With the exception of the civil law system in the Province of Québec, Canada is a common law jurisdiction. This means that Canadian law is derived primarily both from statute (Acts and legislative instruments of the federal Parliament of Canada and provincial and territorial legislative assemblies made in accordance with Canada’s Constitution) and common law (the decisions of the Canadian Courts and tribunals, also known as ‘case law’).
In Canada, the areas of law which are relevant to building works are as follows:
Last modified 22 Mar 2024
Professional and other licensing and permit requirements vary widely in each province and territory in Canada. Moreover:
This is a highly detailed and regulated area of law that not only depends on the jurisdiction, but on the nature of the project being undertaken and the type of work being performed.
As only a very broad and generic overview, examples of licenses and permits that an engineer or contractor may be required to obtain to carry out construction work include:
The practice of engineering and architecture is governed mainly by statute and common law. The most relevant common law principles involving engineers and architects are the laws of tort and contracts. Certain provinces also have regulations in addition to the statutory framework that deals with these professions. Lastly, there are also certain federal statutes that affect architecture and engineering practices.
Not all provinces require general contractors to obtain a license. Hiring a licensed contractor may provide benefits, such as mandatory warranty insurance.
Many provinces require trade contractors to have licenses. However, certain provinces only require trade contractors to hold a certification, such as a Certification of Qualification. Most provinces, territories and municipalities also require permits for construction, such as building permits or plumbing permits.
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Safety standards in Canada are regulated by the provinces and territories, each one having its own occupational health and safety legislation. However, there is federal legislation that relates to employees of the federal government, as well as to employees of federally regulated businesses and industries, such as:
In most cases, contractors must be registered with their local workers’ safety organization. There are specific rules in each province and federally to protect the health and safety of works on construction sites. Different rules apply when construction is completed.
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Most provinces and territories have their own Environmental Assessment Act. In addition, there is a federal act, the Canadian Environmental Assessment Act. The Canadian Environmental Assessment Act applies to designated projects and provides for input from certain authorities on the environmental protection that needs to be considered and carried out during a designated project. The act also promotes communication and cooperation with Aboriginal peoples and promotes sustainable development.
The main statute dealing with water quality in Canada is the Canada Water Act, which contains provisions for formal consultation and agreements with the provinces. There are a number of other federal and provincial/territorial statutes and regulations that deal with environmental impact on water and protection of bodies of water.
A wide range of federal and provincial/territorial legislation controls the generation, transportation, and disposal of waste, including hazardous waste and construction and demolition debris. There may be additional requirements in dealing with the disposal of hazardous materials.
Energy-efficient buildings are becoming an increasing focus for the government, developers, investors, builders and prospective tenants.
A number of green rating schemes currently operate in Canada across a range of development types, such as the LEED Canada Rating System and BREEAM.
Construction projects may also be required to meet any sustainable development objectives contained within the relevant regional/area development plan.
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Development incentives and infrastructure support provided by local authorities and utilities vary by jurisdiction and often, within the same jurisdiction, can differ from project to project based upon local need and other market forces. Counsel in Canada can assist in assessing incentives or other arrangements available for a specific project.
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Although the National Building Code of Canada has no legal status, substantial parts of the Code have been adopted by many jurisdictions in Canada, within provincial building codes. However, building codes do vary significantly in some areas from province to province. In addition, the Code applies to construction that falls under the federal jurisdiction of Canada, such as military bases, federal government land and airports.
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The use of standard form contracts on construction projects in Canada is quite common. One of the most widely used sources of standard forms is the Canadian Construction Documents Committee (CCDC). The CCDC publishes a number of different types of construction contracts that they have developed in consultation with representatives from all sectors of the construction industry. CCDC contract forms are endorsed by the Association of Consulting Engineering Companies (Canada), the Canadian Construction Association, Construction Specifications Canada and the Royal Architectural Institute of Canada (RAIC).
