Today our Construction Industry is pressured by two overwhelming dynamics:  the methods of construction available to contractors are becoming more and more innovative, cutting edge, and specialized; while, owners “need” the design and construction phases of their project to be as quick and as cost effective as heavenly possible.  The confluence of these two dynamics often manifests in the impact costs of a delay from the initial schedule, which are becoming more and more expensive.  Still, the owner wants to keep the original completion date while also pushing back against paying money for these impact costs.  So, how is the law now fairly allocating these delay costs?  I propose to review two recent Ontario cases to give you some insight.

In Bre-ex v. Hamilton, the City in 2001 issued an Invitation to pre-qualified bidders to install a drainage system and construct a pumping station at its Glanbrook Landfill site for the purpose of stemming the leaking of contaminated water beyond the Landfill’s boundaries.  Included among the pre-qualified bidders was the operator of the landfill, Canadian Waste Services. Eventually the project was awarded to Bre-ex and it eventually completed a good project. But, Bre-ex’s delay claim remained in dispute until the fall of 2011 (11 years!), when the Court awarded Bre-ex $850,860.00 + court costs. 

The facts in this Bre-ex case were a bit different:

•          The Contract Documents included the Bid Documents, unlike the standard CCDC 18;
• Thus, the Construction Contract included a Bid Term not only requiring that the bidder describe its proposed method of work, but also prescribed:

Under no circumstances shall any of the investigations proceed prior to acceptance of the proposed methodology.

•           This is also unlike CCDC 18 which provides:

The consultant will not be responsible for and will not have control, charge, or supervision of construction means, methods …or procedures, …required in connection with the Work…

While, the Bid Documents as well provided:

The City will require that Work commence immediately following award of the Contract, and will require the Work to be completed approximately the end of July, 2002.

Bre-ex proposed an ingenious methodology for laying the drainage pipe up to 16 meters below the surface of the existing garbage mound, and bid $3.2mil, roughly 43% of the next lowest bid being that by the existing landfill operator, Canadian Waste.  The advantage of Bre-ex’s bid was technical innovation. While the others proposed an open trench system involving the costs of dewatering, rodent/seagull control, and odour management, Bre-ex proposed using stacked trench boxes and hydraulic sleeve and rollers guided from the surface by laser technology. No open trench; no significant odour; minimal dewatering; and no rodent/seagull costs!  City Council loved the price and some of its knowledgeable staff recommended this proposed method.  But others in City Hall as well as the City’s outside consultant were not convinced. On December 11, 2001, City Council awarded the project to Bre-ex.  But, the doubters stalled delivery of the award letter to Bre-ex until Jan. 24^th and obfuscated the Construction Contract’s terms such that it was not signed until April the 12^th! Until then, Bre-ex did not start installing the drainage pipe, because it feared that the doubters might persuade the City to include a Contract Term giving the City a Right of Termination and paying only the value to date for Bre-ex’s work.  Thus, Bre-ex lost the opportunity of beneficial winter conditions from January 6^th to April 12^th. 

Here’s how the Court arrived at its award of $850,866.00 for Bre-ex’s delay claim:

•   As is so frequent for projects today, the Construction Contract did not spec a specific schedule, except start immediately and complete approximately by the end of July.  
• Thus, given there was no precise schedule, the Court accepted its mandate to determine a reasonable fair schedule in the circumstances of the project, the owners expectations, and the work expected of the Contractor.
• This measure of reasonableness does not necessarily depend on the convenience of the Contractor.
• Here, everyone was aware that Bre-ex’s method preferred winter conditions, thus the Court determined that it was reasonable that it ought    to have started work on January 6^th.
•  The City’s procrastinations concerning the terms of the Construction Contract were also found to be not reasonable, and accordingly the delay until the April 12^th signing was caused solely by the City. 
•  Thus, though the City agreed to extend the schedule to permit Bre-ex to perform during the Winter of 2002-03, Bre-ex was entitled to:

1. Lost business opportunity reflecting that it couldn’t seek other jobs during the period of doubt and lost benefit of the better bid pricing for work done in 2002‑03;
2. Increased expenses for rental equipment, fuel, and labour costs in 2002-03;  and,
3. Financing costs to cash flow the extended schedule.

