1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

Canada is a federation, with a single national government as well as 10 provincial and three territorial governments. Each of Canada's provinces and territories is a common law jurisdiction, except for the province of Quebec, which is a civil law jurisdiction due to its French heritage.

The Constitution Act, 1867, divides powers between the federal and provincial/territorial governments by subject matter. The provincial and territorial governments have jurisdiction over ‘property and civil rights', including the power to address most construction-related issues.

A landmark feature of the Canadian construction law landscape is provincial statutory lien legislation. Each Canadian common law province and territory has construction lien legislation (while an analogous remedy exists under Quebec's Civil Code), which protects companies and individuals that supply services or materials to construction projects through the statutory creation of a ‘construction lien'. The construction lien protects unpaid suppliers of services and material by creating a limited security interest in the improved premises that, broadly speaking, is equal to a percentage of the value of the services or materials that the general contractor has supplied to the project (which amount the owner is required to ‘hold back' from payments made to the general contractor).

In addition to creating lien rights, Canadian construction lien legislation will typically govern other important aspects of the construction process, including:

  • the release of holdback;
  • statutory trust obligations;
  • prompt payment; and
  • in some provinces, the summary adjudication of construction disputes.

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

In addition to statutory lien legislation, a wide variety of legislative and regulatory provisions are relevant in respect of construction projects in Canada. These include the following.

Laws governing the use, development and redevelopment of land: Each Canadian province and territory, and the municipalities within which projects are located, has legislation, policies and/or bylaws that provide a framework for the use, development and redevelopment of land. At the beginning of any construction project, the parties must ensure that they have obtained the proper land use permissions, including zoning, site plan approval and environmental approvals.

Laws governing construction and building standards: Constructors must obtain a building permit (or permits) from the local municipality, in order to construct, renovate or demolish any building. When the project is complete, the owner must obtain an occupancy permit, which will be issued only once the applicable requirements under the relevant building code legislation have been met.

Laws regulating labour conditions and health and safety: Provincial labour and employment legislation mandates minimum standards for the health and safety of workers and will also govern, among other things:

  • work site conditions;
  • wages;
  • termination; and
  • collective bargaining/other union-related issues.

Laws governing the environment: Federal and provincial legislation imposes restrictions which affect construction, including in relation to required permits and the release (spills) of contaminants.

Laws governing public procurement: The federal, provincial and municipal governments in Canada are collectively some of the largest purchasers of goods and services in the country; as such, Canadian governments and courts have developed robust laws, regulations, policies, directives, guidelines and procedures that govern public procurement.

Laws governing competition and corruption: A variety of federal and provincial laws enhance and protect competition in the construction industry, prevent bid rigging and criminalise corruption.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

Various federal, provincial and municipal administrative bodies and law enforcement agencies have the power to enforce the laws and regulations that govern the construction industry in Canada. By way of example:

  • local municipalities have the authority to grant land planning permissions and issue the requisite permits, licences and approvals that are required for construction to proceed. If a party commences construction without these permissions and approvals in place, municipal authorities have the power to put a stop to the work and issue fines;
  • health and safety inspectors that act on behalf of the provincial governments can issue orders and fines, and can even shut down construction sites that fail to meet legislated safety standards or work site conditions; and
  • the Competition Bureau, a federal government law enforcement agency, has the power to investigate and prosecute crimes relating to bid rigging and the formation of cartels.

Construction disputes (which usually involve claims in either breach of contract or tort) are principally adjudicated by the provincial superior courts of justice. The superior courts have the power to award damages for breach of contract or for tortious conduct; and also have the power to issue a number of other common law remedies that can impact on the construction sector, including injunctions or orders for specific performance. That said, some provinces have recently adopted statutory adjudication, such that private adjudicators are empowered to resolve disputes on an interim binding basis.

1.4 What is the general approach in regulating the construction sector?

Canada is a common law country. As such, laws governing the construction industry are derived not only from the statutes and regulations described above, but also from the common law.

Generally, the laws regulating the Canadian construction industry are aimed at promoting a free, fair and competitive marketplace, such that goods and materials can be purchased at the best price.

In this regard, a key principle of Canadian common law is freedom of contract: private persons in Canada are free to contract with whomever they please, on whatever terms they choose (subject to very narrow exceptions, such as illegality). Accordingly, subject to the duties of honest contractual performance and good faith, Canadian courts are reluctant to imply terms into or otherwise rewrite construction contracts.

Further, a variety of Canadian laws are specifically aimed at promoting and protecting a competitive marketplace. In the public sector, competitive procurement processes are required for federal, provincial and municipal construction projects in order to protect public value on the basis that competitive bidding between firms is intended to encourage lower pricing, higher quality and innovation. Similarly, Canadian courts have developed a robust set of common law principles that govern procurement processes in both the public and private sector, which are aimed at promoting and protecting competition, fairness and transparency.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

In Canada, the two main categories of owners - the public and private sectors - typically procure goods and services through formalised, competitive procurement processes, by issuing either a call for tenders or a request for proposals (RFP). These processes do not vary depending on whether international parties are involved, though any applicable treaties must be observed and Canadian content requirements may be included in some procurements.