In addition to the contracts published by the CCDC, certain professional organizations in Canada produce their own industry specific standard forms. The RAIC, for example, publishes a standard form contract between consultants and architects and a standard form between architect and client, among other standard forms. Certain provincial bodies produce their own standard forms, and various international standard forms may also be adopted in Canada.
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Depending on the type of project, and the project delivery method selected by the owner, the main parties to a construction or engineering contract include the following:
A party who owns or develops a project, engages parties to design and construct the project, and compensates those parties for their services and work.
A party engaged by the owner to design the project. An engineer is required to design and engineer specialized projects, such as public works (ie bridges, highways) or plants (ie manufacturing facilities, utilities).
A general contractor is a party engaged by the owner to construct the project. The general contractor typically hires subcontractors to perform and complete separate parts of the project. Those subcontractors, in turn, may hire sub-subcontractors to perform a portion of the part of the project for which the subcontractor is responsible.
Construction management structures are widely used in Canada. A construction management contract is entered into by the owner and construction manager and can take the form of either a construction management contract for services only, in which case the owner hires all of the trades directly; or a construction management contract for services and construction, in which case the trades are retained by the construction manager, as subcontractors.
A party engaged by the owner to design and construct the project. A design-builder takes responsibility for both the design and construction functions, either with respect to the entire project or a portion of the project. A design-builder is sometimes a joint venture made up of a contractor and design consultant.
A party typically engaged by the owner to provide design services and/or assistance regarding a particular aspect of the work. For example, an owner might hire an architect to design and administer the project; an architect might hire a specialty engineer; a contractor might hire a remediation consultant; a design-builder might hire an MEP (mechanical-electrical-plumbing) engineer. Several consultants may render professional services on a single project, each engaged by and responsible to a different party.
A project manager is commonly hired by an owner to represent the owner’s interests in overseeing the entire project and managing the owner’s relationship with its general contractor, construction manager or consultants, as the case may be. This can be a particularly important role for a specialized project, such as a water park, golf course, or manufacturing facility.
An entity from whom materials are obtained that will become part of the project; for example, those who supply the steel, cement, wood, glass, tiles, and electrical and plumbing fixtures.
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In so-called ‘traditional’ procurement, the building contractor is responsible for the construction of the works, but not for their design. In design-build contracts, the building contractor also takes on responsibility for design of the works, usually by retaining the design consultants. In some scenarios, the design consultants may be appointed by the owner in the usual way, even before the building contractor is selected; when the owner enters into the design-build contract, the design consultants’ appointments are simultaneously transferred across (or ‘novated’) to the building contractor and this places single point design (as well as workmanship) responsibility on the contractor and gives the building contractor control of the design process.
Force majeure clauses are often included in design and construction contracts. It is common for a force majeure clause to provide a contractor with only an extension in time. In some contexts compensation will be payable as well, but it is often limited when available. For example, certain force majeure provisions will entitle a contractor to be compensated for the cost of maintaining and securing the construction site during a shutdown.
However, given that force majeure clauses are creatures of contract, they can be heavily negotiated and unique from contract to contract. Their interpretation will be governed by the normal rules of contractual construction. Force majeure provisions will be construed strictly in the event of any ambiguity. In this context, it means that the clause will be interpreted against the interests of the party that drafted and is seeking to rely on it (contra proferentem).
Importantly, parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.
Most force majeure provisions will also be negated where a particular event was within the contemplation of the parties when they made the contract. The event must also have been outside the control of the contracting party.
The events which trigger the operative clause must be clearly defined. It is in the interests of both parties to ensure that the 'force majeure' is clearly defined in their contract.
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Public-Private Partnerships (P3s or PPPs) are a performance and merit based approach to procuring public infrastructure whereby the private sector assumes the majority of the risk associated with a project and is only paid on performance. This ensures that the project is completed effectively and secures long-term maintenance.
P3s gained prominence in the 2000s, supported by the Canadian Council for Public–Private Partnerships. There are dedicated agencies in certain jurisdictions in Canada that manage major infrastructure projects, including P3s.
