Canada: Construction & Engineering Law 2018

1 Making Construction Projects

1.1 What are the standard types of construction contract in your jurisdiction? Do you have contracts which place both design and construction obligations upon contractors? If so, please describe the types of contract. Please also describe any forms of designonly contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to "construction contracts" as an abbreviation for construction and engineering contracts.)

There are a variety of project delivery methods and construction contracts in Canada. In Design Bid Build contracts, the owner contracts with an architect/engineer for design work before contracting with a general contractor for construction. Design Build contracts involve the owner contracting with one party to design and build the project. In Construction Management contracts, the owner retains a construction manager to work with a design team and either helps the owner retain subcontractors or retains them directly. Engineering Procurement and Construction contracts are used for large projects and involve the owner contracting with a single party to deliver the entire project. In Engineering Procurement and Construction Management contracts, the owner retains a contractor to perform engineering, procurement and construction management services. The contractor is usually retained before construction starts through project close-out, and sometimes through the warranty period. Public Private Partnerships involve a partnership between a public owner and a private contractor to construct a project. This may involve various delivery methods and services including designing, building, financing, transferring, operating and maintaining the project.

Parties often use standard form contracts which have been developed by industry associations and include the Canadian Construction Document Committee (CCDC), the Canadian Construction Association, and other local organisations such as the Construction Owners Association of Alberta.

CCDC has recently released a form of Integrated Product Delivery (IPD) contract. IPD contracts are single, multiparty contracts that often involve multiple trades in addition to the contractor and consultant. IPD contracts are relatively new to Canada, but are becoming increasingly popular.

The Royal Architectural Institute of Canada and the Association of Consulting Engineers of Canada have developed standard form contracts for situations where an owner retains an architect or engineer for design only.

1.2 Are there either any legally essential qualities needed to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any specific requirements which need to be included in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?

Most provinces in Canada require the elements of offer, acceptance and consideration as well as capacity of the parties to enter into contractual arrangements. Contracts need not be in writing, though most construction contracts are and should be.

Agreements that involve a sale of land must be in writing to comply with the Statute of Frauds. In addition, a contract may be found invalid or void for uncertainty if it lacks one of the following three basic components: parties; price; and product.

The province of Québec is governed by civil law. The Civil Code of Québec provides that "[a] contract is formed by the sole exchange of consents between persons having capacity to contract, unless, in addition, the law requires a particular form to be respected as a necessary condition of its formation, or unless the parties subject the formation of the contract to a solemn form". There is no particular form required for construction contracts. However, there are laws governing public bodies that require them to follow certain formalities; for example, requiring the public body to launch a tendering process.

1.3 In your jurisdiction please identify whether there is a concept of what is known as a "letter of intent", in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.

Letters of intent are used and may be enforceable if they meet the requirements of a contract detailed above. However, if the letter of intent is in substance an "agreement to agree", it is not enforceable. In the construction context, letters of intent are often used to allow contractors to commence performance of a limited scope of work prior to the completed negotiation and execution of a more fulsome construction contract.

1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer's liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors' all-risk insurance?

The three most common types of insurance policies include:

  1. Builder's Risk/Course of Construction policies for physical loss or damage to property in the course of construction, installation or repair. These are typically obtained by the owner or contractor.
  2. Wrap-up Liability policies, naming all or most of the participants in the project. These are typically obtained by the owner or contractor.
  3. Errors and Omissions Professional Liability policies for design professionals' negligence. These are typically obtained by the engineers and architects.

Other types of insurance common in construction contracts include: General Liability Insurance; Automobile Liability Insurance; Tools and Equipment Insurance; and Subcontractor Default Insurance. If the construction project has environmental risks, supplemental polices may be required to cover them.

Some provinces in Canada have legislation requiring new home warranty insurance. Also, each province has a statute regarding workers' compensation, in which the employer pays a premium and employees are insured for the replacement of wages in the event of injury. The statute abrogates a worker's right to sue the employer, other employees, and other employers and their employees in industries to which the legislation applies. Employers' Liability insurance is necessary to cover anyone coming to site not covered by workers' compensation.

1.5 Are there any statutory requirements in relation to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety?

Construction projects, and those working on them, must comply with applicable local legislation. Provincial employment legislation generally sets various minimum standards that employers must meet (e.g. hours of work, minimum wages, vacation, etc.).

Each province also has occupational health and safety legislation which imposes a duty on employers to ensure the health and safety of workers engaged in the work and those at the worksite. Workers are obligated to take reasonable care to protect their own health and safety and that of other workers on site, and to cooperate with the employer to ensure the same.

In many provinces, occupational health and safety legislation requires that a prime contractor or principal contract be designated (otherwise it will be the owner). The designated party is responsible for ensuring that health and safety requirements are complied with. The Criminal Code of Canada also imposes criminal liability on organisations and individuals that do not take reasonable steps to prevent workers from being injured or killed on the job.

The federal government has jurisdiction over criminal matters. It also has exclusive jurisdiction over certain specific industries such as aviation and interprovincial transportation. Federal labour and employment legislation applies to construction projects undertaken in these industries, such as airports, inter-provincial pipelines, railways and highways.

Employers are required to withhold and remit to the government income tax, employment insurance premiums and Canada Pension Plan contributions on behalf of employees.

1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability is complete?

Most provinces have lien legislation which requires a certain percentage of the value of the work to be held back (typically 10%, but this differs between provinces). Outside of lien legislation, any right to holdback funds is a matter of contract. The parties may agree to different amounts of holdback for different purposes. For example, owners may contract to hold back certain amounts in relation to deficiencies. Typically, a statutory holdback cannot be applied to deficiencies.

In some provinces, such as Alberta, only the owner is statutorily required to hold back 10% of the total value of the work rendered. However, parties lower down the contractual chain may agree that one party may hold back a certain amount of money from each payment. However, legislation in other jurisdictions, such as Ontario and British Columbia, requires the owner, the contractor and each subcontractor to hold back 10%.

Typically, the owner is required to hold back the applicable percentage of funds for a specific period of time after the work on the project is complete/substantially complete or, if a certificate of substantial performance is issued. Assuming no liens are filed, the holdback can be released. In some provinces, the amount that must be retained is reduced to an amount for finishing the work. Some lien legislation provides for earlier and progressive release of holdbacks.

In Québec, the Civil Code provides that a subcontractor or supplier may register a lien (construction hypothec) for improvements to land, even though they have no contract with the owner. However, the lien is limited to the work done after the subcontractor or supplier provides written notice of their contract to the owner. Consequently, the owner may deduct from the price of the contract an amount sufficient to pay their claims. The deduction is valid until such time as the contractor gives the owner a release from such claims.

On large projects, financial security may replace the lien holdback such that funds can be advanced without deduction. Some provinces, such as Saskatchewan, provide for the early release of the holdback on large projects of long duration.

Ontario recently passed legislation creating new rules governing holdback. It allows for payment of holdbacks on an annual, phased or segmented basis. Parties may retain holdbacks in the form of a letter of credit or repayment bond rather than in cash. Release of holdbacks is now mandatory once all conditions are satisfied. However, holdbacks may be withheld if the payer publishes the requisite notice in accordance with the regulations. If the payer fails to do so, there is no right of set-off against the holdbacks. Contractors and subcontractors who are not paid holdbacks may refuse to pay related holdbacks to its subcontractors, provided that notice is given and the matter is referred to the adjudicative process set out in the legislation.

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Originally published in Global Legal Group

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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