construction contracts - risk management 101 · liquidated damages unenforceable penalties •...

Construction Contracts - Risk Management 101Liquidated damages and notice provisions

April 17, 2013Presented by:Art Barry, QC

© 2013 Stewart McKelvey. All rights reserved. Not to be copied or used in whole or in part without the express written consent of Stewart McKelvey

LIQUIDATED DAMAGES

LDs for Interim Milestones• LD clauses establish agreed sums payable on failure to achieve a

specified contractual obligationT diti ll LD t l bl di b i• Traditionally, LDs most commonly were payable on a per diem basis for failure to achieve the scheduled completion date

• Increasingly, LDs are being included in respect of interim schedule il tmilestones

• Some clauses deduct the LDs from progress payments. Such LDs are potentially fertile ground for course of construction disputes

© 2013 Stewart McKelvey all rights reserved82 2013 Construction Seminar

LIQUIDATED DAMAGES

Unenforceable Penalties• LD’s must be a genuine pre-estimate of damages• If the amount is not a genuine pre-estimate, it may be found to be an

f bl ltunenforceable penalty• The Owner may rely on the clause contained in the signed

agreement – the onus of establishing an LD clause is not f bl i th C t tenforceable is on the Contractor

• Unilaterally imposed arbitrary amounts that have no relation to actual losses suffered may be subject to challenge


LIQUIDATED DAMAGES

Unenforceable Penalties• Factors relevant to challenging LD clauses:

• If estimating probable damages on breach is difficult at the time• If estimating probable damages on breach is difficult at the time of the negotiations, it is reasonable to settle on a lump sum in advance (supports enforcement)

• If the amount does not bear any relationship to the loss likely to be suffered, it may be a penalty. e.g. $5,000/day for late delivery to site of equipment where delivery on the scheduled date is not

th iti l th ( t f bl lt )on the critical path (supports unenforceable penalty)


LIQUIDATED DAMAGES

Unenforceable Penalties• Is the clause negotiated or imposed?• If imposed, and appears disproportionate to either estimated likely

d t l d th t th t it i ltdamages or actual damages, the argument that it is a penalty strengthens

• Some contracts use the term “penalty” – not advisable, although the l b l ill t illabel will not necessarily govern

• The more equal the bargaining strength of the parties, the more likely a clause will be upheld


LIQUIDATED DAMAGES

Is a Challenge Viable?• Law is well established that there is jurisdiction to declare LDs

unenforceable if they are penalTh i l k f th it dd i th f bilit f i t i• There is a lack of authority addressing the enforceability of interim LDs but the principles are the same

• The discrepancy between likely loss and the penal amount must be t i l if th LD t i 10 ti th bl ti t dmaterial – if the LD amount is 10 times the reasonably estimated

actual loss, the case is there to be made – this is the best argument• If the Owner has not calculated actual loss and is using interim LDs

l i ti th th t ti l f h ll i tas a penal incentive, then the potential for challenge exists.


LIQUIDATED DAMAGES

Alternative Solution• Attempt to negotiate relief where interim LDs become payable• Example, if the Contractor is back on schedule by the next Schedule

Mil t i l i d LD ll d ( dMilestone, previously incurred LDs are cancelled (and any associated deduct or holdback is reversed or released)


NOTICE PERIODS

Compliance with Notice Periods• Typically delay clauses include a specified notice period to advise of

delays which have occurred.C t t i ti l d t b f th l• Contractors in particular need to be wary of these clauses

• There can be practical considerations which result in reluctance to give formal notice

• Or.. A sense that verbal notice is enough• The case of Technicore Underground Inc. v. Toronto, 2012 ONCA

597 is a fresh reminder of the need to comply with notice clauses


NOTICE PERIODS

Technicore Underground Inc. • Clearway Construction entered a contract with the City of Toronto for

construction of 5.88 kilometres of water main piping• Clearway subcontracted with Technicore to perform the underground

tunnelling (using a tunnel boring machine)• A flood occurred during the tunnelling on August 2-3, 2006• The affected work was delayed and completed on December 22,