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Yes, parties can enter into a ‘fixed price contract’, often referred to as a ‘lump sum’ or ‘stipulated price’ contract, for performance and completion of the construction work. However, although the price is fixed, the lump sum amount might be increased for certain reasons, including additional work that the owner would like the contractor to perform, differing site conditions, or force majeure (see allocation of risk).
Additional work causing an increase to a lump sum contract likely would be performed pursuant to a ‘change order’, which is an amendment to the contract signed by both owner and contractor providing for the additional work. Change orders should describe the change in the work and state any change in compensation or time as a result of the changed work.
In a lump sum contract, the contractor generally takes the risk of increases in the cost of labour and materials, but also benefits in the event of any decrease. In such a case, fluctuations in price or the labour force will not change the lump sum amount.
Absent the ability to add to or reduce the scope of work (and thereby increase or decrease the lump sum amount), an owner would not be able to make any material change to the project after execution of the contract, which is often too rigid for most owners. Thus, fixed price contracts generally have some mechanism where compensation can be changed under certain circumstances.
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Each party to a design or construction contract should always confer and obtain advice from its own risk manager or insurance agent regarding the types and limits of insurance that will best protect the risks with respect to each project. Architects generally carry professional liability insurance. Some contractors carry professional liability insurance as well. Both architects and contractors generally carry the following types of coverage:
The project owner will also usually specify that the contractor take out a builders’ risk policy, designed to insure against damage to the works under construction. This policy may also include delay in start-up coverage, to protect against a loss of revenue if construction is delayed by an insurable risk.
Further, particularly for larger projects, it is also common for a project owner to take out its own “all risks” builders’ risk policy and “wrap-up” general liability policy, with the contractor and consultants named as additional insureds.
In addition to the above, other requirements with respect to insurance may be desirable. Examples include:
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In relation to the construction activities comprised within a development project, the financier will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the financier. The type of security which the employer will usually obtain from a contractor (and which may then be assigned to the financier) includes the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance security from a third party surety to the employer.
It is fairly common in Canada for contractors to provide a performance bond and a labour and materials bond. These bonds are issued by licensed surety companies. Under the performance bond, the surety has the right to complete the construction work following a default by the contractor or to pay a fixed amount to the owner. The labour and materials bond is designed for the protection of subcontractors and allows subcontractors to claim payment from the surety if the contractor fails to pay or becomes insolvent. In Ontario, both types of bonds are now mandatory for contracts on public projects that exceed $500,000 in value.
On larger projects, it is also common for major subcontractors to be required to procure both performance and labour and material payment bonds.
Performance security can be either ‘on demand’ in nature (meaning that the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the “obligee” under the bond before the surety would release bond monies). The latter is typical for both performance and labour and material payment bonds. Other types of security include letters of credit and retention monies, that is, monies which are deducted from a payment made to the contractor.
On large projects it is also reasonably common to require the parent company of the contractor to provide a guarantee of performance. These guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.
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Several payment methods exist in order to compensate the above-described parties. Some of the methods of payment are described below.
For contractors and subcontractors, the most common payment methods are lump sum, cost plus a fee, and cost plus a fee with a guaranteed maximum price.
The contract sets out a pre-agreed sum that the contractor/consultant/sub-contractor will be paid to carry out either a stage or the whole of the works that are required under the contract (subject to various provisions, including variations for which the contractor may receive additional monies).
Under a cost plus fee arrangement, the owner pays the contractor for the entire cost of the work, including, without limitation, the cost of engaging workers (including employee benefits), equipment, materials, supplies, supervision etc The owner also pays the contractor a fee representing the contractor’s profit and other items, such as office overhead. The fee can be a percentage of the cost of the work or a lump sum. If the fee is a percentage, then the fee generally will increase or decrease as changes are made to the scope of the work through change orders or construction change directives (see Variations). If the fee is a lump sum, then any additional fee will have to be provided for in the change order or the construction change directive.
