Eglinton LRT decision could set precedent for other projects, analysts say

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SNC-Lavalin Group Inc. and its three partners building Toronto’s new Eglinton Crosstown light-rapid transit line have said for months that the coronavirus crisis has caused millions of dollars in lost productivity as a result of unexpected workplace safety measures, supply chain problems and increased worker absenteeism.

Now, a court has ruled that the four construction companies have the right to trigger a procedure in their contract with their client, Metrolinx and Infrastructure Ontario, that could give them more time to finish the project without incurring penalties and compensation for any extra costs they’ve assumed. The decision “could create a precedent for other construction projects that were negatively impacted by the pandemic,” Desjardins Securities analyst Benoît Poirier said.

SNC is working on three big infrastructure construction contracts in Toronto, Ottawa and Montreal, all of them light-rail transit systems with their own set of challenges. In Toronto, the company is part of a consortium called Crosslinx Transit Solutions that is building the Eglinton Crosstown LRT with partners Aecon Group Inc., EllisDon, and Dragados. Each company has a 25-per-cent stake.

The consortium in October sued Metrolinx and Infrastructure Ontario over escalating costs and delays on the $5.5-billion project caused by the COVID-19 crisis. The builders said the provincial agencies refused to declare the pandemic an emergency and held Crosslinx responsible for extra costs that arose as a result of it, including financial penalties for delivering the project late.

Crosslinx has estimated the first wave of COVID-19 alone resulted in an extra $134-million worth of expenses. Those costs have probably climbed higher as the pandemic continues.

On Monday, a judge for the Ontario Superior Court ruled in favour of the builder consortium, saying COVID-19 represents an emergency under the transit project agreement. Metrolinx’s interpretation of the contract was “neither a fair nor reasonable approach” and “would reduce its ostensible concern about worker safety to nothing but window dressing,” the judge said in the ruling.

If the decision is not appealed, it clears the way for the two sides to negotiate new terms on project completion dates and financial compensation. For SNC and Aecon, that would likely mean a cash recovery, though the exact amount remains unknown, National Bank analyst Maxim Sytchev said. SNC took $90-million in charges in the fourth quarter as it delayed booking disputed COVID-related expenses as revenue.

“The highly aggressive stance that Metrolinx and Infrastructure Ontario was taking seemed very offside, and the decision is the right one,” ATB Capital Markets analyst Chris Murray said by e-mail. “On other projects, including the [Montreal-area] REM, it appears that the owners have taken a more collaborative approach, appreciating that COVID-19 is a truly unusual event, and more supportive of the health and safety efforts of the contractors and the broader community.”

SNC-Lavalin chief executive officer Ian Edwards has said the stricter health and safety measures implemented by authorities to prevent and contain COVID-19 have hurt productivity on construction of the Crosstown rail line and other projects, particularly on tasks such as tunnelling and working at heights, which usually require workers to be in close proximity with one another. Lockdowns also restrict the number of staff SNC can deploy to worksites, he has said.

The development shows that SNC and its engineering and construction peers are managing risk through the pandemic with some success, National Bank’s Mr. Sytchev said.

“While it’s easy to say that government-issued stay-at-home orders would qualify as force majeure, one never knows how courts interpret all the moving parts,” the analyst said in a note. “With so much capital going into infrastructure development in Canada, U.S., U.K. and Australia, risk transfer strategies that would have been acceptable 10 years ago as players were vying for a piece of the public-private partnership pie no longer suffice.”

SNC-Lavalin has vowed not to bid on any more lump sum turnkey construction projects like the Eglinton Crosstown LRT, which typically put the onus on builders for any cost overruns. The company is now winding down its remaining portfolio of contracts of that type.

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