At the bottom line, the City paid $4.8mil for the late project it could have timely obtained for $3.2mil!  Owners don’t like that.  And thus some try to avoid paying money on delay claims by inserting weasel clauses into the Contract Terms.  The standard CCDC 18 is pretty straightforward:

6.5.3      If the contractor is delayed by… any other cause beyond the Contractor’s control… The Contractor shall not be entitled to payment for costs incurred by such delays unless such delays result from actions by the Owner.

But, other Owners prefer subtle terms like the following:

 32.5  Any delay resulting in increased cost which is the result of improperly scheduled Work shall be borne by the party responsible therefore.

32.6  Delays in the Work shall be resolved in accordance with GC56

What a Contractor will find if he reads further is that GC56 simply gives the Consultant a discretion to extend the remaining contract schedule; no mention is made of paying costs!

What will the law do?  The Ontario case of Dean Construction v. City of Toronto gives us an insight. The City of Toronto issued an Invitation to Bid for construction of the Harbourfont Fire Station.  This Invitation and the Construction Contract adopted soils reports which were misleadingly inaccurate.  Dean eventually claimed for its delay costs necessitated by the unexpected actual site conditions.  In turn, the City sought to hide behind the below weasel clause which it drafted into the Construction Contract:

In the event of delay caused by… any act of the… Corporation,… as, in the opinion of the Commissioner, the Contractor cannot reasonably be held responsible… the Commissioner may allow such additional time for completion as he may deem fair and reasonable.

The Court demolished the efficacy of the City’s attempt as follows:

I find that the … exclusionary clauses relied upon by Toronto … have no effect with respect to Dean’s claims …  These “exclusionary provision” are not effective … on all legal remedies, …  The clauses did not specifically and unambiguously exclude … legal remedies, …  Such broad general provisions granting an arbitrary power to the Commissioner must be drafted in the clearest and most precise language …

CONCLUSION 

My reading of these cases persuades:

1.       Owners should shy from Bid Invitation terms which get into choosing among the various methods of construction proposed by the bidders;

2.        The spec writer should prescribe only the Owner’s ultimate designed purpose together with the requisite contract security to transfer the risks of methodology to the surety industry.

3.        Also, use the fair and clear language of the standard CCDC terms to deal with delay,

4.        Rather than relying upon the hope that the Court will uphold the Owner’s weasel clauses as “perfect”.

5.        Judges will make every effort to wiggle around weasel clauses.

Congratulations Tim.

To read the article click here.

Melvin is a well respected Corporate Commercial lawyer specializing in Tax Law and has been a partner at Robertson Stromberg LLP for more than twenty years.  As well, Melvin devotes time to various civic organizations in a leadership capacity.

Also a Chartered Accountant, Melvin was previously awarded the designation of Fellow Chartered Accountant (F.C.A.) by the Institute of Chartered Accountants of Saskatchewan.  Receiving the distinctions of both  Fellow of Chartered Accountant and Queen’s Counsel is an exceptional achievement.

Congratulations Melvin.

Congratulations Misty.

In 2007 our Misty Alexandre reported a case where a Contractor was sued by an Owner on the basis that the constructed tenant improvements had a design fault which rendered the premises unfit for some of the Owner’s purposes (a tattoo parlour).  There was no written warranty for this project, yet the Owner claimed that the Contractor had impliedly warranted that the design was fit and alternatively, that the Contractor ought to have warned him that the Owner’s instructions were not suitable for all of the Owner’s business purposes.  Misty reported that, eventually, after paying legal costs, etc., the Contractor escaped responsibility because the Judge concluded that the Owner was more familiar with the health regulations governing a tattoo parlour than was the Contractor.  See Misty’s article:  Responsibility for Suitability of Design here.