A guaranteed maximum price is the cost plus a fee compensation structure (immediately above) but with a not-to-exceed price guaranteed by the contractor. If the cost of the project exceeds the guaranteed price, then contractor must complete the project and bear responsibility for such excess costs. If the cost of the project is less than the guaranteed maximum price, then the difference between the guaranteed price and the actual cost becomes savings and may be shared in an agreed-upon proportion between the owner and contractor.
Variations exist on the above as well. For example, under the cost plus a fee, the contractor might agree on a not-to-exceed price for the general conditions costs. Under any of the above methods, the contractor might agree not to charge a fee for changed work unless the changed work exceeds a certain dollar amount. In such a case, the contractor might agree that it is not entitled to a fee until the dollar amount of change orders exceeds a specific collar amount (called a ‘fee holiday’ or ‘dead band’).
A schedule of values also may be used to determine that payment remains on course during course of the construction loan. In such a case, a schedule of values listing the trades and other activities on the Project is made, together with the amount then due such parties.
For design consultants, payments are generally made periodically in accordance with a method agreed upon by the parties in the governing agreement. For design work, the phases of work might be assigned a certain value of the entire contract price (eg $X for the schematic design phase, $Y for the design development phase, $Z the construction document phase, $A for the bidding and negotiation phase, $B for construction administration phase, and possibly $C for sustainable design). Within a phase, the parties might agree that the design professional will receive a pro rata share of such value corresponding to the amount for that phase.
Each jurisdiction in Canada has legislation that grants those who supply construction services and make improvements to the land a charge against the owner of the land. This type of charge is referred to as a ‘builders’ lien’, ‘mechanics’ lien’ or ‘construction lien’ depending on the jurisdiction. Although the legislation differs in each jurisdiction, the main purpose of the legislation is to provide payment protection for sub-contractors and material suppliers. Owners are required to holdback a certain portion of all payments made under the contract with the contractor. In the event of a claim by a subcontractor for payment, such payment amount can be paid out of the holdback in priority to other claimants. Subcontractors can also register a claim of a builders’ lien against title to the property on which the project was constructed. Certain jurisdictions provide for liens against chattels in addition to liens against the property.
Several jurisdictions across Canada, including the federal government, have recently introduced amendments to their construction and lien legislation implementing prompt payment and adjudication, which is modelled after jurisdictions that have had similar legislation in place for many years. Currently, the only jurisdiction in which this legislation has fully taken effect is the Province of Ontario; other provinces will soon follow. Although the requirements will vary from jurisdiction to jurisdiction, the prompt payment regime imposes statutory payment deadlines that cascade down the construction pyramid and are structured around the delivery by a contractor to an owner of a “proper invoice”. Adjudication, also governed by statute, is an interim, binding dispute resolution process that facilitates enforcement of any breach of the prompt payment requirements and also allows for a broader range of disputes to be resolved early. In jurisdictions where these concepts are implemented, it is not permissible to contract out of them. Prompt payment and adjudication are likely to have a significant impact upon the construction industry in the years to come.
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Construction contracts typically require the works to be completed by a specified date. In some contracts, instead of the owner bringing a claim for general damages (compensation) for late completion of the works by the building contractor, the parties may agree that the contractor will be required to pay 'liquidated damages'.
Liquidated damages are damages that are fixed and the amount is agreed by the parties in advance. A typical clause requires the building contractor to pay or allow the employer to deduct liquidated damages at a rate per day or week of delay in the completion of the works. The rate is usually set out in an appendix to the construction contract.
Contractual provisions for the payment of such sums are common in building contracts and favoured because:
It is important to note that:
Conversely, where delays are caused for reasons that are deemed to be the fault of the owner, it is common for contractors to be entitled to recover the direct damages they incur as a result.
