Understanding Construction Contracts In Canada And The Available Remedies For Breach Of Contract

The Essential Elements of a Legally Binding Contract

The project involves the construction of a health care facility in Ontario. The project owner is a notfor-profit entity named Hospice Group, which commenced its RFP process for the facility in June 2018. Hospice Group’s contract with the general contractor Portal Inc. is executed in November 2019, and all subcontracts and sub-subcontracts are dated thereafter.

Site Ltd. is a subcontractor to Portal Inc. and is responsible for installing services for the facility at the site. Dig Co., an excavating company, has entered into a sub-subcontract with Site Ltd. whereby it agreed to rent backhoes and other machinery to Site Ltd. and to maintain this equipment on site.

Dig Co. has retained you and claims that it is owed $500,000. Dig Co. submitted an invoice to Site Ltd. over 35 days ago and did not receive any complaint or notices of non-payment from anyone. However it has heard on the site that Portal Inc. is not pleased with Site Ltd.’s performance. It has also heard that Site Ltd.’s principals are using funds received from Portal Inc. to pay for services and materials on another project.

Dig Co. has a copy of the subcontract between Portal Inc. and Site Ltd. which contains a clause requiring written notices of claims to be submitted within 60 days of the party becoming aware of the claim and a mandatory arbitration provision. Dig Co.’s sub-subcontract contains a clause

which states that the terms and conditions of the subcontract are incorporated into the subsubcontract.

Dig Co.’s last date of work was 43 days ago. There has been no certificate of substantial performance published with respect to this project. Dig Co. is not certain if there is a labour and material payment bond in respect of this project.

1. Based on the above facts, what remedies or actions would you recommend that Dig Co. pursue and why?

2. What factors would you take into consideration and what further information would be needed from Dig Co., if any?

3. What limitation periods should Dig Co. be concerned about?

Otnorot has never taken on a project anywhere near this size or complexity. Otnorot needs to understand the risks involved in moving forward and how to deal with them. They seek your advice on the following questions:

1. Given the importance of the schedule to the financing of the project, what procurement and project delivery options are available? What are their advantages and disadvantages in this particular case?

2. How could Otnorot run its tender process to comply with bidding and tendering laws to ensure it receives the funding?

3. Does Otnorot need an architect and, if so, what role(s) should the architect have?

4. Can Otnorot rely on the budget the engineers prepared; if not, why not?

5. Does Otnorot need insurance and/or bonds, and if so, what type and why?

Construction contract obeys the rules of a general contract. A legally binding contract has to posses the essential elements including; offer, acceptance, legality, intention to create binding relations, consideration and capacity. Parties to the contract should perform their parts of the bargain to avoid claims and actions for breach of contract. In Canada the model of construction contracts commonly used is the Design-Bid-Build (DBB) (Levin, 2014, p. 18). In this model, the owner often engages an architect or an engineer to do the design of the project before a general contractor is engaged to undertake the performance of the construction of the project.

Dig Co. submitted an invoice to Site Ltd over 35 days ago and did not receive any complaint or notices of non-payment from anyone. Dig Co. has however heard on the site that Portal Inc. is not pleased with Site Ltd’s performance. There is also information that Site Ltd’s principals are diverting funds received from Portal Inc. to fund services and materials on a different project. Dig Co. is in possession of a copy of the subcontract between Portal Inc. and Site Ltd which has a clause requiring written notices of claims to be submitted within 60 days of the party becoming aware of the claim and a mandatory arbitration provision. There is a clause in Dig Co’s sub-contract stating that the terms and conditions of the subcontract are incorporated into the sub-contract (Callahan, 2012, p. 11). 

Dig Co. last worked 43 days ago; there has been no certificate of substantial performance published with respect to the project.

Remedies available to Dig Co

From the case scenario, it is evident that Site Ltd is in breach of contract between the Company and Dig co. Site Ltd is the guilty party and therefore, Dig Co has several remedies it can pursue to ensure performance of the contract by Site Ltd or in the alternative, seek payment and damages from Site Ltd for the services rendered. The available remedies are as discussed below:

1. Damages

This is an action in a court of law for an award by the court of monetary compensation for breach of contract (Banwo & Sagoo, 2015, p. 43). Damages for breach of contract are intended to achieve the following goals:

Restitution - here, a party is restored back to pre-contract situation by being awarded the money employed so far in the performance of the contract obligation. Restitution requires the innocent party to furnish the court with an account of all the benefit that the other party has obtained so far (Turner, 2016, p. 35). Restitution is based on two elements; the benefit that the party in breach has obtained and that the retention of such benefit would be unjust if not compensated.

