Canada: Agreeing Before You Disagree: Entering Into Construction Contracts And Handling Disputes Arising From Them

The construction industry has a reputation for being adversarial and, as a result, disputes are a common feature of the lifecycle of a project. In many cases, the causes of construction disputes are frequently the result of:

  • The allocation of risk in the construction agreements;
  • Incomplete or inadequate construction agreements or documentation;
  • Unanticipated conditions or changes;
  • Unrealistic expectations;
  • A breakdown of communication between the parties; or
  • Delays, both foreseeable and unforeseeable.

In the case of construction projects for universities and colleges, while the project may be a major undertaking to the organization, it is likely a one-off relationship for the contractors, design professionals and trades involved. This can exacerbate the risk of disputes, as the parties involved in the project do not have longstanding relationships.

There are ways to mitigate the risk of disputes on your construction project. Set out below are some of the key elements for handling construction documentation and risk management.

AGREEMENT: WHAT TO LOOK FOR IN CONSTRUCTION DOCUMENTATION

Disputes arise as a result of risks which, if not properly dealt with, may mean increased costs for one or all parties, which in turn are likely to result in claims. In most cases a contract will be in place long before a dispute arises. That contract is instrumental in mitigating the risk of future disputes. In awarding and negotiating a construction agreement, prudent owners should consider the following steps to limit misunderstandings and the possibility of seeing a claim come across their desks:

  • Identify the risk and your tolerance for it;
  • Determine which party is in the most suitable position to manage, re-allocate or control the risk; and
  • Consider if it is economical to obtain insurance or surety bonds for the project to mitigate the risk.

The construction industry has no shortage of project delivery models to choose from, including design-bid-build, design-build, and construction management to name only a few. No construction delivery model is one-size fits all, and each has its own benefits and limitations. A university or college, as an owner, through its various stakeholders and with appropriate legal advice, must identify its objectives and prioritize the key elements of the project to evaluate the best possible construction delivery model to minimize its own risk.

For example, an owner will need to consider the scope of work; schedule; contractual methods to manage risk; indemnities; flow down provisions in contracts to subcontractors; surety bonding and insurance; how payment will be processed; how claims may be asserted; and how the parties will resolve claims when they are made. Many dispute resolution models in construction contracts are tiered, meaning that disputes are first dealt with by the parties through negotiation or reference to a dispute resolution before submitting their dispute to mediation, arbitration, or litigation.

Once the owner has identified the objectives and priorities of the project, the next step is to consider the appropriate delivery model for the project. There are several organizations whose primary function is to develop standard industry forms of contracts. For example, the Canadian Construction Documents Committee, the Canadian Construction Association, and the Royal Architects' Institute of Canada each produce standard industry templates for a nominal fee. These standard forms, although a good starting point, will benefit from a review by technical and legal advisors to consider if any project specific issues need to be addressed. Even standard form contracts may benefit from amendments through supplementary conditions to help you tailor the contract to manage your project's specific risk profile.

Importantly, an owner must consider how to deal with gaps and interplay between various construction agreements. Often, if the contract documents are not clear, the owner may be exposed to liability, as the other party may argue that they did not contract with the owner for anything not clearly contained within the contract nor for items which could not reasonably have been anticipated.

Timely legal advice will help an owner control the risk associated with the interplay of each contract. For example, legal advice at the outset of a construction project can help delineate the party who will be responsible for occupational health and safety issues, thereby reducing or eliminating the risk of a dispute in that area at a later stage of the project.

DISAGREEMENT: WHEN DISPUTES ARISE

Despite the best intentions of all involved, legitimate disputes on construction projects are often unavoidable. The best way to be in a strong position if a dispute does arise is to ensure that you have well-developed construction documentation including contracts, and also the design and project documents. It is critical that the team administering the project for you has the resources required to properly administer the contract.

This includes educating the project team to follow procedures and seeking legal and technical advice where needed. Often, advice sought at the appropriate time before a dispute erupts can avoid costly litigation or arbitration proceedings.

Maintaining a complete and accurate record of the project is the single most important tool that can be used to manage and resolve disputes arising out of the project. Being able to produce a contemporaneous record of the project will allow you to not only demonstrate what happened and when but how the parties reacted at the time and what was agreed to or, at least, the intentions of the parties. Keeping an organized and accurate record should be a high priority on any project, but in reality this can often fall to the wayside in favour of getting the job done. Unfortunately, when a dispute arises later, the lack of accurate records can lead to finger-pointing and costly fact-finding expeditions.

It is often said that the party with the most paper wins, but, as a rule of thumb, the party with not just the most paper, but the best documents, wins. This means creating a document structure for your project, which can often be done with technical consultants, keeping records of meetings, including hand written notes, and responding to joint records, such as minutes of meetings, if inaccuracies are found. Finally, professionalism and courtesy are relevant and important, particularly if you find yourself before a third party deciding your dispute. Consider that both external and internal communications are subject to disclosure during a dispute. If the writer would feel uncomfortable having the document read into a court record, then the content is not one that should be recorded in a permanent record.

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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