An ounce of prevention is worth a pound of cure – particularly for construction. Whether it is a new build or a renovation, it is costly work prone to surprises. A properly drafted contract will benefit both the owner and the contractor by providing clarity and certainty. The contract should: Clearly define the scope of […]read more
Contracting Out of Delay?
There are too many moving parts to assume that every aspect of a construction project will stay on schedule all of the time. Delay is not only frustrating: it is expensive. Few can afford to have crews or equipment sit idle. Managing interruptions is a necessity and not just a skill, as traditionally delay costs are only recoverable if work is stopped to the point that there is nothing that you are able to do. So how is it possible to be truly delayed by events completely beyond your control and find that you have contractually released any claim to recover the costs? No-damages-for-delay clauses are becoming more common.
Unlike the familiar delay scenarios:
- a) delay caused by the contractor, for which the contractor is liable,
- b) delay beyond anyone’s control, such as a state of emergency that extends schedules but everyone bears their own costs, or
- c) compensable delay which the owner accepts as its responsibility, extending schedules and covering resultant costs.
In a no-damages-for-delay scenario, the intention is to prevent the contractor from recovering delay costs even where they are not responsible for the delay. For example, from Public Services and Procurement Canada standard general conditions (IDR2860D):
GC6.5. Delays and Extension of Time
3. Subject to paragraph 4) of GC6.5, no payment, other than a payment that is expressly stipulated in the Contract, shall be made by Canada to the Contractor for any extra expense, loss or damage incurred or sustained by the Contractor due to delay, whether or not the delay is caused by circumstances beyond the control of the Contractor.
The “paragraph 4)” exception outlines a notice process to present a claim for Canada to consider so long as the loss or damage is “directly attributable to any neglect or delay … on the part of Canada” but there is no other option for delay claims. In force majeure circumstances a contractor can request an extension of time but no extra payment. If Canada accepts that there was delay and its cause was beyond the contractor’s control, it can then grant an extension of time, or not, in its discretion. As Canada is also bound by the contract, it is not realistic to expect accommodations based on fairness. One local contractor explains how its delay claim was rejected last year: “We have no authority to talk about what’s fair, only what’s in the contract. And it’s not as if public works caused COVID.”
In this example, on its face, the clause clearly waives any right to recover costs that result from delay unless specifically caused by the owner. The owner has the discretion to extend more time to the contractor, which can at least assist with concerns of default, but the contractor has to absorb its costs. Events like interruption in supply chains, labour shortages, or dramatic changes in occupational health and safety oversight can hardly be controlled by the contractor. Nonetheless, it is the contractor who is responsible for the fallout from any delay. Whether the risk was adequately factored into the contract price is beside the point.
In circumstances where both parties negotiate contracts, there is no excuse for any of the terms and conditions to be unfamiliar, but not all contracts are negotiable. When the form of contract is more take it or leave it, the contractor is not released from the obligation to review and understand what is entered into before committing. Never mind the reality that focusing on front-end procurement documents and specifications leaves little opportunity for bidders to study the form of agreement that they are either obliged to enter or have no real bargaining power to renegotiate if they are successful.
Understandably bidders take comfort in standard-form agreements: they are familiar and predictable. Organizations like the Canadian Construction Documents Committee (CCDC) develop standard documents through a consultative process with industry representatives. One of their cardinal rules for risk allocation is that the party best able to manage a particular risk should be the one to bear it. All the same, even CCDC documents can be modified and the CCDC cautions that supplementary conditions can be designed to undermine the fundamental nature of the standard form or the equitable balance of rights and obligations of each party. Careful review is critical. As referenced above, other groups that use non-negotiable standard forms make no pretense about risk allocation.