Misty concluded her article by recommending to Contractors that they avoid these risks by requiring a contractual term like CCDC 2, GC 3.2 – the Contractor shall be responsible to the extent the design permits.

So, what have I recently noticed becoming a trend in our construction industry?  Particularly for industrial and institutional projects, it appears that Owners and their Consultants have been writing in broad warranty terms requiring that the Contractor guarantee that the design is fit for suppliers who are bidding these projects. Given that most of them cannot qualify for E&O Insurance which would transfer this risk to their Insurer, and most of them do not hire a design professional to check the Owner’s entire design, their only response is usually to either refuse to bid or ignore the risk and hope for the best!  A recent BC decision, Greater Vancouver Water District v. North American Pipe & Steel Inc. will give you a bit of an insight into what happens if the choice which is made is to hope for the best.

In 2005 Vancouver Water issued a public Invitation to Tender for the supply and delivery only of both 60″ and 84″ steel pipe for two large water main projects.  It included three significant provisions to this law case:

1.  The Owner’s detailed spec for quoting the pipe referenced the AWWA standard and was one which Vancouver Water had successfully used for 16 years,  but in part it conflicted with a recent amendment to the AWWA standard;

2.  The Invitation also permitted the bidder to supply an alternate design and price;

3.  While, the Construction Contract prescribed the following warranties:

      4.4.3  The Corporation is relying on the Supply Contractor’s skill and …  The Supply Contractor warrants … that the Goods … will correspond with the description of the same in the Contract Documents, and … will be fit for the purpose for which they are to be used …; and

      4.4.4  The Supply Contractor warrants and guarantees that the Goods are free from … defects arising at any time from faulty design.

North American chose to bid and hope for the best by supplying to Vancouver Waters spec.   Well, the worst happened.

Even before all of the installation of the coated pipe had been completed, the coating began to de-laminate.  There were various theories as to the cause of these adhesion problems.  But, because it was urgent that the project progress to completion, various “without prejudice” fixes were tried while Vancouver Water refused to pay North American the $3.3 million balance of the Purchase Price.  That was 2006.  Eventually, these disputes were decided by a  Judge in 2011 after 23 days in Court.   

North American claimed its unpaid Contract price as well as a further $.5 million for remediation costs.  Vancouver Water defended on two alternate arguments:    

4.  North American’s coating was non-compliant with the Owner’s spec; or,

5.  If its design of this coating spec was unfit for the Owner’s purpose, then the broad warranty terms obliged North American to fix the coating for free or pay the Owner’s costs because North American failed to warn that there were design faults in its spec.

At trial, after listening to three experts opine that the conflict between the Owners 16 year old spec and the recent amendment to the AWWA standard was the cause of the de-lamination, the Judge had no hesitation in concluding that it was probably caused by the Owner’s faulty design.  Thus, Vancouver Water argued its alternate position — that North American was still liable because it had warranted the fitness of the Owner’s spec.  Here, the Judge struggled.  he had no difficulty in finding that North American was not aware at the time of coating and supplying the pipe, that the Owner’s design was unfit.  Yet, he had to also acknowledge that literally the warranty term was very broad and could make North American responsible for this faulty design.  Did North American escape this responsibility?

Yes, but only by the hair of its chinny, chin, chin after the Judge spent a number of pages wiggling around warranty term 4.4.4:

     4.4.4  The Supply Contractor warrants and guarantees that the Goods are free from … defects arising at any time from faulty design.

