Construction Law 2023 Comparisons

Canada is a federation, with a single national government as well as ten provincial and three territorial governments. The province of Quebec is a civil law jurisdiction, as reflected by the Civil Code of Quebec, while the other provinces and territories are common law jurisdictions. Under the Constitution Act, 1867, which allocates jurisdiction by subject matter between the federal government and the provinces, in general terms, the law of contract is allocated to the provinces and territories.

As noted, the principal laws governing construction contracts in Canada are rooted in Canadian common law outside of Quebec, and in civil law within the province of Quebec. While Canada’s two legal frameworks differ in certain important particulars, many of the practical remedies afforded to parties under both systems are not dissimilar in relation to construction contracts.

Freedom of Contract

A fundamental principle of the Canadian laws governing construction contracts is freedom of contract, which is generally strongly supported by the Canadian courts. As such, subject to some exceptions such as the duty of honest contractual performance and the duty to exercise a contractual discretion reasonably and in good faith, Canadian courts generally tend to avoid implying or imposing contractual terms into agreements (especially where a contract contains an entire agreement clause, which is common in construction contracts).

Statutory Lien Legislation

Another central feature of the law governing construction contracts in Canada is the use of statutory lien legislation within the common law provinces and territories (and the broadly related legal hypothec in Quebec). Liens provide a person who supplies services or materials to an improvement with the right to place a charge on the improved premises. Liens, which do not exist at common law in Canada, are established pursuant to statutory regimes that vary, as between various provincial and territorial regimes, and, generally speaking, apply notwithstanding any agreement to the contrary.

Standard form construction contracts are widely used in Canada. In particular, the Canadian Construction Documents Committee’s (CCDC) Contract Forms are a suite of standard form contracts which are widely used in both the private and broader public sectors. The CCDC Fixed Price Contract (CCDC 2), which forms part of this suite of contracts, is one of the most commonly used standard form contracts in the country and was last updated in 2020. The CCDC Service Contract (CCDC 31), which is commonly used as a service contract as between an owner and its consultant, was also updated in 2020.

The CCDC standard form contracts are developed through a consultation process with representation from various sectors in the Canadian construction industry. The Canadian Construction Association (CCA) publishes standard form subcontracts, which are also widely used and which are updated intermittently (for example, the CCA released an updated standard form stipulated price subcontract in 2021).

In addition, the federal government of Canada has its own standard forms, as do the provinces (and in some cases specific ministries), municipalities, and other public sector entities. In particular, infrastructure projects are built using standard forms developed over an extended period of time by entities such as Infrastructure Ontario.

The most commonly used form to retain an architect is the Royal Architectural Institute Contract Form, RAIC 6. When an engineer is the prime consultant for a particular project, the contracting forms provided by the Association of Consulting Engineers of Canada are frequently used – most notably, form ACEC 2.

The International Federation of Consulting Engineers’ (FIDIC) suite of contracts, which are the pre-eminent standard forms in the international construction market, are not frequently used domestically in Canada. Also, the New Engineering Contract (NEC) series of contracts is not typically used for domestic construction contracts in Canada.

Broadly speaking, the two main categories of employers (or owners) in Canada are the public and private sectors. Public sector employers invest in infrastructure projects, such as the federal government’s investment in international bridges and airports, government infrastructure, and defence projects, while provinces and municipalities invest in projects such as highways, linear transit, schools, and hospitals. The private sector invests in industrial, commercial or institutional (ICI) projects. Residential development is also a major source of private-sector employer investment across Canada.

Public Infrastructure Projects

For many large public infrastructure projects, a public-private partnership (P3) model is used. While these may take many different forms, generally a government authority, as owner, contracts with a special-purpose entity formed for the project by several sophisticated domestic and/or international contractors. The special-purpose entity (commonly known as a “Project Co”) then contracts with a design-builder, which in turn subcontracts with trade contractors and suppliers, and may also be responsible for the long-term maintenance and operation of the finished project. Each P3 project includes a financing component, whereby the Project Co provides all or part of the financing for the design and construction.

Currently, alliancing and integrated project delivery models of contracts are garnering increased attention in Canada. Various public entities, in particular, are implementing them on a limited basis or are exploring their use.

Laws Governing Labour and Employees

Relationships between the employer, typically the owner, and the contractor and subcontractor are governed by common law (and in Quebec, the Civil Code of Quebec). Labour laws are a provincial responsibility, although no Canadian province or territory has labour laws specific to construction projects. Laws also exist in respect of employment relationships and union labour.

Most of the provincial and territorial employment legislation establishes minimum mandatory standards and covers issues including termination, work site conditions (including health and safety), wages, and in the case of unionised environments, bargaining and other labour-related issues. Some elements of this legislation exempt construction workers from certain provisions in order to allow the construction industry to self-regulate in a way that best suits the industry. On a construction site, in addition to being an employer (of its own employees) under health and safety laws, either the contractor or the owner may be the “constructor” with specific health and safety obligations imposed under the relevant legislation.

