Canada: Important Developments In Construction Law

Late Payments

In recent years, stakeholders in the Canadian construction industry have been looking to resolve the ongoing problem of late payments. Changes are underway across the country, with Ontario taking the lead. In August 2018, the Quebec government announced a pilot project introducing the same reforms as in Ontario: a mandatory payment schedule and a rapid dispute resolution process. For now, these reforms will affect only certain public contracts, but the pilot is expected to be extended in the future.

Quebec's pilot project imposes a swift payment schedule. The public body involved has 30 days to pay the general contractor, who has five days to pay its subcontractors, who have five days to pay their own subcontractors. The legislation imposes specific dates each month by which general contractors and subcontractors must make their payment requests. If a party does not respect the schedule, the party wishing to preserve its rights cannot immediately publish a notice of legal hypothec (construction lien) against the property; instead, it must initiate the dispute resolution process.

A mandatory arbitration process is required for contracts subject to the pilot project and applies to a range of disputes, including disputes relating to requests for payment, the value of a change order, holdbacks and releases, and the cost of the work.

From the date of the notice of dispute, the parties have five days to agree to an adjudicator, who may proceed as he or she deems appropriate — whether by way of written submissions, telephone conference or an oral hearing. Although lawyers may advise the parties, they are prohibited from making submissions. The arbitration does not interrupt the execution of the work.

The process is swift. The adjudicator has 30 days to render an award, which is enforceable as soon as it is received. If the adjudicator determines that an amount is due, payment must be made within 10 days of notification, failing which the offending party commits an offence punishable by a fine ranging from C$10,000 to C$40,000.

At present, a three-year period is planned for Quebec's pilot project. If successful, broader reforms could be introduced sooner than expected.

Payment Bonds

The SCC recently addressed the timely issue of whether owners and contractors are required to notify beneficiaries of existing payment bonds. Payment bonds ensure that parties to a project will be financially compensated for losses resulting from a contractor's default.

In Valard Construction Ltd. v. Bird Construction Co. (Valard), the SCC held that owners and contractors must disclose the existence of a bond if its beneficiaries would otherwise suffer an unreasonable disadvantage. To determine unreasonable disadvantage, the SCC considered several factors, including bond terms, industry practice, and the nature of the entitlement of beneficiaries pursuant to the bond.

The SCC holds trustees to a standard of honesty, reasonable skill and prudence, and noted that posting a notice on-site at a frequent meeting place is enough to meet the requirement.

However, the decision does not define which other circumstances may trigger a duty to disclose. For example, can a trustee contract out of the duty and decision in Valard or is there always an implied duty to disclose?

To avoid liability, owners and contractors who are trustees for a payment bond must reasonably ensure that the bond's beneficiaries are aware of its existence.

Contract Interpretation and Limitation Periods

Another noteworthy case is the Court of Queen's Bench of Alberta's (Court) decision in Riddell Kurczaba Architecture Engineering Interior Design Ltd. v. Governors of the University of Calgary (Riddell), which addressed three legal principles and their applicability to a client-consultation contract.

The plaintiffs in Riddell were a team of architects who argued that upon completing the project, their fee should be paid on a percentage rather than fixed-fee basis. They relied on the principle of contra proferentem, which states that ambiguity in contracts should be resolved against the drafter.

The Court held that the principle has little application in contracts between sophisticated parties. Instead, post-contractual conduct may be considered to resolve ambiguity, particularly if the conduct is consistent with interpretation of one of the parties. Because the architects conducted themselves in a way that reflected a fixed-fee project, they would have been estopped from claiming damages for breach of the agreement even had the contract supported their position. Parties must, therefore, be aware that their subsequent conduct can affect their rights pursuant to a construction contract.

Riddell also explains the applicability of limitation periods to periodic payments. The architects received payments periodically throughout the project. The Court concluded that the two-year limitation period started to run on the date the architects discovered that the payment was made in a manner that was inconsistent with the service agreement. The architects brought their claim over two years after the first such payment was made. The claim accordingly was precluded by the passage of a limitation period.

Riddell indicates that the limitation period for building contracts that have part payment obligations may trigger limitation periods before the contract is fully performed. Therefore, parties to a long-term construction contract need to be aware of limitation periods that may begin to run before the project's completion.

Inter-Provincial Projects

In May 2019, the British Columbia Court of Appeal (Court) held that the province of British Columbia does not have jurisdiction to regulate the operation and expansion of the Trans Mountain Pipeline. Although the decision in Reference re Environmental Management Act (British Columbia) focuses primarily on the constitutional division of powers between the federal and provincial governments, the holding has important implications for future inter-provincial construction projects.1

Federal and provincial laws may co-exist in certain situations. However, the Court was unanimous that the proposed additions to the Environmental Management Act by B.C. were in "pith and substance" regulation of a federal undertaking that is managed by the National Energy Board. Therefore, the ability to regulate the pipeline was out of B.C.'s jurisdiction.

For future inter-provincial construction projects, the decision suggests that courts will scrutinize provincial regulations to ensure that they are not interfering with the federal government's legislative authority.

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© 2019 Blake, Cassels & Graydon LLP.

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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3 Oct 2019, Seminar, Toronto, Canada

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