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Contractual mechanisms for dealing with variations to the works vary depending on why the variation is requested:
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Most jurisdictions in Canada have a statutory concept called ‘substantial performance’ or ‘substantial completion’, which is achieved when the criteria prescribed by the legislation have been met. Typically, this means that the project is ready for occupancy and that a threshold for the amount of work remaining until total completion has been achieved. The substantial performance date will in turn also drive the deadline for preserving construction lien rights and the release of holdback funds.
Canadian construction contracts also often supplement these concepts, to the extent permitted by legislation.
Substantial completion is usually achieved to the satisfaction of a third party certifier such as the architect, superintendent or other employer’s agent who has the discretion to certify substantial completion where minor items are incomplete. Substantial completion should be left to the discretion of the third party certifier. Building contracts are often amended to state that certain requirements must first be satisfied before the works may be certified as substantially complete.
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The general comments below related to bringing claims in Canada apply to the common law provincial and territorial jurisdictions, of which there are 12. There is one additional province, Quebec, which operates under a civil law system unlike any of the other 12 Canadian jurisdictions. Due to the generality of this paper, we have excluded discussion of the Quebec legal system.
The time within which a party to a contract may bring a claim generally is imposed by provincial and territorial statutes if the parties do not provide otherwise in their construction contract. As such, the times differ between the various common law jurisdictions in Canada.
Each province and territory has a form of limitations statute prescribing the deadline by which a legal action must be commenced, in default of which the cause of action is extinguished. For example, in British Columbia, the Limitation Act, S.B.C. 2012, c.13 establishes a 2-year limitation period for most types of claims running from the date that the claimant either knows of, or reasonably ought to have known of, the basic elements of the claim. A 2-year 'reasonable discovery' test can be found in many of the Canadian common law jurisdictions. Others use a basic 6-year limitation period.
The various limitations statutes also prescribe an ultimate limitation period running from the date on which the impugned act or omission took place (and not extended by a 'reasonable discovery' test). A lengthy ultimate limitation period is common in the various Canadian common law jurisdictions, although the number of years varies typically from between 10 to 15 years. Some jurisdictions outside of Canada, such as Illinois, U.S.A. for example, stipulate an ultimate limitation period by way of a separate 'statute of repose' (which is generally not done in Canada).
Parties in Canada may agree to vary the effect of a limitations statute by contract. For example, it is possible for parties to agree that notwithstanding the limitation statute, the time limit for commencing legal action will be shorter than the two years. Similarly, parties are permitted to enter into standstill agreements postponing or lengthening the running of time under the applicable limitation statute, usually to defer an ancillary dispute (or potential ancillary dispute) until such time as the principal dispute is determined. Such agreements are typically struck if there is a prospect that a particular determination of the principal dispute will render the ancillary dispute moot.
No matter what the limitation period is, it is necessary to determine at the outset of any new claim whether the limitation period has expired. If it has, the claim will be barred, and the claimant may be prevented from bringing a claim against the alleged wrongdoer. The defendant will be able to plead a limitations defence, and the claimant will have the evidentiary burden of proving that the claim was commenced within the relevant statutory period.
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The pursuit of claims against a developer by the end-user of the facility for physical damage or economic loss, and how the developer can potentially exclude those claims, depends on whether the developer is in “privity” with the end-user, ie whether the end-user and developer have entered into a contract. If they have entered into a contract, recovery of damages or losses incurred by an end-user will be governed by the law of contract. If the developer and end-user are not in privity, recovery of damages or losses is governed by tort law, and the limitations on recovery applicable to claims for “pure economic loss” under the law of torts.
Depending on the contract provisions, claims for physical damage and economic loss against the developer may be made by the end-user, if the two parties are in privity and the contract so permits. Subject to any limits imposed in the contract, the party in breach of the contract will be liable to the counterparty for all reasonably foreseeable damages flowing from the breach of contract. The developer can limit its liability via contract provisions, and insure for some risks it cannot otherwise eliminate or limit by contract.
One method to limit liability is to negotiate a shorter liability period than allowed by the statute of limitations where the project is located (see limitation period). Another method, which may be beneficial to both parties, is to provide for limited damages via a liquidated damages provision; the liquidated damages likely will include economic loss suffered by the end-user.
