Goals in Canadian Construction Contracting

Generally, except in the case of an agreement for the sale and purchase of real property, a contract need not be in writing. However—particularly in view of the commonly detailed, technical and high-value nature of construction contracts—, reducing them to writing is advisable to memorialize and evidence the terms agreed by the contracting parties for their rights and their responsibilities to each other.

To that end, the form of a construction contract needs to be done right. The contracting parties should above all strive to achieve the goals of correctness, completeness and clarity of the document.

Correctness involves whether the right contract, providing a structure and procedures suitable for the performance required, is being used. The contract must satisfy the parties’ preferences as to the method for the construction to be delivered (as between general contracting and construction management) and for its payment (as among stipulated price, cost plus and unit price arrangements).

Completeness involves the sufficiency of the contract document in addressing the anticipated requirements of the project. When standard form contracts are used, care should be taken to allow any supplementary provisions that are necessary for the management of special circumstances or custom requirements to be included.

Clarity involves the proper drafting of the contract, as regards both consistency and comprehensibility. 
Relative to those goals, contractual shortcomings can have the following adverse effects.

1. Not in writing: Difficulty in evidencing the terms, and possibly even the existence, of an agreement. At the least, reliance on verbal communications and conduct of the parties for the content of a contract will mean a lack of fine details. Moreover, the complexity of construction militates against undocumented contracting.

2. Poor drafting: Poorly drafted contracts can be incomplete and unclear, potentially giving rise to complications from the absence of important terms or from ambiguity of meaning. Ambiguity can then lead to the application of the common law rules of contractual interpretation, which can have results not anticipated by the contracting parties.

Furthermore, construction contracts can be affected by the following additional complicating factors:

1. Not reflective of standard construction trade practices: Misleading or confusing effect, with the contracting parties potentially not being on the same page concerning expectations and deliverables.

2. Bias: The unreasonable allocation of construction risk can jeopardize an unsophisticated or less powerful contracting party. This can have a negative impact on the contractual relationship from its inception and can result in higher construction cost factored into stipulated prices for contingencies, as well as a more claims-motivated atmosphere.

Construction contracts come in different forms. As referred to above, they vary depending on the methods for delivery of the work and for its payment. They may use “standard” forms or be customized documents. Even when standard forms are used, they are usually customized with the addition of supplementary conditions. This may be to address the specific circumstances of a project. However, amendments to standard forms and non-standard contract formats are often used to reapportion construction risks from what might otherwise be considered to be a neutral balance between the contracting parties.

The sets of documents provided by the Canadian Construction Documents Committee (CCDC) and the Canadian Construction Association (CCA) are the standard forms of construction contracts and subcontracts in the country. Their successive iterations have been the products of input from various stakeholder groups in the construction industry, have been intended and are generally considered to strike a reasonable balance between the contracting parties’ interests.

Nonetheless, not all parties consider such balance to be reasonable or desirable. In particular, many owners with respect to general contracts and contractors with respect to subcontracts want to incorporate into those documents rights and responsibilities that are more favourable to them than would be the case under the unamended standard forms. A similar motivation can operate in reverse as between contractors and the owners of new residential or renovation construction projects. In all such instances, the party proposing the form of the contract may pursue a format more favourable to its interests: by way of supplementary conditions to a standard form or a customized contract that it seeks to impose on the other contracting party.

The range of potentially troublesome contractual provisions is wide. They include unrealistically short notice periods, limits to recourse for delay not caused by the claimant, allocation to the contractor of responsibility for differing site conditions, limitations of damages recoverable for breach of contract, unbalanced rights to terminate the contract, over-broad indemnities, and purported limitation of the exercise of builders’ lien rights (despite the fact that such a latter provision will be void by operation of the Builders Lien Act).

Agreeing to one-sided construction risk allocation can be perilous. Unfortunately, business considerations, relative power imbalances and the formalities of the tendering process (if applicable) can limit the ability of the party that is not choosing the form of contract to ameliorate its more onerous aspects by negotiation.

Potentially problematic contractual provisions should not be ignored as being simply a necessary evil borne for the successful obtainment of a contract or subcontract. They can seriously impact the profitability of a project, especially when claims or disputes arise. They should be identified, understood and assessed on a worst-case basis, because they will come back to haunt a contractor or subcontractor who may—for the first time when they want to assert a claim—find out that an extension of time or additional compensation is limited or excluded by the bargain that was made. In most cases, if a contractual provision is unambiguously worded, the contracting parties will be held to its terms.

The objectives of any potentially contracting party should be the following: to be aware of the risk presented by a one-sided contractual provision; to remove or soften the provision, if possible; to evaluate the risk if that is not possible, in order to consider the desirability of entering into the contract at all; and not to be surprised by the later operation of the provision.

In all cases, and particularly to the extent that there may be an opportunity in the procurement process for negotiation with respect to a difficult provision, it is recommended that such a provision be assessed as follows:

1. How does the provision differ from provisions addressing the same subject matter in a standard form contract, from rights and responsibilities otherwise provided under the common law of contract and from standard construction trade practices?

2. Is such variation necessary or appropriate in the circumstances of the contract in question?

3. Is it otherwise reasonable?

If there is no possibility of negotiating the amendment or deletion of a difficult provision, going through the above assessment will at least assist in identifying the risks surrounding the operation of the provision and will possibly enable the implementation of mitigating measures.