Public sector owners in Canada are generally required, subject to narrow exceptions, to use competitive procurement processes to purchase goods and services. Similar requirements do not exist in the private sector; but given the advantages of competitive bidding, private owners and contractors regularly use formal procurement processes to purchase goods and services.

Canadian courts have developed a set of common law principles that govern the tender and RFP processes. In general, these principles are aimed at:

  • enhancing competition so that owners can obtain the most competitive price for labour and materials; and
  • ensuring that the tender/RFP process is fair and that all bidders are treated equally.

2.2 What are the advantages and disadvantages of these different methods?

Pursuant to the Supreme Court of Canada's decision in the seminal case of R v Ron Engineering, in a tender process, each bidder enters into a binding contract with the owner upon the submission of a valid bid (known as Contract A). Pursuant to the terms of Contract A, the owner must award the contract to perform the project to the successful bidder (typically the bidder with the lowest bid price), and the successful bidder must agree to enter into that contract (Contract B). The Contract A/Contract B paradigm gives rise to fixed rights and obligations. Specifically:

  • the owner and successful bidder must enter into the contract to perform the work on the terms and conditions set out in the bid documents; and
  • if the owner fails to follow the tender process by accepting a non-compliant bid, for example, unsuccessful bidders can make claims against the owner (typically limited to lost profits).

While the tender process is strict, it is advantageous because the owner need not conduct further negotiations with the contractor on the final contract scope or price. The successful bidder must live with the terms of its bid and must perform the contract accordingly.

In contrast, in an RFP process, each bidding party will submit a non-binding proposal that does not necessarily give rise to a contractual relationship with the owner. The owner can evaluate and potentially negotiate on those offers prior to entering into a contractual relationship with the successful bidder.

The Canadian courts have held that the specific rules set out in the document governing the procurement process will ultimately determine whether that process is a tender or an RFP. As such, simply referring to a document as a ‘request for proposals' or a ‘call for tenders' does not make it one - especially if that document has not been drafted properly. Accordingly, parties seeking to procure goods and services in Canada should seek legal advice when drafting procurement documents, to ensure that such documents are consistent with their preferred process.

2.3 What other factors may influence the choice of procurement method?

Several other factors may influence whether to issue a call for tenders or an RFP.

If design and construction details are not fully developed and/or there is some uncertainty as to whether the contract may proceed, and the owner is willing to negotiate on the price and scope of the work, an RFP may be preferable.

In contrast, where design details are known (eg, in the design-bid-build delivery model) or where obtaining the lowest price and best value is a significant consideration, and it is clear that the owner will need to carry out the project, a call for tenders may be preferable.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

A variety of construction project delivery methods are typically used in Canada. These methods do not vary depending on whether international parties are involved.

Some of the most common structures include the following:

  • Design-bid-build: The owner contracts with a design professional to fully prepare plans, drawings and specifications and then contracts with a contractor to build to this 100% design. This is still the most common form of construction contract in Canada, particularly for small to medium-sized projects. During the course of the project, the designer may remain involved as the owner's consultant or payment certifier, while the general contractor will typically subcontract portions of the work to specialised subcontractors (which may, in turn, subcontract aspects of their work to other subcontractors).
  • Design-build: The owner contracts with a single design-builder that is responsible for both designing and building the entire construction project, which may include design; construction; obtaining land planning permissions and the appropriate permits, licences and approvals; and even financing.
  • Design-build-operate-maintain (DBOM): Similar to the design-build model, the owner contracts with a single special purpose entity that is responsible for both designing and building the project. The special purpose entity is also responsible for operating and maintaining the asset or project after construction is complete, typically for a contractually specified period of years. Currently, the DBOM model is widely used in public-private partnership projects in Canada.
  • Engineer, procure and construct (EPC): The owner contracts with a single entity that is responsible both for designing and building the entire construction project, and for procuring, installing and commissioning major process industrial equipment, which is stipulated by the owner and forms a fundamental aspect of the work. To the extent that the project represents a process plant - for example, a distillery - the design of the process itself may be licensed by the owner and provided to the EPC contractor as a ‘black box', with assumed inputs and outputs, around which the balance of plant must be engineered by the EPC contractor – which will guarantee the ultimate output of the plant itself.
  • Engineer, procurement and construction management (EPCM): Similar to an EPC model, the owner contracts with a single entity - typically a professional engineering firm - which is responsible for designing the project and managing the process construction, and procuring the owner-stipulated process industrial equipment, as opposed to actually undertaking the construction and procurement roles on its own behalf. In this regard, the EPCM contractor may, for example, arrange for the owner to enter into contractual relationships with contractors or venders and subsequently manage the performance of those contracts; or may enter into these contracts as the express agent for the owner, but will not take on the risk of entering into such contracts itself.
  • Construction management at risk: The owner contracts with a construction manager that will be paid a fee for developing a budget and schedule, soliciting bids from trade contractors and managing the construction of the project. Under the ‘at risk' model, certain risks are shifted directly from the owner to the contractor pursuant to the terms of the ‘at risk' construction management contract; for example, the construction manager will enter into contracts directly with trade contractors and will assume liability for delays or cost overruns.
  • Construction management not at risk: Similar to the ‘at risk' model, the owner contracts with a construction manager that will be paid a fee to manage the project and will be reimbursed for its expenses. However, the construction manager will only enter into contracts with trade contractors as the owner's agent and will not assume liability for delays or cost overruns; and the owner will typically provide indemnities to the construction manager pursuant to the terms of the ‘not at risk' construction management contract.

