Canada: Time Is Money – Remedies For Delay In Construction Projects

Last Updated: December 29 2016
Article by Kelly Hannan and Alex Norris

Delay can be caused by many things — weather, planning errors, change orders, contractor error and so on and on and on. Even a minor delay can quickly cause schedule changes to snowball. This increases the risk of multi-party litigation which often involves layers of builders' liens and potentially complex damage calculations of direct, indirect and impact costs.

Can you terminate the contract?

Where a party causes inexcusable delay, the most common question that arises is whether there is a right to terminate all or part of that party's contract. This typically requires an assessment of whether the responsible party has failed to comply with the contract to a "substantial degree" or whether there has been "fundamental breach" in carrying out the contract. These are difficult concepts to apply — especially where the delay has not yet compounded to cause a significant schedule change.

In one Ontario case, the Court ruled that the owner was not entitled to terminate the contract because the contractor's delay did not amount to a fundamental breach.1 The owner and contractor had entered into a CCDC 2 contract for the construction of a civic administration complex in Guelph. The project soon experienced significant delays. The consultant issued written notice of the contractor's default and the owner sent a Notice of Default two days later. The contractor replied with a schedule for remedying the delay but the owner rejected it. The owner then terminated the contract and required the contractor to immediately leave the site. In turn, the contractor sued for wrongful termination of the contract.

The Court determined that the central question "is not whether [the contractor] may have been in breach of its obligations," but whether those breaches "were in law a fundamental or substantial breach."2 The parties' CCDC 2 contract granted various remedies to the owner, one of which permitted the owner to treat the contract as at an end. However, the Court specified that such a remedy is only available "where the foundation of the contract has been undermined, where the thing bargained for has not been provided."3 In this case, the contractor's delay was not so fundamental as to deprive the owner of what it had bargained for. The owner would still have taken possession of the building, albeit late. The Court held that in order for a construction delay to amount to a "fundamental breach" the delay would have to be "intolerable." Otherwise the owner is not permitted to terminate the contract.

Are there other ways to address delay?

Apart from termination provisions, there may be other provisions in your construction contract that are designed to prevent delay from compounding, or even make up for delay, in order to help keep the construction schedule on track. For example, an agreement might require a contractor to accelerate its work and/or immediately increase its workforce. An agreement might also permit a contractor to cure delay by inserting its own workforce to assist in or take over some of the work of its subcontractor. When this happens, who pays?

What does the contract say about payment?

The first step in any delay situation is to look to what the contract says.

Sometimes the contract is silent and will not expressly provide for compensation where a party is directed to accelerate the work. Generally speaking, as long as a party did not cause the delay, it may be permitted to recover reasonable costs associated with the delay (e.g. costs of increasing the workforce) as damages.

In a British Columbia case, the Court permitted a subcontractor to recover damages from both the owner and the general contractor for delay caused by another subcontractor.4 In that case, construction of the Prince George Courthouse was delayed by 6 months. The electrical subcontractor claimed damages against the general contractor, but the general contractor alleged that the delay was caused by another subcontractor responsible for the millwork. The Court held that every construction contract includes an implied term (in the absence of language to the contrary) that an owner or general contractor will not unreasonably delay a contractor in the execution of its work. The owner and the general contractor were therefore liable to the electrical subcontractor for damages. The Court commented that the general contractor and owner could later seek recovery from the millwork subcontractor whose work gave rise to the delay.

Alternatively, some contracts expressly provide that a party may recover additional costs incurred as a result of another party's delay — but may require that the costs be recovered from the responsible party first. For example, if Party A causes delay, the Contractor can direct Party B to accelerate its work and Party B may claim additional expenses from the Contractor. However, Party B can only recover its additional expenses if the Contractor can recover from Party A first. In this situation, based on the language of the contract, Party B accepted the risk that it could be required to accelerate the work, and ultimately do so, at its own cost if the Contractor cannot recover from Party A (the party responsible for the delay).

What does the contract say about notice?

A subcontractor who encounters delay may be obligated to inform the general contractor in a timely manner so that it can adjust the schedule and/or accelerate the work. At the very least the contractor will generally want express notice of a future claim for damages. In one Ontario case, the Court refused to award damages to a subcontractor for overtime costs because the contract specifically required that it seek written authorization from the general contractor before incurring any additional costs associated with delay.5

Know your contractual rights and obligations

When delay inevitably arises, it is important to know what remedies you can invoke, who you should look to for recovery and what kind of notice must be given. Pay close attention to these types of delay clauses in your contracts. Depending on how they are worded, these clauses have the potential to significantly impact profits. Delay can be the biggest determining factor as to whether a contractor or subcontractor will make or lose money.

Footnotes

1 Urbacon Building Groups Corp v Guelph (City), 2014 ONSC 2641 [Urbacon].

2 Urbacon at para 141.

3 Urbacon at para 142, citing T Heintzmann and I Goldsmith, Heintzman and Goldsmith on Canadian Building Contracts, 4th ed (Toronto: Thomson Reuters Canada, 1988) at 1-70 and 1-71.

4 Kraft Construction Co v Martech Electrical Systems Ltd, 2004 BCSC 703.

5 Kor-Ban Inc v Pigott Construction Ltd, [1993] OJ No 1414 (Ont Ct J Gen Div).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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