This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.
April 20, 2023
Managing Construction Claims through Key Contractual Provisions in Canada: of Waiver, Covenants to Insure, Indemnification and Conditions Precedent
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Generally speaking, the expiry of claims for contractual liability or negligence in Canada are tied to limitation periods set out in various pieces of legislation. In Ontario, for example, the Limitations Act, 2002, establishes a general limitation period of 2 years (from the date the claim is ‘discovered’) and (in most cases) an outside limitation period of 15 years. Similar statutory limitation periods (with varying timeframes) are in place across Canada. These general limitation periods can be ‘trumped’ by more specific legislation in some cases (for claims against Municipalities in most jurisdictions, for example). Significantly, however, the statutory expiry of claims can also be over-ruled in contract, by agreement of the parties. It is this ability that will be addressed in this article.
Exclusion Clauses
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First, contract documents can simply provide that a party will not be entitled compensation for certain impacts or breaches of contract. As the Supreme Court of Canada made clear in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways, [2010] 1 SCR 69, so long as the clause is clear (and not unconscionable) the Courts will not interfere with the parties’ right to negotiate what a party can and cannot pursue a claim for. Such clauses commonly include where the contractor is precluded for making any claims for delay or where a bidder is precluded from making any claim arising from an owner’s breach of its obligations in a tender process. We also note that proving ‘unconscionability’ (which could over-ride the contractual exclusion) involves a very high bar: See Uber Technologies Inc. v. Heller, [2020] 2 SCR 118.
Exclusion clauses are therefore very effective towards managing the risks of claims on a project. Parties should accordingly take care in drafting and reviewing such claims. Pushing exclusions down the ladder, of course, can result in less bidders and higher prices, while agreeing to exclusions from above without considering the impact of same can significantly change the risks a party undertakes in relation to a project.
Contractual Conditions Precedent: Notice and Dispute Resolution Clauses
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Parties can make a claim conditional on certain conditions being met (often referred to as ‘conditions precedent’). Notice provisions might require notice of a potential claim to be given within a certain period of time, for example. Provisions might also require claimants to provide detailed backup to a claim and/or initiate dispute resolution within certain time-periods, failing which the claim will be extinguished. Although such clauses are common to Canadian standard form contracts, they can vary widely (through supplementary conditions or in non-standard forms). Canadian Courts have also established that (absent unconscionability/illegality), there are only two ways that a party can avoid the application of such a condition precedent clause: it can establish that the condition was met in substance (if not in form) or it can establish that the other party had, though its prior conduct, waived the application of the clause. The latter generally requires evidence that the other side allowed a claim to proceed in a prior circumstance, without objection, notwithstanding the clause. See Elite Construction v. Canada (Attorney General), 2021 ONCA 803, Ross-Clair v. Canada (Attorney General), 2016 ONCA 205 (CanLII) and Technicore Underground Inc. v. Toronto (City), 2012 ONCA 597, for example.
In sum, Canadian courts are inclined to enforce a notice and dispute resolution provisions which act as a condition precedent to a claim, unless waiver of the clause by prior conduct can be established, the provision’s requirements have been substantially met or the high-bar of unconscionability/illegality can be proven. Such clauses accordingly have to be considered seriously. Some may want to push risk using strict, time-sensitive provisions, while others may prefer that claims not be so restricted. Care certainly needs to be taken in drafting and negotiating such provisions.
Covenants to Insure
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Our Courts recognize that a covenant to obtain insurance can create “tort immunity”: that where one party agrees to insure itself and others against a particular risk, it cannot then sue the others if the risk materializes – even if they fail to take out, or can’t source, the insurance. The covenants are often given so that everyone in the contract ladder doesn’t need to charge for insurance against the same type of damage or loss to persons or property. The insurance can be referred to as (among other possible descriptors) ‘Broad Form’, ‘Builder’s Risk’ and ‘All Risks’ insurance, however the scope of the covenant will depend on the contractual wording and the scope of the insurance will depend on the wording in the policy.
Tort immunity which arises under a covenant to insure will only extend so far as the covenant called for there to be coverage. It is accordingly important that parties consider the scope of any covenant to insure. On the one hand, the covenant can be over-reaching, requiring the party who gives it to obtain insurance that may be very difficult or impossible to find. On the other, parties will want the scope of the covenant to be broad enough to cover the risks they believe should be insured against in relation to the project. Although beyond the scope of this Article, towards ensuring that proper insurance protections are in place, parties can also require that they be named as additional or named insured under the policy in question, and that evidence of that insurance be provided. Leading cases on the tort immunity which flows from a covenant to insure include the Supreme Court of Canada decisions in Ross Southward Tire Ltd. v. Pyrotech Products Ltd., [1976] 2 S.C.R. 35, Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd., [1976] 2 S.C.R. 221 and T. Eaton Co. v. Smith, [1977] 2 S.C.R. 749, as well the Ontario Court of Appeal decision in Madison Developments Ltd. v. Plan Electric Co., (1997), 36 O.R. (3d) 80 (which confirmed that the principle applies under construction contracts).