There is a wide range of contractors in Canada, from smaller sole proprietors who work principally in the residential sector on new builds and renovations, to medium-sized regional contractors, to well-known national corporate general contractors, to large joint ventures created for individual projects. Over the past two decades, given the extent of infrastructure growth in Canada, various international contractors have entered the Canadian market in different provinces and territories.

Joint Ventures

Joint ventures are frequently formed to complete large infrastructure projects under P3 contractual arrangements. In Canada, a joint venture is defined as any two or more persons (typically corporations) who join together in a common business venture under one contract, sharing the expectation of profit and the risk of loss. Joint ventures are not defined by legislation, and therefore are not considered a separate legal entity; each party remains independent, to an extent, within the joint venture. This is most significant from a taxation perspective, as well as in regard to risk sharing, as the individual legal persons who make up a joint venture can be found jointly and severally liable for any contractual breaches or for any common law liability that the joint venture incurs.

Construction Management Arrangements

Construction Management Agreements (“CM Agreements”) are also in common use. Under a CM Agreement, the contractor is paid to manage the project and is reimbursed for its expenses, either by a fixed fee or a percentage of the construction costs. The construction manager may share none of the project risk or may accept a degree of risk in regard to budget and schedule.

In Canada, there are a wide variety of specialised, well-established subcontractors ranging in size from sole proprietors to international entities with highly specialised expertise. Contractors generally manage the relationship with their subcontractors through the use of their own standardised subcontracts, which are most commonly modified versions of industry-standard forms such as the CCDC or CCA suites (ie, those mentioned in 1.2 Standard Contracts). Pay-when-paid provisions are a typical feature of such forms.

Bonds

A potentially important aspect of the relationship between the subcontractor and the contractor in respect of a particular project is the provision of a labour and material payment bond by the contractor. In some instances, subcontractors may also be required to obtain their own performance and labour and material payment bonds as security for the performance of the subcontractor’s work and the payment of sub-subcontractors.

Holdback

As noted in 1.1 Governing Law, in the common law provinces there is statutory lien legislation, which requires owners to retain a percentage of the contract price as “holdback.” Broadly speaking, the holdback is for the benefit of the subcontractors and suppliers that supply services and materials to the improvement. In certain provinces, the same legislation establishes statutory trusts in favour of the suppliers of services and materials. In addition, some provinces have recently adopted mandatory prompt payment and adjudication into their lien legislation, with other provinces in the midst of implementing such legislation.

Public infrastructure projects are either funded directly by federal, provincial or municipal governments, individually or jointly, or as noted in 2.1 The Employer, are public-private partnerships with a private sector financing component. Private sector construction projects are financed by way of self-funded investment, including share and/or subordinated debt offerings, or through various lending structures such as commercial bank loans and capital market bonds.

Loans

Loans can be secured through a variety of methods, typically in combination, such as mortgages or debentures registered against the property to be improved (provided it is owned by the developer), purchaser deposits (supported by insurance and surety products), letters of credit, bank guarantees and parent-company guarantees. Occasionally, lenders may also request assignments of planning approvals, permits, licences, or other third-party agreements. In certain circumstances, provincial lien legislation may partially subordinate mortgage security to the lien rights of those who supply services and materials to the improvement financed by advances under the mortgage in question, although such subordination is typically limited to the amount of the holdback.

Bonds

Additionally, lenders may seek indirect security through performance or labour and material payment bonds provided by the contractor. Under Ontario‘s Construction Act, the provision of surety bonds is a mandatory requirement in relation to public contracts (any contract between an owner and a contractor with respect to an improvement, if the owner is the Crown, a municipality or a broader public sector organisation) where the contract exceeds a specified amount. There, the contractor must provide the owner with a performance bond of at least 50% of the contract price, and a labour and material payment bond of at least 50% of the contract price, with certain limits for larger projects.

Typically, the owner (often working with some combination of a designer, engineer and/or architect) develops the tender package to include the design and specifications for the project, including the engineering and architectural design and specifications.

In the traditional design-bid-build model, a detailed design will be prepared prior to tender. On larger projects, the design-build model may be used where the scope of work may be described in performance-based terms, as opposed to detailed specifications, although some large projects include a 30% design (ie, one that is advanced to a reasonable degree in respect of the major design elements of the project) as part of the owner’s request for proposals.

Certain aspects of the scope of the work represented in the tender documents may be negotiated by the parties if permitted by the tendering process.

The following methods are generally used by parties during the project to negotiate variations, with the specifics of the process being set out in the contract.

Change Orders

Change orders are issued by the owner or consultant, which direct the contractor to perform the variation and document an agreement between the owner and contractor as to the change to be enacted and the corresponding effect(s) on the price and/or schedule.

Change Directives

Change directives are issued by the owner or the consultant directing the contractor to complete the change contained in the documents without a prior agreement between the parties as to its effect on the price or schedule. The associated price and schedule changes are then determined by the process outlined in the contract, typically either by negotiation between the parties, or by way of the contractual dispute resolution process if agreement cannot be reached. Change directives can also be issued by the owner or consultant to effect a deletion of part(s) of the scope of the work. Having said this, change directives are not typically used to enact large-scale changes, but rather smaller variations that require a quickly enacted direction to keep construction moving forward. Large-scale changes may instead be implemented via a formal amendment to the contract.