Developers seek to limit their risk on construction projects by purchasing (or ensuring that their construction manager or principal building contractor purchases) course of construction insurance, and a project liability of wrap-up insurance policy. Developers also typically require that any major contractor on the project carry commercial general liability insurance, and that professional consultants carry errors and omissions insurance.
In Canadian common law jurisdictions, claims for physical damage against a developer by those who ultimately use the facility (but who are not in privity with the developer) would be governed by the law of tort (generally, the law of negligence), and not contract. Under the law of tort, the claim must satisfy four elements in order to constitute a viable cause of action:
The developer would typically attack each of those elements in an attempt to exclude or limit the claim. The developer would also assert affirmative defences that might exclude the claim, eg an expired limitation period.
Claims for “pure economic loss” are afforded special treatment under Canadian law, and are best explained by way of an example. If a building is negligently constructed and leaks, the loss of rental income while the building is being repaired is “pure economic loss” (sometimes referred to as consequential or indirect damages), as opposed to the cost of repairing the physical damage caused by the leaks — still a form of economic loss, but considered direct damages. Subject to one exception explained below, the parties must be in privity of contract in order for one of them to assert a claim against the other for damages in the nature of pure economic loss. The one exception is claims arising out of conditions that constitute a physical danger to person or property. Such claims for pure economic loss are recoverable even in the absence of contractual privity.
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The answer to this question depends on whether the architect, other designer, building contractor, or subcontractor is in privity with the entity advancing the claim. With the exception of builders’ liens, the answers will be the same as developer's liability to end-user explained above.
Builders’ lien legislation provides a small measure of payment security to contractors, design consultants, subcontractors and workers even if they are not in privity of contract with the developer (for example, where a subcontractor is only in privity with a general contractor). In such circumstances, an unpaid subcontractor can (within strict time limits) register a claim of builders’ lien against title to the property on which the project was constructed, and secure its claim to a maximum (depending upon the jurisdiction) of 10% of the value of the head contract. However, a builders’ lien cannot be claimed on federal property given that builders lien legislation creating lien rights is within provincial jurisdiction.
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Privity of contract is a fundamental component of Canadian law. Generally speaking, subject to limited exceptions a contract can neither confer rights nor impose obligations on non-parties to the contract.
Once such limited exception was pronounced in a 1992 Supreme Court of Canada decision in London Drugs Ltd. v. Kuehne & Nagel International Ltd., wherein warehouse employees of London Drugs (who had started a fire) were held to be entitled to the protection of a limitation of liability clause in the contract between their employer, London Drugs and Kuehne & Nagel. In determining whether to apply this limited exception, Canadian courts take into account whether:
Another way in which third parties can enforce obligations in contracts to which they are not parties is to take an assignment of the rights of one of the contracting parties. Unless the contract prohibits assignment, a party receiving notice of the assignment must deal with the third party as if it was the original contracting party. That said, the party receiving notice of the assignment can also raise as against the assignee all the same defences as it could have raised against the original contracting party (the assignor).
A contract also may provide specific requirements with which the contractor must comply in order to afford protections to non-contracting third parties such as a purchaser, tenant, or lender. For example, the contractor may be required cooperate with a purchaser, not interfere with tenant's business, cooperate with lender, enter into an escrow if requested by lender, obey the landlord's rules and regulations, etc. However, generally speaking, the contractor’s compliance with these types of obligations can only be enforced by a party to the contract unless an assignment is given to the purchaser, tenant, lender or landlord in the above example.
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Generally, construction disputes are heard in the Supreme Court or equivalent of the province or territory where the project is located. Canadian “Supreme” or “Superior” Courts (referred to as “King’s Bench” in some provinces) are cloaked with both legal and equitable jurisdiction. So, unlike some jurisdictions in the United States, there is no separate equity or chancery court, for equitable relief such as an injunction or specific performance.