20062006• February 9, 2007, Technicore claims $800,000 from Clearwater• March 6, 2007 Clearwater claimed the $800,000 as well as

$400 000 of its own costs (expressly reserving its rights to claim$400,000 of its own costs (expressly reserving its rights to claim payment for work not specifically mentioned)


NOTICE PERIODS

Technicore Underground Inc. • April 4, 2007: The City denied Clearwater’s claim• July 30, 2008: Technicore sued the City for damages due to the

fl d Th Cit b ht thi d t l i i t Cl tflood. The City brought a third party claim against Clearwater• Clearwater defended and counterclaimed against the City for

indemnity for the Technicore claim and for additional damages of $1 000 000$1,000,000

• August, 2010 Clearwater revised its claim and added new claims in excess of $3,000,0000


NOTICE PERIODS

Technicore Underground Inc. • The Notice Provision:• The Contractor shall submit detailed claims as soon as reasonably

ibl d i t l t th 30 D ft l tipossible and in any event no later than 30 Days after completion of the work affected by the situation. The detailed claim shall:

• a) identify the item or items in respect of which the claim arises;• b) state the grounds, contractual or otherwise, upon which the

claim is made; and• c) include the Records maintained by the Contractor supporting

such claim. (emphasis added)


NOTICE PERIODS

Technicore Underground Inc. • The City successfully obtained partial summary judgment dismissing

over $3,000,000 of Clearwater’s claims. The motion judge held that the Notice provision was a condition precedent to the August 2010the Notice provision was a condition precedent to the August 2010 additional claim due to expiry of the time limit

• Clearwater appealed – the appeal was dismissedH ld th N ti l did t h t l t t th t if it• Held: the Notice clause did not have to expressly state that if it was not complied with, the contractor could not advance the claim

• SCC authority (Corpex, 1982) followed – the Notice clause provides b fit t b th ti d t b li d ithbenefits to both parties and must be complied with


NOTICE PERIODS

Technicore Underground Inc. • Clearwater argued there was no prejudice to the City• Ontario CA – proof of prejudice was not a requirement under the

l i ticlause in question• At para 51:• “Accordingly, there was no onus on the City to lead evidence of

prejudice. As owner, the City is assumed to have been prejudiced by a multimillion dollar claim being made years after the Contract permitted and long after the City could consider its position and take t t t t it fi i l i t t ”steps to protect its financial interests.”


NOTICE PERIODS

Technicore Underground Inc. • Clearwater argued that the City did not raise any issue regarding the

timing of the March 2007 claim and waived or varied the terms by its conductconduct

• Held: there was no evidence that the City communicated an “unequivocal and conscious intention to abandon its right to rely upon the Notice provision or otherwise waiver strict compliance withupon the Notice provision or otherwise waiver strict compliance with its terms

• There was no pattern of conduct that indicated an intention not to be boundbound


NOTICE PERIODS

Technicore Underground Inc. • The Bottom Line: if you have a claim, ensure you check the claim

provisions and comply with the notice requirements

• “soft” arguments such as waiver by conduct or failure to rely on strict requirements may not save you


These materials are intended to provide brief informational summaries only of legal developments and topics of general interest The materials should not be relied upon as ainterest. The materials should not be relied upon as a substitute for consultation with a lawyer with respect to the reader’s specific circumstances. Each legal or regulatory situation is different and requires review of the relevant factssituation is different and requires review of the relevant facts and applicable law. If you have specific questions related to these materials or their application to you, you are encouraged to consult a member of our firm to discuss your needs for specific legal advice relating to the particular circumstances of your situation. Due to the rapidly changing nature of the law, Stewart McKelvey is not responsible for i f i f f t l l d l tinforming you of future legal developments.


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