Requests for Information

Requests for information are issued by the contractor to request further information from the owner or the owner’s consultant regarding an ambiguity or inconsistency within the shop drawings or other contract documents, and may be the precursor to a change order or change directive.

Design-Bid-Build Model

Under the classic design-bid-build project delivery method, the owner first enters into a contract with the designer to develop the design for the project. Once the design is complete, the project is then put out to tender and the successful bidder, typically the general contractor, enters into a contract with the owner. As the designer is not a party to the construction contract between the owner and the contractor, it is the owner that bears the design risk. Of course, the designer often remains involved in the project, as the owner’s consultant, to ensure that the work is performed in accordance with the contract documents and to perform various field services. However, the general contractor and the various subcontractors remain responsible for the means, methods and techniques chosen to build the project and must deliver the project in accordance with the contractual plans and specifications.

Design-Build Model

In contrast, under the design-build model, the owner contracts with a single entity to both design and construct the project, and the design-builder will enter into a subcontract with the designer. The design-builder then bears sole legal responsibility for both design and construction.

As described in 3.3 Design, construction takes place within the context of differing delivery systems. However, unless the contract stipulates a method of construction, and subject to the schedule obligation(s) undertaken by the contractor in the contract, the contractor has complete control over the means, methods and sequence(s) of construction.

The owner’s responsibilities during construction include:

• providing access to the site;
• providing the necessary supplementary information in response to reasonable requests for information;
• making payments pursuant to properly issued payment certificates; and
• considering potential changes that may be necessary to permit the successful performance of the work, such as where, for example, the design is incomplete or flawed in some respect.

Permitting is also a significant consideration, and the contract will allocate to either the owner or the contractor, or allocate between them, the responsibility for obtaining the necessary permits from government authorities.

The owner is generally responsible for making access to the site available to the contractor, while the responsibility for unanticipated site conditions that may be encountered, such as pollution, underground obstacles, geotechnical conditions, and archaeological finds, will either be allocated by the contract to the contractor, remain with the owner, or be allocated between them. This allocation varies depending on the project, with the parties attempting to allocate risk to the party best able to bear that risk. In addition, statutory liability may be imposed (eg, in respect of pollution risk) and parties are not able to contract out of that risk.

At the onset of a project, permissions in regard to land use must be secured. As detailed below, construction projects are generally required to comply with provincial building code legislation, and with municipal by-laws respecting building permits. Provincial environmental permits are required for certain classes of projects, and if fish habitats are involved, federal permits will also be required. Projects that fall within federal jurisdiction require federal licences or permits.

Examples of the Procedure

British Columbia

For example, in British Columbia, project sponsors must obtain a development permit for construction of the precise project they are seeking to build. After obtaining a development permit, project plans and specifications prepared in accordance with all applicable codes and standards must be submitted to the municipal planning department for approval and issuance of a building permit. Once the project is complete, the project sponsors must obtain an occupancy permit following the delivery of final letters of assurance.

Ontario

In Ontario, the Planning Act, RSO 1990, provides the statutory framework for the regulation of land-use development. A preliminary project review with the municipal authority must first be requested to determine that the proposed project complies with the municipality’s zoning by-laws, following which, a zoning certificate will be issued. This step is followed by obtaining site plan approval from the municipal authority, which considers the jurisdiction’s official plan and zoning by-laws. Once site plan approval is completed, a building permit application is submitted. Finally, once construction and inspections are completed, an occupancy permit will be issued if all applicable requirements under the Building Code have been met.

Contractual warranty provisions vary by contract, but maintenance obligations can be included in respect of a defined warranty period. Such maintenance obligations may include repair of defects or deficiencies for a stipulated period.

In addition, on some larger projects there may be a maintenance obligation in respect of the continued operation of the project for its intended use. For instance, in a P3 infrastructure project with an operation and maintenance term, the contractor will become the operator and maintainer of the infrastructure for a prescribed period while the applicable government authority retains the underlying ownership rights.

The obligation to rehabilitate the infrastructure asset at the end of the operation and maintenance period (ie, prior to the asset being handed back to the owner) is a common feature of P3 projects.

The general obligation of a contractor in delivering the construction project is to complete the project in accordance with the relevant plans and specifications under the agreement (within the project schedule). Of course, the contract will frequently call for testing and commissioning, and, generally speaking, the successful completion of testing and commissioning may form part of the precondition(s) to substantial performance. Detailed testing and commissioning plans may be required under the contract.

For example, and subject to any additional criteria established under the contract, a contract is substantially performed under Ontario’s Construction Act, when:

• the improvement to be made under that contract or a substantial part thereof is ready for use or is being used for the purposes intended; and
• the improvement to be made under that contract can be completed or, where there is a known defect, corrected, at a cost of not more than:
1. 3% of the first CAD1 million of the contract price;
2. 2% of the next CAD1 million of the contract price; and
3. 1% of the balance of the contract price.

Also, under Ontario’s Construction Act, a contract is deemed to be completed and services or materials are deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of:

• 1% of the contract price; or
• CAD5,000.