Indemnification Provisions
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Contracts can also limit the extent to which one party will be required to indemnify another. An indemnification clause is an undertaking by one party (the indemnifying party) to compensate the other party (the indemnified party) for certain costs and expenses, usually in relation to third-party claims. Standard form CCDC contract language allows for indemnification only where notice in writing for a specified event is given within a specified time, and only in relation to claims caused by the negligence or breach of contract of the party from whom indemnification is sought (or by anyone for whom that party is responsible). The right does not extend, under such language, to claims for indirect, consequential, punitive or exemplary damages. The right is also limited, under such language and in relation to certain types of claims, to the monetary limits of the insurance taken out by the party that has to indemnify.
Indemnification provisions need to be read carefully. They can be drafted with very broad, imprecise and even vague language, leaving the scope of indemnification unclear. They can also require a party to indemnify where neither it nor those it is responsible for breached contract or were negligent. In those cases, it can be seen as ‘side-agreements’, which are unrelated to the indemnifying party’s scope of work and which make the indemnifier assume risks over which it will have no control. Properly drafted, however, the clauses are useful tools to manage claims as between contracting parties. Many parties will want the scope of the indemnification to be mutual, in the sense that both parties will be indemnified by the other and to the same extent.
Waiver of Claims on Contract Close-Out
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It is not uncommon for construction contracts to provide that, upon a certain date or event (such as substantial completion or the owner’s taking over of the project, as is common under Canadian standard forms), each party will waive and release the other from all claims for breach of contract or negligence which they have, subject to certain exceptions. The exceptions commonly include claims resulting for acts or omissions which occur after the date or event in question, claims for which notice has been given prior to that date or event, indemnification for claims advanced by third parties which can be asserted under the contract or subcontract (see above) and claims of various specific types (such as environmental claims).
These clauses can be significant. In addition to limiting the ability of parties to pursue claims against each other, they can protect against claims being made by non-parties. This, because as the Supreme Court of Canada confirmed in Giffels v. Eastern Construction, [1978] 2 S.C.R. 1346, a party that is protected by a valid contractual limitation of liability for certain conduct cannot generally be called upon to pay the damages suffered by a third-party as a result of the same conduct. By way of example, if an architect and a contractor might both be potentially liable for a building failure, and the owner cannot sue the contractor because of a waiver clause, the owner might then sue the architect, alone. In that case, in accordance with Giffels, the architect would not generally be able to bring the contractor in by way of a third-party claim, to seek contribution from the contractor for what it might have to pay to the owner.
Accordingly, waiver clauses can provide substantial protections against liability claims. Still, they must be read carefully to ensure that parties are not waiving claims prematurely (ie. before they have had a reasonable opportunity to preserve them through notice provisions or some other conditions precedent set out in the contract).
Tolling Agreements
It should be noted that claim expiry can also generally be suspended, or extended, by agreement between the parties, through what are often referred to as ‘tolling agreements’. By way of such agreements, and depending on the terms of applicable limitation period statutes, the parties can agree to suspend or extend the expiry of a claim either indefinitely, or to a specific date.
The importance of such agreements should not be underestimated in construction, particularly given the Supreme Court of Canada decision in Grant Thornton LLP v. New Brunswick, 2021 SCC 31, which held that the clock starts ticking when a “plausible inference” of liability arises on facts that are, or ought to be, known by the claimant through the exercise of reasonable diligence. This, because it is not unusual for a party to know about a potential claim long before they might decide the claim is worth pursuing. Such circumstances include where a party might know it has suffered a deficiency or impact (such as delay) but is not sure that the dollar-value would be worth pursuing. Also, where the fact of a deficiency is known but the severity is not and where a contractor or trade is working at, but has not yet completed, the correction of a known defect. In such circumstances, a statutory limitation period can creep up on a party very quickly. They might accordingly wish to formally ‘toll’ the expiry of the claim(s), to allow for investigation and/or negotiation, etc. The alternative, of course, is to either allow a claim to expire or to commence an action, which comes at a cost and can set the wrong tone if the parties are trying to resolve an issue.
Final Thoughts
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The contractual clauses we have reviewed above can significantly alter the risk profiles between parties to a construction contract or subcontract. They accordingly need to be reviewed and negotiated carefully. For contractors and subcontractors, it is also critical that these provisions be dovetailed with, or incorporated into, their subcontracts with those below them in the construction ladder. This, because a failure to do so can result in an inability to flow a valid claim from below up to those above, exposing the claim recipients to untold damages they did not actually cause.
Reviewing these types of clauses can also be a daunting task, as they are generally grounded in legalese. We suggest that a baseline for determining reasonableness might be drawn from the language set out in the standard form CCDC (Canadian Construction Documents Committee) contracts and CCA (Canadian Construction Association) subcontracts. This, because these have been negotiated/drafted collectively by representatives from across the construction industry. We are not, however, suggesting that the standard forms should be used unaltered. Supplementary conditions will be needed in some, if not most, circumstances. (Indeed, as prompt payment and adjudication legislation rolls-out across Canada, we believe that clauses which address these changes should, at a minimum, be considered). Nonetheless, the standard forms’ approach to the exclusion, expiry and waiver of claims can provide a base from which parties can assess the extent to which it is reasonable to push or assume risk in that regard.
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Rob Kennaley
Kennaley Construction Law
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