Presented by: Art Barry, QC

Transcription

1 Construction Contracts - Risk Management 101 Liquidated damages and notice provisions Presented by: Art Barry, QC April 17, Stewart McKelvey. All rights reserved. Not to be copied or used in whole or in part without the express written consent of Stewart McKelvey

2 LIQUIDATED DAMAGES LDs for Interim Milestones LD clauses establish agreed sums payable on failure to achieve a specified contractual obligation 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 milestones Some clauses deduct the LDs from progress payments. Such LDs are potentially fertile ground for course of construction disputes Construction Seminar

3 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 unenforceable penalty The Owner may rely on the clause contained in the signed agreement the onus of establishing an LD clause is not enforceable is on the Contractor t Unilaterally imposed arbitrary amounts that have no relation to actual losses suffered may be subject to challenge Construction Seminar

4 LIQUIDATED DAMAGES Unenforceable Penalties Factors relevant to challenging LD clauses: 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 on the critical path (supports unenforceable penalty) Construction Seminar

5 LIQUIDATED DAMAGES Unenforceable Penalties Is the clause negotiated or imposed? If imposed, and appears disproportionate to either estimated likely damages or actual damages, the argument that t it is a penalty strengthens Some contracts use the term penalty not advisable, although the label l will not necessarily govern The more equal the bargaining strength of the parties, the more likely a clause will be upheld Construction Seminar

6 LIQUIDATED DAMAGES Is a Challenge Viable? Law is well established that there is jurisdiction to declare LDs unenforceable if they are penal There is a lack of authority addressing the enforceability of interim i LDs but the principles are the same The discrepancy between likely loss and the penal amount must be material if the LD amount is 10 times the reasonably estimated t 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 as a penal incentive, then the potential ti for challenge exists Construction Seminar

7 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 Milestone, previously incurred LDs are cancelled (and any associated deduct or holdback is reversed or released) Construction Seminar

8 NOTICE PERIODS Compliance with Notice Periods Typically delay clauses include a specified notice period to advise of delays which have occurred. Contractors t 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 Construction Seminar

9 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, 2006 February 9, 2007, Technicore claims $800,000 from Clearwater March 6, 2007 Clearwater claimed the $800,000 as well as $400, of its own costs (expressly reserving its rights to claim payment for work not specifically mentioned) Construction Seminar

10 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 flood. 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 August, 2010 Clearwater revised its claim and added new claims in excess of $3,000, Construction Seminar

11 NOTICE PERIODS Technicore Underground Inc. The Notice Provision: The Contractor shall submit detailed claims as soon as reasonably possible and din any event no later than 30D 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) Construction Seminar

12 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 2010 additional claim due to expiry of the time limit Clearwater appealed the appeal was dismissed Held: the Notice clause did not have to expressly state t that t if it was not complied with, the contractor could not advance the claim SCC authority (Corpex, 1982) followed the Notice clause provides benefits to both parties and must be complied with Construction Seminar

13 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 clause 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 steps to protect t its financial i interests. t Construction Seminar

14 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 conduct 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 with its terms There was no pattern of conduct that indicated an intention not to be bound Construction Seminar

15 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 Construction Seminar

16 QUESTIONS Construction Seminar

17 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 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 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 informing i you of future legal l developments Construction Seminar