Typically, the contract will define what is required for the contractor to obtain substantial performance or substantial completion for the project as well as all the documentation, testing and commissioning, and/or other items required at the time of close-out for either owner occupancy or the turning over of the project for its intended use.

More recently, some standard form contracts (such as the CCDC-2) have introduced the concept of “Ready for Takeover” as a replacement for substantial performance, with the former terminology setting a higher standard for completion that includes requirements over and above substantial performance (eg, acquisition of occupancy permits, final cleaning and waste removal, etc).

Turnover documents will often require a close-out log from the contractor which lists the certificates for testing and commissioning, maintenance manuals, and as-built drawings, among others.

Quality assurance provisions may also apply to a project’s completion phase in order to ensure that the final product has met quality milestones throughout the project and has been deemed of good quality by the consultant or owner before turnover.

Financially, final holdback amounts will not be paid out upon substantial performance if there are deficiencies in the works that preclude the project meeting the specifications for use or occupancy. This encourages the contractor to complete the work in a way that meets the specifications.

Construction Warranties

Warranty periods for the correction of defects and deficiencies in the work are typically specified in a construction contract. A construction warranty provides a remedy to the owner for non-conformance with the contract.

Under the CCDC standard form contracts, there is a construction warranty period for the work for one year from the date of substantial performance of the work. The contractor is responsible for correcting, at its own expense, defects or deficiencies in the work which appear during the specified-year warranty period. Extended warranties may be defined in the contract documents for certain portions of the work. Also, some contracts require the basic warranty period to run for an extended period, such as two years or more.

Latent Defect Regime

Contracts may also include a latent defect regime for a longer period of time, where contractors will be held responsible for latent defects which were not discoverable at the time of contract completion.

The basic methods of establishing the contract price in Canada are unit price, fixed price, and cost plus.

Methods to Calculate the Contract Price

Unit price

Unit price contracts attribute specific prices to each individual work unit, which results in a total contract price that is variable, depending upon the number of units supplied – although there may also be a guaranteed maximum price. In order to calculate the total contract price, the parties simply multiply the units supplied by their respective price and add the totals of the individual items together.

As the quantities, nature and cost of each work unit are critical components of the unit price contract, one benefit of the unit price method is that it allows parties to renegotiate the cost of each work unit.

Fixed price

A fixed price (or lump sum) contract is a contract in which the parties agree to a pre-determined price for the defined scope of work.

Cost-plus

A cost-plus contract, on the other hand, is a contract that utilises an agreement to pay the contractor’s costs, plus a fee.

Milestone Payments

Milestone payments are often used on larger contracts. There may be a number of significant milestones which result in payments and are intended to incentivise prompt performance of the work.

Contractual Payment Mechanisms

Most commonly, payment is pursuant to monthly certification of progress draws (requests for payment), based on a percentage of completion of the works. The percentage that has been completed is measured in relation to a schedule of quantities agreed at the commencement of the contract and is typically certified by the “payment certifier” (the owner’s architect or engineer) or an “independent certifier.” Payments may also be certified on a milestone basis. Standard form contracts such as CCDC contracts, for example, provide for interest to apply in the event that a party fails to make payments as they become due. Many bespoke contracts provide for the same.

Statutory Payment Mechanisms

In addition to these contractual payment mechanisms, however, Canadian construction contracts may also be subject to a statutory payment mechanism, depending on the jurisdiction in which the project is situated. For example, the Province of Ontario has legislated a mandatory prompt payment mechanism within the Construction Act, which is intended to ensure that all parties on the construction pyramid are paid in a timely manner. At a high level, the prompt payment regime requires contractors to provide a “proper invoice” to the owner, which triggers the start of a period leading up to the payment deadline, subject to a right to dispute part or all of the amounts claimed in an invoice. The prompt payment mechanism also provides for mandatory interest on late payments.

A number of Canadian provinces have adopted or are in the process of adopting similar payment legislation to facilitate timely payments in the construction industry. For example, The Builders’ Lien (Prompt Payment) Amendment Act, 2019 and related regulations came into force on 1 March 2022 in the province of Saskatchewan and include a prompt payment and adjudication regime, while  Alberta’s Prompt Payment and Construction Lien Act came into force on 29 August 2022.

Importantly, the federal government has also introduced a prompt payment regime which applies to federal construction projects. Standard form contracts are in the process of adapting to these new prompt payment regimes.

Advance and Interim Payments

Advance payments are used on some construction projects – though security may be required in respect of such payments. Interim payments are common in the form of interim milestone payments (see 4.1 Contract Price).

As noted in 4.2 Payment, the primary method and timing of payment for construction work is by way of regular progress claims during the course of the project. Generally, the construction contract provides that these amounts are due and owing 30 to 45 days after submission. The payment mechanism is typically triggered when the registered professional or consultant for the project certifies payment, if there is a payment certifier under the contract, and if there is not, when the owner certifies the payment.