The Design-Bid-Build Model

Reliance interest – where a party puts heavy reliance on the performance of a contract, the party has interest on recovering losses that directly arises from the contract (Adriaanse, 2016, p. 37). The guilty party pays monetary compensation meant to return the innocent party back to the pre-contract position. The costs incurred by the innocent party in the performance of the contract form the basis for compensation.

Expectancy Principle – this gives the innocent party the promise in the contract in form of damages. It is compensation and not punishment (Abdul-Malak & Khalife, 2017, p. 49).

In the case of Groves v John Wunder, the plaintiff had leased land to the defendant. In an action for breach of contract by the defendant, it was held that the plaintiff was entitled to the cost of completion of the work or remedying the defect.  

Damages at this juncture is payable for breach of contract by Site Ltd because though Dig Co. has submitted an invoice; they have not received any complaint based on the submitted invoice or a notice of non-payment. There is therefore loss of expectation for the consideration in the sub-contract that Dig Co entered into with Site Ltd. The damages would be payable together with the invoice submitted to compensate on the time taken to process such payment.

2. Specific Performance

Specific performance is available in circumstances where it is not possibly to compensate a party by payment of damages. Where damages are not sufficient, a party to a contract can sue for specific performance. Specific performance is to the effect that the other party is ordered to complete their part of the bargain. The innocent party must have done a substantial part of their bargain for specific performance to be open to them (Klee, 2015, p. 14). 

Courts are however reluctant to order for specific performance for speculative breaches of contract. The party seeking specific performance must prove that breach of contract has already been committed by the other party before ordering for specific performance. The likelihood of a party committing breach cannot be a ground for seeking specific performance.

Specific performance in this case scenario just relates to the payment of the invoice submitted by Dig Co. action for the price would be cheaper as opposed to the payment of damages as well as the consideration (invoice).

There have been notable amendments that have been introduced by the new Construction Act. The issues captured in the new Act captures areas such as prompt payments, mandatory construction dispute interim adjudication, lien rights, leasehold interests, trusts, surety bonds and holdbacks.

Invoicing and Payment

The considerations that should be taken would be the provisions of the contract between Portal Inc. and Site Ltd. The provisions of this contract should include the right of Site Ltd to sub-contract. The subcontract between Portal Inc. and Site Ltd. Has a clause that requires written notices of claims to be submitted within 60 days of the party becoming aware of the claim and a mandatory arbitration provision (Eggleston,2015, p. 28).  Therefore, there has to be a determination whether Site Ltd gave a written notice to Portal Inc. on the invoice submitted to it by Dig Co.

I would need a copy of the sub-contract between Site Ltd and Dig Co. to ascertain the provisions of the contract to identify those provisions that relate to the nature of dispute resolution mechanism and the time limits within which a party is supposed to claim payment after performance of the contract.

The fact that provisions of the subcontract between Portal Inc. and Site Ltd. and those of the sub-contract are dependent provides a nightmare on the action by Dig Co. there should be a consideration whether the sub-contract and its provisions could be severed so that it stands alone and not dependent on the provisions of the main contract between Portal Inc. and Site Ltd.

Prompt payment is facilitated through the issuance of a proper invoice. The employer should receive a proper invoice on a monthly basis unless the contract between the parties provides otherwise. A proper invoice is one which contains:

1. the names and address of the contractor, the invoice date and the period when the services were rendered
2. The information that identifies the authority and the contract for which the materials were delivered or supplied

• The description of the quantity of the services or goods that were supplied

1. The amount owing on account of the services or materials provided or supplied as well as the terms of payment
2. The identity, telephone contact, the title and address, postal and mailing address of the person who is to receive the payment
3. A proper invoice is also required to contain any other information that is prescribed by the terms of a contract and this normally varies from contract to contract.

• A proper invoice can however be revised by the contractor with the consent of all parties in circumstances where there had been an omission when drawing the invoice (Harrington et al, 2016, p. 36).