A relatively small number of construction disputes can also be heard in Canada’s federal court if the resulting claim arises from the provision of goods or services to the federal government.
Final decisions of these courts generally can be appealed to intermediary court of appeals. Any appeals thereafter to Canada’s highest court, the Supreme Court of Canada, are generally at the discretion of the Supreme Court of Canada, particularly for construction cases which may not be considered to be of sufficient national importance -- the threshold test for the exercise of the Supreme Court of Canada’s discretion.
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In order for a dispute to be referred to arbitration, the parties to the dispute must mutually agree to submit their dispute to arbitration. The parties may do so when the dispute arises, or, more likely, the parties will have provided in their contract that any dispute will be decided by binding arbitration. Parties to construction contracts in Canada often use standardized contract forms prepared by the Canadian Construction Association or similar organizations, and virtually all such contracts include a multi-step dispute resolution procedure culminating in arbitration.
Arbitration and litigation are different in many respects. In arbitration, disputes are resolved in private; whereas in litigation, the procedure is public, as are the documents and evidence filed by each of the parties. In arbitration, the parties generally have a voice in selecting the arbitrator or panel of arbitrators. However, in the court system, judges are assigned randomly to cases without any input from the litigants;
Although not always the case, arbitration is intended to be a less formal and speedier process when compared to litigation. Absent a mutual agreement by the parties, the arbitration process does not carry with it a right of document discovery or examinations for discovery (the latter of which is sometimes referred to as “depositions” or “questioning”), although it is possible to apply to the arbitrator in advance of the hearing for a discretionary order including such procedures. Arbitral disputes generally can be resolved more quickly than court cases. Once the arbitrator renders his or her decision, there is usually no appeal to the courts except in extremely narrow circumstances, such as fraud, bias or conflicts of interest, or a decision rendered outside of the scope of the arbitrator’s jurisdiction. Courts encourage private resolution of disputes by parties, and so avoid setting aside decisions made by arbitrators.
An analysis of the cost of litigation as against arbitration depends on the size of the dispute and other facts. Arbitrators are typically paid an hourly fee for preparation and study time, travel, attendance at the arbitration, and deciding and preparing the award. Judges, however, are not paid by the litigants. Lawyers charge the same hourly rates for arbitration as they do for court appearances. However, unless the arbitrator grants full document discovery and examinations for discovery rights, the arbitral proceedings will generally involve fewer steps, and therefore, less lawyer time may be required.
Last modified 22 Mar 2024
As noted above, various jurisdictions have now introduced adjudication through legislative reform to the governing construction and lien legislation. In most jurisdiction that implement adjudication, it will be binding on an interim basis, with the parties retaining the right to advance the same claims and defences again in a subsequent litigation or arbitration proceeding if they so choose. As is the case in various international jurisdictions where adjudication is available or required, it is anticipated that it will be very difficult to appeal from or set aside a determination made in an adjudication.
The default is otherwise for disputes to be resolved by litigation unless the parties mutually agree upon an alternative method to resolve the dispute, which might include mediation, arbitration, or a combination of methods. However, even if a party commences litigation, that party may be required to attempt to resolve the dispute by way of ADR.
Most common law jurisdictions have a form of judicial mediation or settlement conference that can be triggered by one or more of the parties. Some jurisdictions such as British Columbia, have mandatory private mediation that can be triggered by one of the parties delivering a notice of intention to mediate to the other. The mediation process is without prejudice. If the parties are unable to settle after engaging in good faith efforts to do so, the legal dispute between them carries on as if the mediation had never occurred, and nothing that was said or delivered in the mediation can be compelled in the legal proceeding.
Parties may also mutually agree to voluntarily submit their dispute to mediation prior to arbitration or litigation. Most standard form commercial construction contracts include mediation as one of a few prerequisite steps to engaging in binding arbitration.
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How are payments to contractors, design consultants and subcontractors normally structured?
Several payment methods exist in order to compensate the above-described parties. Some of the methods of payment are described below.