In Ontario, the prompt payment mechanism described in 4.2 Payment requires that invoices be provided to the owner on a monthly basis, unless otherwise provided in the contract (which permits the use of milestone payments). Under the legislation, the owner must then pay the contractor within 28 calendar days of receiving the invoice, subject to the owner’s right of delivering a notice of non-payment.

The contractor is generally responsible for the schedule pursuant to the construction contract. Contractors are typically required to prepare a construction schedule and provide it to the owner during the request for proposal (RFP) or call for tenders period, or within a defined period after contract execution. The proposed schedule is sometimes negotiated prior to contract formation, and then becomes the contractual schedule. Subsequently, the contractor will usually be required to provide monthly schedule updates. In the event that the project falls behind schedule, the contract may require the contractor to provide a recovery plan.

In the event of delay, the contractual outcome(s) depend(s) upon the nature of the delay and, in particular, whether the delay is caused by the contractor or the owner, or neither of them (ie, unanticipated circumstances).

Delays Caused by the Contractor

For example, if the contractor is responsible for a delay as a result of failing to obtain appropriate municipal approvals or co-ordinate subcontractors or materials, the owner is generally able to claim against the contractor for losses suffered as a result of the delay, including by levying liquidated damages (LDs), if the contract provides for schedule-related LDs. Owners may be entitled to set off such amounts from the contract price.

Delays Caused by the Owner or Its Consultant

On the other hand, an owner or its consultant may also be responsible for causing delay if they have increased the scope of the work, or if there are design errors, or if Requests for Information (RFIs) are not answered in a timely manner, for example. The delays associated with the contractor having encountered unanticipated conditions are particularly contentious and will engage specific provisions of the contract. Generally, construction contracts limit the contractor’s ability to claim against the owner for its direct costs associated with the delay and place the contractor under strict notice obligations in this regard.

Delays Due to Unexpected Circumstances

Finally, if the contractor is delayed due to unexpected circumstances, such as a flood, severe weather conditions, earthquake, or any other natural occurrences commonly referred to as “acts of God”, construction contracts will typically include force majeure provisions (discussed in 5.5 Force Majeure) that will allow the contractor to obtain schedule relief and be excused from performing its contractual obligations for the duration of the force majeure event.

As explained in 5.2 Delays, an owner may in theory set off or deduct damages from the contract price for the damages it suffers as a result of delays caused by the contractor.

In Canada, construction contracts generally include notice provisions which provide formal requirements in relation to the timing and manner in which one party may make and deliver a claim for delay against the other.

These provisions typically provide that if the delay claim is not advanced within the prescribed time and manner (ie, notice typically must be in writing), the entirety of the claim will be barred. Canadian courts have generally upheld these notice provisions as valid and binding unless the conduct of the parties demonstrates that they are not abiding by the notice provisions. In such cases, a party may be estopped from relying on the notice provision to bar a delay claim, or may be found to have waived such right.

However, it is worth noting that Canadian courts have not been uniform in their treatment of notice provisions – whereas some courts (such as the Ontario courts) have interpreted such provisions according to a theory of strict compliance, others (such as the British Columbia courts) have occasionally adopted a somewhat more relaxed approach in allowing for constructive notice to satisfy contractual notice requirement(s). Under either approach, the specific wording of the notice provision in question will, unsurprisingly, largely dictate a court’s analysis of whether timely and sufficient notice was provided.

Although there are various methods by which a contractor may request an extension of time, a common method used is by way of change order request. As noted in 3.2 Variations, a change order is a written document that details a change in the work and the agreed terms of that change. In addition to detailing an increase to the contract price, change orders may also provide contractors with an extension of time.

In larger, more complex construction contracts for P3 projects, there are robust mechanisms through which a contractor or Project Co may claim additional contract time as a result of supervening events, including by claiming a delay event, for example.

Force majeure provisions within construction contracts operate to excuse a party’s performance to the extent that its failure to perform is caused by a particular extreme circumstance outside the party’s control, but which has not satisfied the common law doctrine of frustration. The construction contract will define what constitutes force majeure.

A party which intends to rely on a force majeure provision to relieve it from liability must provide sufficient evidence to establish that the force majeure event is the actual cause of the party’s inability to perform its contractual obligations.

Parties to a construction contract may negotiate the specific circumstances which would constitute a force majeure event. In the context of the COVID-19 pandemic, for example, relevant provisions might include “disease”, “illness”, “pandemic”, “government action”, or “public health emergency”, to name a few.

Ultimately, each force majeure provision should be considered and interpreted separately and in the light of the contract as a whole.

Although special considerations apply in the Province of Quebec, the treatment of unforeseen site conditions is generally governed by the construction contract.

Claims in respect of unforeseen site conditions are often brought by the contractor and may relate to soil and water-related issues, including, for example, environmental contamination. In brownfield projects, unforeseen conditions can include issues encountered behind walls and ceilings, and beneath floors. Generally, these disputes involve claims by the contractor that the site conditions were not adequately disclosed to the contractor prior to the execution of the contract. Such claims may also include more serious assertions involving misrepresentations in relation to the site conditions.