Dig Co. should therefore worry whether the invoice it submitted to Site Ltd was made in a proper form depending on the unique circumstances of the contract between the part

Provinces in Canada have limitation legislations which limit the duration within which liability for breach of contract. This would apply to construction contracts as well. There is the British Columbia Limitation Act which has limit the time for bringing a claim for liability to a period of two year from the time on which the claimant had the right to institute a claim (Bult et al, 2016, p. 370). 

Ontario’s Limitation Act provides for a 15 year period within which a claim should be brought. These limitation periods are capable of being varied by parties and commercial contract provisions. The laws on limitation of liability clauses have been reviewed recently by the Supreme Court of Canada. The Court required that the clauses be drafted in a manner that is express, unambiguous so that it is easier to ascertain the period within which a claim can be brought successfully without worrying on the time limits.

Remedies for Breach of Contract

In this scenario, Dig Co. should be concerned with the time and limitation periods within which to submit a claim for payment after successful performance of the contract. The contract between Portal Inc. and Site Ltd requires written notices of claims to be submitted within 60 days of the party becoming aware of the claim and a mandatory arbitration provision. The invoice submitted by Dig Co. has lapsed for only 35 days. It can therefore be said that the 60 day period provided by the main contract has not been exhausted and as a result, Site Ltd could argue that they are still within the time limit provided for in the main contract document.

The timelines for payment is 28 days for a proper invoice submitted by the contractor (Gad et al, 2016, p 61). The employer however could refuse to pay where a notice of non-payment has been issued within a period of 14 days of receipt of the proper invoice. The notice of non-payment should contain the reason why payment has not been effected. The notice of non-payment should:

6. State the amount that is not being paid to the subcontractor as stipulated under subsection 6.4(4)
7. Specifically state the amount that is not being paid

• Undertake to refer the issue of non-payment to adjudication within 14 days of giving the notice as required under subsection 6.3(2

Procurement and project delivery options

Canada has a unique tendering and tendering processes that are contract-based whether in the public or private sector. This is applicable at every stage of a construction contract depending on the nature and uniqueness of every contract. There are however alternative financing and procurement arrangements (Ter Haar et al, 2016, p. 15) . For instance, there is the use of public-private partnership which is referred to as P3 and Alternative Financing and Procurement (AFP).

There is the new Construction Act which provides for and recognizes the emergence of infrastructural projects and clarifies the fact that there should be no confusion with the P3 model of delivery which has since been imposing the special purpose entity known as Project Co between the employer and the contractor or sub-contractor (Thomas & Wright, 2016, p. 17).

The Construction Act provides that the special purpose entity would undertake projects on behalf of the public as is considered as the owner. Certain AFP projects often involve separate sites under a single agreement mainly because of economic reasons that would encourage substantial performance of contracts. The type of procurement chosen notwithstanding, all public bodies have a duty to ensure that procurement is drafted and conducted consistently with the terms of all the applicable purchasing laws, trade treaty obligations and any policy directives

The New Construction Act

Public-private partnership is commonly applied in the development of public projects where the private sector sets in to aid the government in providing services to the people. This is not or may not be suitable to this type of contract since the owner is not a government institution which would enter into an agreement with the private sector.  Alternative Financing Procurement (AFP) is the most viable method of funding that is applicable to this type of contract.

AFP would attract financial institutions into providing loans that would be used in performance of the contract through bonds. An advantage of a bond being given be a financing institution is that there is guarantee that the cost of the contract will be paid even in circumstances where the owner declines to release payments to satisfy a proper invoice submitted to it for settlement. The disadvantage of AFP is that the bond would only be payable to the tune of the amount stated therein and will not be varied to cover additional costs that had not been anticipated by the contractor at the time of entering into the contract (Burr, 2017, p. 30).

Compliance with tendering laws for funding

Ontorot should use the procurement process applicable to PPP so that it qualifies for funding of the project. The procurement process applicable to a PPP is as discussed below:

Creation of output specifications and other preliminary designs for the project to be used throughout the stages of the procurement processes. Ontorot will then request for qualification (RFQ) for prospective bidders to submit their bids.