For contractors and subcontractors, the most common payment methods are lump sum, cost plus a fee, and cost plus a fee with a guaranteed maximum price.
The contract sets out a pre-agreed sum that the contractor/consultant/sub-contractor will be paid to carry out either a stage or the whole of the works that are required under the contract (subject to various provisions, including variations for which the contractor may receive additional monies).
Under a cost plus fee arrangement, the owner pays the contractor for the entire cost of the work, including, without limitation, the cost of engaging workers (including employee benefits), equipment, materials, supplies, supervision etc The owner also pays the contractor a fee representing the contractor’s profit and other items, such as office overhead. The fee can be a percentage of the cost of the work or a lump sum. If the fee is a percentage, then the fee generally will increase or decrease as changes are made to the scope of the work through change orders or construction change directives (see Variations). If the fee is a lump sum, then any additional fee will have to be provided for in the change order or the construction change directive.
A guaranteed maximum price is the cost plus a fee compensation structure (immediately above) but with a not-to-exceed price guaranteed by the contractor. If the cost of the project exceeds the guaranteed price, then contractor must complete the project and bear responsibility for such excess costs. If the cost of the project is less than the guaranteed maximum price, then the difference between the guaranteed price and the actual cost becomes savings and may be shared in an agreed-upon proportion between the owner and contractor.
Variations exist on the above as well. For example, under the cost plus a fee, the contractor might agree on a not-to-exceed price for the general conditions costs. Under any of the above methods, the contractor might agree not to charge a fee for changed work unless the changed work exceeds a certain dollar amount. In such a case, the contractor might agree that it is not entitled to a fee until the dollar amount of change orders exceeds a specific collar amount (called a ‘fee holiday’ or ‘dead band’).
A schedule of values also may be used to determine that payment remains on course during course of the construction loan. In such a case, a schedule of values listing the trades and other activities on the Project is made, together with the amount then due such parties.
For design consultants, payments are generally made periodically in accordance with a method agreed upon by the parties in the governing agreement. For design work, the phases of work might be assigned a certain value of the entire contract price (eg $X for the schematic design phase, $Y for the design development phase, $Z the construction document phase, $A for the bidding and negotiation phase, $B for construction administration phase, and possibly $C for sustainable design). Within a phase, the parties might agree that the design professional will receive a pro rata share of such value corresponding to the amount for that phase.
Each jurisdiction in Canada has legislation that grants those who supply construction services and make improvements to the land a charge against the owner of the land. This type of charge is referred to as a ‘builders’ lien’, ‘mechanics’ lien’ or ‘construction lien’ depending on the jurisdiction. Although the legislation differs in each jurisdiction, the main purpose of the legislation is to provide payment protection for sub-contractors and material suppliers. Owners are required to holdback a certain portion of all payments made under the contract with the contractor. In the event of a claim by a subcontractor for payment, such payment amount can be paid out of the holdback in priority to other claimants. Subcontractors can also register a claim of a builders’ lien against title to the property on which the project was constructed. Certain jurisdictions provide for liens against chattels in addition to liens against the property.
Several jurisdictions across Canada, including the federal government, have recently introduced amendments to their construction and lien legislation implementing prompt payment and adjudication, which is modelled after jurisdictions that have had similar legislation in place for many years. Currently, the only jurisdiction in which this legislation has fully taken effect is the Province of Ontario; other provinces will soon follow. Although the requirements will vary from jurisdiction to jurisdiction, the prompt payment regime imposes statutory payment deadlines that cascade down the construction pyramid and are structured around the delivery by a contractor to an owner of a “proper invoice”. Adjudication, also governed by statute, is an interim, binding dispute resolution process that facilitates enforcement of any breach of the prompt payment requirements and also allows for a broader range of disputes to be resolved early. In jurisdictions where these concepts are implemented, it is not permissible to contract out of them. Prompt payment and adjudication are likely to have a significant impact upon the construction industry in the years to come.
Last modified 22 Mar 2024