Importantly, construction contracts commonly require a contractor to investigate the site. If a contractor is provided an opportunity to investigate the site but fails to conduct its due diligence in accordance with good industry practice, the contractor may be barred from advancing a claim based on unforeseen site conditions.

If successful, an unforeseen site conditions claim by a contractor may lead to significant additional costs being borne by the owner, as well as significant schedule extension(s). Therefore, the language of the construction contract is vitally important to ensure that the parties fully appreciate the allocation of risk. In that regard, it is not uncommon for owners to warrant the accuracy of geotechnical information provided to bidders, but not the completeness.

Disruption claims are not infrequently advanced on construction projects in Canada, although it is not a freestanding ground for legal relief. Rather, parties must identify a legal basis for relief under the contract (eg, a breach of contract, including prevention), and then rely upon disruption as a means of quantifying their entitlement to compensation and/or an extension of time.

In that regard, parties advancing disruption claims will invariably rely on expert evidence from delay and/or quantum experts, which evidence is typically the subject of significant disagreement in disputes, even where legal entitlement is undisputed. In that regard, disruption can be measured according to a number of different methods commonly used across the world, including the measured mile approach, earned value analysis, and total cost (or modified total cost). In each instance, disruption analysis considers contemporaneous project records to the extent they are available, as a result of which parties are well advised to keep detailed project records.

Limitations of liability can be included in Canadian construction contracts. However, where provinces or territories have legislation which provides for liens and/or statutory trusts, the applicable legislation voids any attempts to exclude the legislative scheme. Again, Quebec represents a special case in this regard. Outside of such considerations, in Canada, parties are free to contract among themselves as they see fit regarding exclusion clauses, subject to certain common law duties of good faith (discussed in 1.1 Governing Law), out of which parties cannot contract.

Broadly speaking, the contractual consequences of wilful misconduct are not regulated by statute or regulation. Rather, damages stemming from the wilful misconduct or gross negligence of a party are frequently excluded from limitation of liability provisions. Having said this, from both common law and civil law perspectives, it is unlikely that a party could successfully rely on a limitation of liability provision to protect itself from the consequences of an intentional breach, while gross negligence introduces the issue of recklessness.

Parties can agree to contractually limit their liability. Exclusion of liability clauses are common in construction insurance and construction contracts in Canada and are generally enforceable as long as the circumstances, viewed objectively, are consistent with the parties’ mutual intentions at the time of contracting, are not unconscionable, and do not go against public policy. In this regard, the bar for refusing to enforce a contract or clause on the basis of public policy is very high, and rarely invoked by the courts. This applies to all construction parties as per the Supreme Court of Canada in Tercon Contractors Ltd v British Columbia (Transportation and Highways), (2010) 1 SCR 69, 2010 SCC 4.

The parties frequently place a cap on liability in professional services agreements between owners (and contractors) and consultants. Such caps are commonly related to the fee for the service provided by the consultant or the amount of professional liability insurance required by the contract, so that the consultant’s liability is limited to the amount of coverage they have under their professional liability insurance.

Indemnities are intended to hold one party liable for any loss or damage incurred by the other party in connection with the services performed. Generally, the parties to a construction contract are free to indemnify one another from claims by third parties, typically in regard to personal injury, property damage, and defects in title, as well as from the consequences of breaches of contract (subject to any applicable limitation of liability provision and taking into account insurance considerations).

Bonds protect against financial loss due to a party failing to meet project specifications. Bonds serve as a guarantee that should the contractor fail to complete the project (a performance bond) or fail to pay its subcontractors (a labour and material bond), the owner’s project will be completed and the subcontractors will be paid.

Another relevant type of surety bond is the bid bond, which provides a way to obtain financial security during the contract bidding process. Bid bonds secure the interests of the owner by establishing a promise from the surety to the owner that if the successful bidder fails to enter into a contract with the owner, the surety will compensate the owner, typically to the extent of the difference in price between the defaulting lowest bidder and the second lowest bidder.

Under a parent company guarantee, the parent company will assume the completion of the project if its subsidiary is unable to bring the project to completion. It is important to highlight that this method of guarantee may provide minimal benefit, especially where the insolvency of a contractor includes the insolvency of the parent company.

Insurance is critical to the successful risk management of a construction project. Generally, the most important insurance policies found in construction projects are builder’s risk policies, commercial general liability/wrap-up liability policies, and professional liability policies.

Various other insurance policies are used in construction projects, such as contractor’s equipment insurance, boiler and machinery insurance, and pollution insurance. Furthermore, any party employing workers in Canada must participate in workers’ compensation plans, governed by the provincial governments.

Canadian construction contracts typically provide that the insolvency of the contractor is grounds for termination. However, if the contractor takes the protection of federal insolvency legislation, the owner may be subjected to a stay of proceedings that prevents termination. Conversely, the Supreme Court of Canada’s recent decision in Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41 clarified that in circumstances of an insolvency, a receiver may itself be prevented from pursuing litigation against the insolvent contractor’s debtors if the contractor and debtor had previously agreed to arbitrate any disputes. Whether a receiver can pursue litigation or must stay the litigation in favour of arbitration will depend on the particular facts of a given case.

