guarantees given in respect of money payable under the consumer agreement;

(d) all security given by the consumer or a guarantor in respect of money payable under the consumer agreement; and

(e) all credit agreements, as defined in Part VII, and other payment instruments, including promissory notes,

(i) extended, arranged or facilitated by the person with whom the consumer reached the consumer agreement, or

(ii) otherwise related to the consumer agreement.

96 (1) If a consumer cancels a consumer agreement, the supplier shall, in accordance with the prescribed requirements,

(a) refund to the consumer any payment made under the agreement or any related agreement; and

(b) return to the consumer in a condition substantially similar to when they were delivered all goods delivered under a trade-in arrangement or refund to the consumer an amount equal to the trade-in allowance.

(2) Upon cancelling a consumer agreement, the consumer, in accordance with the prescribed requirements and in the prescribed manner, shall permit the goods that came into the consumer’s possession under the agreement or a related agreement to be repossessed, shall return the goods or shall deal with them in such manner as may be prescribed.

Accordingly, upon rightful cancellation of the agreement, the consumer is entitled to return of deposit, or other prepaid and unearned monies.  Additionally, the consumer also has the obligation to return, or permit repossession, of goods that may have come into the possession of the consumer such as material delivered to the work site that was intended for installation.

With these points said in respect of return of deposit, among other things, as explained below in respect of monies which may remain payable for goods and services provided or otherwise already received, it is important to bear in mind that rights and obligations, such as the right to receive, or obligation to return, deposit monies, such applies merely to, and only in, the realm of contract law and other rights and obligations as legal concerns outside of contract law may remain unaffected. 

Partially Rendered Services

A quandry arises whereas, at first glance, both a contract frustrated per the Frustrated Contracts Act as well as a contract cancelled per the Consumer Protection Act initially appear to show that deposits and other prepaid monies are fully refundable.  Indeed, as is indicated these statute laws require that frustrated or cancelled contracts be treated as nullities.  However, the nullification of contracts merely nullifies the corresponding contract law duties.  Duties and obligations in law may, and often do, remain applicable within a realm outside of contract law principles.

Quantum Meruit

The legal principle of quantum meruit, being Latin for, loosely, 'the amount that it merits', arises out of the law of equities or 'fairness' rather than the law of contracts.  Accordingly, where the Frustrated Contracts Act and the Consumer Protection Act solely address issues arising in contract law, including nullity of contracts and contract law obligations, the law of equities, including rights and obligations within the realm of the law of equities, remain unaffected.

Albeit a renovation contract cancelled for reasons other than Covid-19, yet very thorough in addressing issues such as return of deposit monies per the Consumer Protection Act with some setoff for value of partial services rendered, is the case of Sawh v. Par-Tek Construction Services Inc., 2017 CanLII 53634 which dealt with many of these issues, although, again, arising from a different reason.

Personal Liability

Interesting, per the Sawh case at paragraphs 61 to 64, also addressed the issue of personal liability for the return of deposit monies whereas deposits prepaid for a future construction or renovation project that is terminated without fault of, or in accordance to the rights of, the consumer prior to commencement of the project should be held in a trust account rather than comingled with the general funds of the contracting business.  If the contracting business failed to hold the deposit monies in trust, the directors or officers of the business, or other persons involved in management of the business financies, may be held personally liable for the refund of the deposit.

Payment
Rights and Duties

Effective October 1 2019, the new amendments per section 6.4 the Construction Act, R.S.O. c. C.30 took effect including the duty to pay invoices from general contractors within twenty-eight (28) days of receipt unless genuinely disputing the validity of the invoice.  Specifically, the Construction Act says:

6.4 (1) Subject to the giving of a notice of non-payment under subsection (2), an owner shall pay the amount payable under a proper invoice no later than 28 days after receiving the proper invoice from the contractor.

However, the recent suspension of various timelines and deadlines per the recent emergency Order in Council 518/2020 as is O. Reg. 73/20 to the Emergency Management and Civil Protection Act, R.S.O. 1990, c. E.9, including limitation periods, among other things, without providing clarifying definitions, could pose some concern and cause for disputes whereas a possible interpretation is that the undefined term "limitation periods", includes the twenty-eight (28) day payment deadline within the Construction Act.  Specifically, the Order states, in part:

Whereas an emergency has been declared pursuant to Order in Council 518/2020 (Ontario Regulation 50/20) on March 17, 2020 at 7:30 a.m. Toronto time pursuant to section 7.0.1 of the Emergency Management and Civil Protection Act (the “Act”);

And Whereas the criteria set out in subsection 7.1 (2) of the Act have been satisfied;

Now Therefore, an Order is made pursuant to subsection 7.1 (2) of the Act, the terms of which Order are the following:

1. Any provision of any statute, regulation, rule, by-law or order of the Government of Ontario establishing any limitation period shall be suspended for the duration of the emergency, and the suspension shall be retroactive to Monday, March 16, 2020.

White legal practitioners have a good idea of what the government intends when referring to a "limitation period", it is quite possible that the issue remains within the possibility of legal debate.  Furthermore, the general public may view the term "limitation period", again as undefined within the Order in Council per the Emergency Management and Civil Protection Act, as referring to the twenty-eight (28) day payment deadline within the Construction Act.  Such a possibility will certainly be frustrating and aggravating of financial difficulties to contractors who may find payment for invoiced work lawfully suspended; or at the least, quite debatable as to whether the payment deadline is currently applicable.

While the Frustrated Contracts Act and the Consumer Protection Act, 2002, may currently provide for the nullification or cancellation of construction and renovation projects where terms, such as project commencement dates, are made impossible due to the government mandates requiring the closure or suspension of operations of various non-essential businesses, where contracts are nullified or terminated by operation of these laws, or others, without fault of the parties to the contracts, the parties should treat the contract as if never existing; and accordingly, any deposits or prepaid monies should be returned.  However, if partial performance such as delivery of materials or supplies, or design efforts, or even partial construction occurred, prior to the nullification or cancellation, partial payment on a quantum meruit basis may be required.

An addition concern affecting contractors and customers is the Order in Council per the Emergency Management and Civil Protection Act and whether the twenty-eight (28) day payment requirement per the Construction Act is currently suspended.

Ultimately, the Covid-19 crisis provides questions for many unprecedented legal issues that will, unfortunately, give rise to many disputes and legal proceedings once the crisis passes.

Every situation is different and different statutes may apply. If you have questions about your specific matter, contact Matters in Law Paralegal Services.