He first recognized that a warranty term can trump the Contractor’s perfect performance of the Owner’s spec’d design, by making the Contractor responsible for the fitness of the Owner’s design.  He then noted that in this case the Owner’s Contract Documents were contradictory in that, if this warranty term was given its literal interpretation, then it would be contradictory with other terms requiring the Contractor to comply with Vancouver District’s spec.  He thus concluded that in the face of these contradictory provisions, he should attempt to reconcile them by giving effect to the parties’ intentions if at all possible.  Here, he concluded that neither party expected that Vancouver Water was relying upon North American to provide design services.  Thus, given this broad warranty term is found in Vancouver Water’s standard form frequently used for various types of purchasing, the Judge was more willing to narrow it down “to promote the true intent of the parties at the time of entry into the Contract”. “A literal meaning should not be applied where to do so would bring about an unrealistic result.”  The Judge thus ruled that this warranty term could be narrowed down to making North American responsible only for that design which Vancouver Water intended that North American would provide.  This interpretation does not make North American responsible for the design which Vancouver Water spec’d and relied upon without North American’s involvement.

Conclusions

1.  Legally, it is certainly possible for a Contractor, trade or supplier to agree to accept responsibility for the faulty work or design of others on the project;

2.  And, thus particularly for industrial and institutional projects, owners are asking their lawyers to download the risks of faulty design by broad warranty terms;

3.  But, Judges and Arbiters will exercise their best efforts to wiggle around an unfair, broad interpretation of these warranty terms; yet,

4.  Remember that it is an expensive risk process to have to go to Court or Arbitration if a problem arises and the bidder hasn’t transferred this risk to an Insurer.

You will find that the site conditions are different than the bid documents upon which you bid your stipulated work.  You feel you’re entitled to an extra, right?  No necessarily; it depends!  What to do?  Clearly, if your contract terms permit you to promptly give a Written Notice of a Claim for Extras and also entitle you to retain your right to have a dispute determined later, do so perfectly.  Otherwise, read on.  A recent Ontario case involving a Subcontract dispute which did not have these dispute/defer terms can help provide you with some answers.

In Asco Construction Ltd. v. Epoxy Solutions, Inc.,  Epoxy was awarded the concrete floor topping repair work for renovations to the Kingston Grand Theater.  Epoxy’s Bid Price was based upon both a sketch reporting the existing floor elevations as well as an Architect’s detailed spec’s of what finish Epoxy’s work had to achieve.  The problem was with the elevations on the sketch; in places they were out as much as 2 inches, and all of the discrepancies would reasonably increase Epoxy’s costs by as much as 45%!  Who bears the risk of sucking up these costs?  Asco, the general contractor, took two positions.  Firstly, it weaseled by saying that if later it was determined Epoxy’s costs increased, it would plead to the owner’s consultant for payment of these costs, and secondly, that Epoxy had no claim for extras because it ought to have known when it bid the job that the elevations on the sketch were approximate and thus Epoxy ought to have included this risk in its Bid Price.  The owner’s position was simple: the bid documents required Asco, as the general contractor, to do whatever elevation surveys were needed, while the court determined that Asco/Epoxy subcontract terms had not passed this obligation on down to Epoxy.  Finally, Epoxy took the position that it could not have been aware that the sketch elevations were significantly different from the actual.  But unfortunately, Epoxy did not have in its subcontract terms the below usaul terms found in the CCA/CCDC Standard Forms:

8.1.3    If a dispute is not resolved promptly, the Contractor shall give instructions for the proper performance of the Work to prevent delays pending settlement of the dispute. The Subcontractor shall act immediately according to such instructions.

8.3.1   It is agreed that no act by either party shall be construed as a renunciation or waiver of any rights or recourses, provided the party has given the Notices in Writing required.

Thus, Epoxy refused to start its Work until Asco either prepared the floor surface to near the elevations on the sketch drawings, or agreed to pay an extra for Epoxy’s increased costs.  Asco did neither.  Rather, it tried to persuade Epoxy to start its Work by using words (often heard on other construction projects) like:

“You must start .. if later it is found that more costs are required, it will be dealt with at that time.” 

“I agree with you that there is not sufficient information supplied by the sketch; we will later refer the matter to the Consultant.”

“You are one month behind schedule.  Dumping this on us … being a month late … kind of unprofessional joke and if you do not meet and solve this with architect’s approval … I will find a new subcontractor for the job.  I have no more patience with you.”