Products That Protect against Insolvency

The various products that are intended to protect an owner against the risk of insolvency include surety bonds, default insurance, letters of credit, and parent company guarantees. Performance bonds also serve as an important guarantee that should the contractor fail to complete the project, or fail to pay its subcontractors, the owner will be compensated and the subcontractors will be paid. Default insurance is designed to protect a general contractor from the financial loss of default by its subcontractors and suppliers by transferring the risk of subcontractor default from the general contractor to the insurer. Letters of credit are often used in construction projects to secure the performance of a contractor’s obligations to the owner.

As mentioned in 7.2 Guarantees, a parent company guarantee is another form of performance security in which a parent or holding company guarantees the performance of its subsidiary. However, this method of guarantee provides minimal benefit where the insolvency of a contractor arises out of the insolvency of the parent company.

Supreme Court Decision

By contrast, the Supreme Court of Canada has recently clarified in Chandos Construction Ltd v Deloitte Restructuring Inc., 2020 SCC 25 that it is not open to the parties to a construction contract to agree that upon insolvency, the contractor will forfeit any portion of the contract price to the owner. Such an arrangement violates bankruptcy and insolvency common law and legislation.

Traditionally, apart from bonus/penalty provisions and certain guarantee price contract mechanisms, risk sharing in construction contracts has been uncommon. Risks are generally divided between the owner and the contractor during the contract negotiation phase. However, relatively recently, a new form of risk sharing called alliance contracting has been introduced in Canada. Alliance contracting is a contract structure between an owner and a number of project participants including lenders, contractors and designers, to collectively undertake a construction project in which all parties work to achieve the same project-wide goals.

Alliance contracting allows for risk sharing, so that each party individually holds less risk for the project, often with additional contractual terms intended to lessen the likelihood of disputes. Alliance contracting is similar to integrated project delivery or progressive design-build; however, alliance contracts provide for a greater amount of risk sharing between the parties.

In large projects, personnel who are critical to the performance of the project are often included in bids and identified as key individuals. Once the contract is executed, there are often provisions which require key individuals to be named and approved by the owner or consultant, as well as provisions which explain the process for removing and/or replacing key individuals. In most construction contracts for smaller projects, specific personnel are not named, nor is there a process to include or vary key individuals, although it is relatively common even on smaller projects for bidders to include CVs of relevant personnel as part of their bid.

Construction contracts with subcontractors can be as formal and detailed as those between owner and contractor or can be in a more simplified form. For larger projects, standardised subcontracts such as those published by the CCA may be used, or as noted in 2.3 The Subcontractors, major contractors have bespoke subcontract forms.

Subcontracts can incorporate the obligations of the contract between the owner and contractor if the language is clear and the subcontractor is given a copy of the prime contract. Without such clarity or provision of the prime contract, these obligations are unlikely to be fully passed down to the subcontractor in the event of a dispute.

In provinces with lien legislation, there are mandatory provisions which require the contractor to retain specified holdback amounts for the benefit of the sub-subcontractor or supplier.

Concerns regarding intellectual property in Canadian construction contracts involve the design drawings and documents, which are most often an issue in respect of larger projects. Intellectual property provisions in such contracts will set out detailed requirements regarding the use of intellectual property, including which party retains rights to the intellectual property in question.

For Contractors and Subcontractors

As noted in 1.1 Governing Law, the common law provinces and territories have lien legislation in place which protects the contractor and subcontractor in respect of unpaid amounts, at least to the extent of the statutory holdback. In addition, in the majority of the common law provinces statutory trust rights exist that permit the contractor and/or the subcontractors to pursue the owner (or contractor) to recover funds that were earmarked for the project but have been diverted.

Of course, the most common remedy is compensation for breach of contract.

For Owners/Employers

From the owner’s perspective, a common remedy in the event of certain types of breaches of contract is liquidated damages. These operate as per the contractual terms, and can accrue daily, include interest, and be used as a deterrent (such as attaching to a failure to provide timely documentation). The owner is often able to set off, or deduct, from the progress draws for such damages, minus any statutory holdback.

However, liquidated damages clauses must represent a genuine pre-estimate of the owner’s damages in case of the contractor’s default, or else the clause may be found to be a penalty clause and therefore unenforceable.

Again, the most common remedy is compensation for breach of contract.

Remedies may be limited contractually in so far as freedom of contract permits. Remedy provisions that are unconscionable or which could be found to go against public policy may be voided by the court should a dispute arise. Common law rights of termination may also be limited by express default/termination and dispute resolution provisions. As noted in 1.1 Governing Law, the remedies provided by lien legislation cannot be limited by the contract.

These clauses provide that to the extent rights and remedies are provided in the contract, such rights and remedies are the exclusive remedy available for the event described. Generally speaking, they are enforceable through the courts.

Limitation of liability clauses are commonly included in construction contracts and typically exclude consequential damages from liability, with consequential damages including loss of profit, loss of use, and other “indirect” damages.