The bidders should when submitting their bids demonstrate their qualifications and expertise in the performance of the project and works described in the project specifications and show that it is in a position of obtaining financial assistance necessary for the successful performance of the contract works (Burr, 2016, p. 9). 

All the prospective bidders should submit information on its teams such as the design team, maintenance and construction teams and the ability to obtain finances necessary for a successful completion of the project.

Out of a number of bidders who respond to the RFQ, Ontorot would request for proposals (RFP) on account of those bidders who satisfy the requirements as outlined in the RFQ. The proposal (RFP) is to provide more and detailed information to the bidders on the project as well as stating all the rules and regulations applicable to the remainder of the competitive bidding process on the project such as the required submission and the process that will be followed to evaluate the submitted bids.

Ontorot should then proceed and appoint a fairness monitor whose duty is oversight on the completion of the tendering process and ensure that it is competitive. The role of a fairness monitor should be taken up by a professional who is trained and experienced as an accountant or an engineer.

During RFP, each bidder is required to do the following;

1. Demonstrate the ability to procure financial approval for the particular project
2. Prepare all the construction designs, construction and procurement schedule and also maintenance plans.

• Submit and develop all additional information that may be required from time to time in the RFP.

1. Participate in all meetings organized for bidders to gain more information and insight on the project specifications and requirements as well as the best form of formulating a bid.
2. Submit any questions on the terms of the agreement between bidders and Ontorot
3. Finalize the major terms of the contracts existing between its members and teams.

At the last stage, the authority proceeds and selects a successful bid following the criteria outlined in the RFP and thereafter a closing date applicable to the financial and contractual transactions on the procurement process is set. The agreement is then finalized between the authority and the contractor. Team members also finalize their respective agreements.

After financing of the successful bid has been secured all the parties execute the agreements and the work on the project then begins.

Whether an architect is required

Since this project is complex and Ontorot has never taken on a project such as this, it is necessary that an architect is engaged to design this project completely before a contractor is engaged to carry out the works, the model of Design-Bid-Build (DBB) and Public –Private Partnership requires the engagement of an archtict to carry out the general works on design of the project (Smith & Valiante, 2015, p. 12) . Thereafter, other contractors and sub-contractors and builders are engaged to carry out the remainder of the works until completion. Ontorot as well will need to engage an architect to carry out similar functions on design before other professionals are engaged.

Whether Ontorot can rely on the budget prepared by the engineers

The engineers have the expertise to determine the bill of quantities on construction projects. Ontorot can engage trustworthy engineers who have had a sparkling career to design the project and estimate the total cost that the construction would require. Since these engineers are expertise in the construction field, Ontorot has no reason to doubt on the budget provided by them. The values provided by the engineers would be compared with the ones quoted by bidders and as a result, the ones provided by the engineers would act as a guide in setting the budget for the project (Marsh, 2017, p. 43). 

Bonds and Insurance

Canada has no fault insurance system that compensates employees who suffer workplace injuries. Employers are required to fully participate in these programs. Ontorot require bonds to assist it in financing the project. The most important type of bond required is the surety bond that provides security for the investment by organizations that fund construction projects.

Labor and material payment bonds are also applicable. These are always issued by contractor’s surety who in addition provides security for subcontractors to perform and supply materials to the general contractors.

Ontorot would require contractors to carry material and labor bonds to be part and parcel of security for the project (Adriaanse, 2016, p. 16).  The bonds in addition to providing security for the subcontractors also enable the owners to make subcontractors to continue in the performance of the contract. Subcontractors should also provide their own performance bonds to act as security necessary for the successful performance of the subcontract.

Conclusion

In conclusion therefore, construction contracts have to comply with the formalities of a general contract to be valid. The general essential requirements for a valid contract including offer, acceptance, and legality, intention to create binding relations, consideration and capacity have to exist for a construction contract to be validly entered into. Construction contracts are a unique type of contract which requires an extensive procurement process.

It also incorporates smaller contracts through reference and as a result, parties should negotiate in good faith and follow all the procurement laws as required in Canada (Hughes, et al, 2015, p. 21). Due to the nature and costs involved, bonds are also necessary to secure payment and funding of projects to ensure that they do not stall after being started. Disputes are also common in construction contracts. Contracting parties should therefore agree and incorporate dispute resolution mechanisms in the contract document (Terrell & Surace, 2016, p. 390).

References

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