Eventually, Asco’s weaselling did not entice Epoxy to start performance of its Work, and thus Asco terminated Epoxy and hired another for costs above Epoxy’s Bid Price.

Asco sued Epoxy for both its additional costs as well as for impact costs which it incurred because Epoxy delayed the Project’s completion.  In turn, Epoxy counterclaimed for lost profits because Asco had wrongly terminated its Subcontract. Epoxy won hands-down!  Asco was denied its claim while Epoxy was awarded  lost profit on the basis that Asco wrongfully terminated the Subcontract!  Here’s the Judge’s reasoning:

1. Where there is a Subcontract bid process, a Prime Contractor stands in the same position and has the same obligations toward a subcontractor as apply to an Owner tendering the Prime Contract.
2. Thus, in  the absence of a warning announcing the unreliablility of the sketch , or a well drafted weasel clause in the Bid Documents, Asco had a  duty to reasonably make available to Epoxy the actual floor elevations, or at least elevations sufficiently close as to permit Epoxy to do its Work without a Change Order.
3. And, if it is here, Epoxy before starting Work discovers that the elevations are so far off as to substantially change its costing and/or schedule, Epoxy must not start the Work because to do so is an acceptance of the surface without a change in either the price or schedule.
4. Rather, Epoxy must get a Change Order or a Change Directive; Judges won’t require that the price of the Change Order be certain, because they will imply a reasonable market value, but Asco must agree that Epoxy is entitled to an extra payment by it, not the Consultant nor the Owner for whom Asco does not have the authority to commit their credit.
5. And, in this case, Asco never agreed.
6. Thus, if the Subcontract had included the usual dispute/defer CCA/CCDC standard terms, Epoxy must perfectly give Asco a Written Notice and defer termination of it claim until later.
7. But here, because the Subcontract did not have these terms, Epoxy was in a tough spot.  Does it start work and hope that someone will later make a sympathetic extra payment?
8. Or, does it take the chance that later a Judge will decide either that Epoxy ought to have known that the sketches elevations were only unreliable estimates which Epoxy should have either verified before bidding, or priced in its Bid Price, or the elevation variances were not “substantial to a degree changing the character of Epoxy’s Work?
9. Here the Court had no trouble finding that a two inch variance and a cost change of 45% is “substantial. As well, the Court did not expect Epoxy to be aware of this variance at the time of its take off because the actual floor surface was not viewable given the demolition debris and scaffolding covering the floor, and the fact that usually in the industry bidders do not invest in the costs of an elevation survey until they have been awarded the Work.
10. Thus, Epoxy was always entitled to access to the Project’s Site once Asco brought the As-Built Floor Elevations close to those reported in the sketch which was part of the Bid Documents.
11. And, for this reason, Asco’s termination was wrongful, entitling Epoxy to lost profits and Court costs.

Conclusion

Here’s what I take from this case:

• The Bid Caller should make sure that its Bid Documents and the eventual Construction Documents call for pretty much the same Work, and that any difference can be solved by a no credit Site Instruction.
• The Bid Caller has a duty to disclose all known material circumstances or to clearly warn the bidder to investigate and take the risks.
• While, the Bidder should exhaust its opportunity to investigate and seek clarifications or addenda so as to be able to reasonably take off a Bid Price from the Bid Documents.
• The Bidder should assure that the spec’d Contract B (the Construction Contract) has the usual CCDC/CCA dispute and deferral terms so that it can start and complete what the Bid Caller wants, while continuing to be entitled to a fair award on its Extras claims.
• Otherwise, if the Construction Contract spec’d in the Bid Documents does not have these usual terms, the Bidder runs the risk of having to refuse to work and later having to pay the extra expenses of a competitor to do its Work because it was unable to satisfy the Judge that there was a substantial difference between the Bid Documents and the Construction Documents to the degree causing “a change to the very character of the Bidder’s Work”.