The enforceability of such clauses is determined through a plain and literal reading of the language in the provision. In Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4, the Supreme Court of Canada released a three-part test outlining the applicability of exclusion of liability clauses which included:

• looking to the language of the clause and whether the clause applies to the specific circumstances at hand;
• assessing whether the clause is unconscionable; and
• considering whether there is an overriding public policy reason to justify not applying the provision.

As noted above, courts very rarely invoke public policy as a justification for finding a contract or clause unenforceable. Similarly, it is unlikely in the construction context for a party to succeed in arguing that a clause is unconscionable, particularly where the contract involves two sophisticated parties. 

Some contracts provide for the owner’s right to suspend the project (which is, of course, to be distinguished from an owner’s contractual right of termination for convenience). Certain suspension rights are also provided for by way of legislation. For example, Ontario’s Construction Act, RSO 1990, c. C. 30 provides contractors and subcontractors with suspension rights in relation to non-payment.

Under the Construction Act, RSO 1990, c. C. 30, if an amount payable to a contractor or subcontractor under an adjudication determination is not paid by the party when it is due, the contractor or subcontractor has the right to suspend further work under the contract or subcontract. The contractor or subcontractor may suspend work until the party pays the following:

• the amount required to be paid under the determination;
• any interest accrued on that amount; and
• any reasonable costs incurred by the contractor or subcontractor as a result of the suspension of work.

Furthermore, a contractor or subcontractor who suspends work for the reasons above is entitled to be paid for any reasonable costs incurred by them due to the resumption of work following the payment.

Broadly speaking, construction contracts typically provide for termination for default, which allows either the owner or contractor to terminate the contract if the other party engages in any act(s) which the contract identifies as an event of default. Examples of events of default found in standard form contracts include, without limitation, insolvency or bankruptcy, a failure to prosecute the work, abandonment of the work, and persistent failure to pay amounts due and owing. If the contract does not specifically identify events of default, breach of certain terms may still amount to a default if the term is identified as a condition rather than a warranty.

In the event of a termination of the contractor for default, the contractor will typically be entitled to its costs of the work it has performed up to the date of the termination, and potentially profit thereon, although typically the contract will stipulate that the owner’s additional costs of completion are to be set-off against such an entitlement.

By contrast, some construction contracts may include a termination for convenience provision, which typically provides the owner (but the not contractor) with the ability to terminate the contract for any reason, at its discretion. That being said, recent case law from the Supreme Court of Canada (see Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd, 2021 SCC 7) has confirmed that a contractual discretion must be exercised reasonably, meaning it must be exercised consistent with the purpose(s) for which it was conferred.

Similar to a termination for default, a termination for convenience will typically entitle the contractor to its costs performed up to the date of the termination, as well as profit thereon, but will not entitle the contractor to anticipated profits for work not performed. In any event, however, compensation will depend on the exact terms of the termination for convenience provision. There is scant case law on termination for convenience in Canada, as a result of which there are a number of unsettled points, such as whether the contractor would be entitled to its demobilisation costs, and whether a bad faith termination for convenience entitles the contractor to all of its anticipated profits.

In Canada there are no specialist courts to hear construction disputes, though in Ontario there are some associate justices (formerly known as masters) who specialise in construction lien matters (though currently only in the city of Toronto). In practice, however, most construction disputes proceed to mediation or arbitration, which is addressed in 10.2 Alternative Dispute Resolution.

In addition to the courts, some provinces have introduced mandatory statutory adjudication regimes aimed at facilitating efficient dispute resolution that is interim binding. In Ontario for example, adjudication under the Construction Act provides for the swift resolution of disputes pertaining to the valuation of services or materials provided under the contract, payment under the contract and the non-payment of holdback, among other things.

As courts tend not to be equipped with the technical expertise to hear complex disputes in the construction and infrastructure industries, mediation and arbitration have largely occupied this field.

Mediation

Mediation has been widely used to resolve construction disputes since the early 1990s. Mediation has been highly successful and continues to have broad application today. In fact, mediation is often mandated in complex construction contracts as part of the contractual dispute resolution process.

Arbitration

Arbitration is also frequently used to resolve construction disputes in Canada. In fact, in Canada it is not uncommon for government agencies to participate in private arbitration. It is worth noting that all arbitration proceedings, including those involving government agencies, are subject to provincial arbitration legislation. That being said, there is federal arbitration legislation which applies in respect of contracts in which federal Crown corporations or agencies are involved.

Dispute Resolution Boards

Though not nearly as widely used as mediation or arbitration, contracting parties are also increasingly using dispute resolution boards to efficiently resolve disputes on an advisory, mandatory, and interim basis. A dispute resolution board is a panel which is appointed at the outset of the project, and which is generally comprised of independent technical experts or highly experienced individuals who regularly attend the site and address disputes as they arise.

Dispute Resolution Schemes

In addition, certain construction projects also rely upon bespoke dispute resolution schemes that provide for different forums to resolve different types of disputes. For example, these schemes could include any or all of mediation, arbitration, and dispute adjudication boards, as well as referral of technical issues to the contract’s independent certifier. In addition, these dispute resolution schemes typically require the parties to engage in various attempts at party-level discussions amongst differing levels of management in an effort to resolve disputes, typically on a without prejudice basis.