Evolution in the Courts
Faced with catastrophic costs and the ongoing obligation to complete the work, the obvious question is whether the clause that excludes liability can be successfully challenged. There is not a lot of case law on specific no-damages-for-delay clauses, but on the broader category of clauses that exclude liability the arguments go both ways:
- Absent specific concerns like intellectual competency or fraud, people are generally free to contract and are held to their bargains. If it does not turn out to be the great deal that was expected, the courts cannot handout “do-overs”—agreements need to be reliable; but
- When there is an imbalance of bargaining power or an agreement is so blatantly contrary to business interests, considerations of public policy can lead the courts to narrow their interpretation of the specific terms and hold that they mean something quite different from what they state on their face.
The usual approach of the courts is to decide whether the specific language used in the contract is clear enough to exclude damages for delay. The results are not reliably predictable.
In 1967, the Supreme Court of Canada denied the contractor’s claim where the clause said: “…the Contractor shall have no claim or right of action against the Corporation for damages, costs, expenses, loss of profits or otherwise…by reason of any delay in the fulfilment of the contract within the time limited therefor occasioned by any cause or event within or without the Contractor’s control, and whether or not such delay may have resulted from anything done or not done by the Corporation under this contract.” (Perini,  SCR 189).
In separate decisions in 1985 and 1993, the Nova Scotia Supreme Court refused to enforce a clause because the language was not clear or express enough in stating: “… the Contractor shall not have, nor make any claim or demand, nor bring any action, suit or petition against the Minister for any damage which he may sustain by reason of any delay or delays, from whatever cause arising in the progress of the work.” (Westcounty Construction, 69 N.S.R. (2d) 234
and D.J. Lowe, 121 N.S.R. (2d) 361).
Supreme Court of Canada Split
In 2010, the Supreme Court of Canada set the currently-accepted benchmark for when an exclusion clause is enforceable. They used a three-part test:
1. Does the clause clearly apply to the circumstances?
2. If it does, was it “unconscionable” when the contract was made, such as because of unequal bargaining power?
3. Even if the first two points are met, is there an overriding “public policy” concern that outweighs the public interest in upholding contracts?
There, a clause in a procurement document said: “… no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal each Proponent shall be deemed to have agreed that it has no claim.”
The court was split: five judges held that “participating” in the RFP was ambiguous and did not include conduct in breach of the owner’s implied obligations, and the other four judges decided there was no unconscionability because there was no true inequality in bargaining power between the owner and a sophisticated contractor, and concerns about public policy were less important than upholding the reliability of contracts. (Tercon, 2010 SCC 4).
Obviously, decisions follow the specific facts of each case, but there have been some notable endorsements of exclusion clauses that track with the minority’s approach that sophisticated parties should be held to their contracts. This presumes that contractors are aware of any restrictive terms and have accepted them and provided for any associated risk in their price, and further that, if they cannot renegotiate terms and conditions, then contractors can choose to simply not pursue that work. Whether this reflects the economic realities of industry or promotes the concept that procurement is intended to promote competition and best value is worth serious consideration. A big-picture understanding of the construction industry and “best value” for the public deserves investigation, understanding and less presuming.
In recent years, the Supreme Court of Canada has confirmed a duty of good faith in contracts. It does not mean that if a contract is not “fair” it will not be upheld, it recognizes that there is a duty of honesty in how contracts are administered and performed. There is no suggestion that terms later thought to be unfair would be in breach of this duty or could, as in the Public Works example, authorize relief that exceeds the terms of the contract.
There is no substitute for knowing your contract before you commit to it. In a perfect world, this would mean incorporating the risk that you accept into your contract price. In every circumstance, you are better served by doing your best to plan and prepare for every contingency, but clearly there are things beyond your control. Even when your contract includes a no-damages-for-delay clause, the owner should not be assumed to be an adversary and may be willing to work with you towards an equitable result—open that dialogue as soon as possible. After all, smart owners value motivated contractors over desperate contractors.
Relief through litigation may be available but litigation should never be your strategy on entering the contract. Do your best to be informed, stay realistic in your expectations, and do not be afraid to ask for help at any stage of the process.