Other models in use include:

  • alliancing;
  • integrated project delivery; and
  • progressive design-build.

These models are more recent in the Canadian market and continue to undergo development.

3.2 What are the advantages and disadvantages of these different structures?

The design-bid-build model can be advantageous because it increases the owner's ability to control the cost of construction by tendering out the construction work to the lowest bidder based on a previously completed design specification.

However, separating design and construction can slow the progress of the project and cause delays. Specifically, the contractor - which had no input into the design of the project - may disagree with the owner about the interpretation or application of design specifications, which can lead to delays. The contractor may also be unable to (or claim that it is unable to) perform work in a timely manner because the design documents are incomplete, contain an unclear scope (sometimes due to a lack of coordination as between plans, drawings and/or specifications), or are otherwise flawed. The owner will typically bear the risk of these delays and will have to compensate the contractor for any changes to the scope of the work as a result of an incomplete or problematic design.

In contrast, under a design-build model, given that a single entity is responsible for the design and construction of the project, the owner can allocate the risks of these issues and delays to the design-builder, which serves as a single point of responsibility. Under the design-build model, the process is also viewed as faster and more streamlined, as design and construction can proceed, to an extent, in parallel; and the owner need only coordinate with a single entity that is responsible for all aspects of design and construction.

However, compared to the design-bid-build model, the design-build model may be less cost efficient, as the owner does not have the opportunity to put out a call for tenders based on a previously complete design. Also, it can be difficult for a designer to price the work, particularly if the owner's requirements are not clearly articulated; and this can give rise to disputes.

3.3 What other factors may influence the choice of project structure?

Several other factors may influence an owner's choice of project structure, including the following:

  • the owner's relative degree of sophistication and experience in overseeing and managing construction projects;
  • the owner's relative degree of confidence in entrusting all aspects of a design and construction of the project to a single entity;
  • the complexity of the construction project and its design;
  • the owner's relative access to financing or sensitivity to cost increases; and
  • the owner's willingness or ability to bear the risk of delays and design errors.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

In the public sector, infrastructure projects are often funded directly by the federal, provincial and municipal governments, sometimes jointly. In this regard, in 2016, the government of Canada launched the Investing in Canada Plan, committing C$180 billion over 12 years for infrastructure development, including:

  • public transit;
  • trading ports;
  • broadband networks;
  • energy systems;
  • community services; and
  • natural spaces.

According to the federal government, the plan has thus far invested over C$101 billion in 74,500 projects, 98% of them completed or underway. However, public-private partnership (P3) projects usually also involve an element of private sector financing, and in many cases the private partner will be responsible for providing all or part of the financing for design and construction.

In the private sector, construction projects are usually financed through self-funded investments, including through:

  • bank loans;
  • construction loans; and
  • even share and/or subordinated debt offerings.

In Canada, numerous financial institutions provide construction loans, which are typically used solely to finance construction costs (as opposed to financing the purchase of land). Construction loans will usually be repayable upon the completion of construction and typically have short-term maturity dates. In some cases, construction loans can be converted into longer-term forms of financing.

The various structures that are available to finance construction in Canada do not typically vary depending on the involvement of international parties.

4.2 What are the advantages and disadvantages of these different structures?

The nature of the financing required will depend on the size of the project and the financing available.

For very large public projects, in some instances the P3 model can be advantageous from a financing perspective. However, Canadian government entities are often in a position to finance these projects, such that in recent years there has been movement towards different, more innovative models, including the alliancing and progressive design-build models.

4.3 What other factors may influence the choice of financing structure?

Other factors that may influence the choice of financing structure include:

  • the size of the project;
  • the nature and complexity of the project;
  • the geographical location of the project; and
  • the financial situation of the owner (or other party that may be responsible for financing the project), including its ability to self-fund the investment or obtain the forms of financing set out above.

4.4 What types of security and other protections are available to lenders to safeguard their position?

In Canada, lenders can rely on a wide variety of security and other protections to safeguard their lending position.

Construction loans to the developer of a construction project are typically secured by mortgages (or debentures) against title to the property that is to be improved (although in some cases against other real property owned by the borrower).

Apart from mortgages, lenders can enter into general security agreements with the borrower and obtain guarantees and letters of credit. Lenders can also request the assignment of other forms of property owned by the borrower, such as planning approvals, permissions, licences or agreements that the borrower has with third parties, such that the lender can step into the shoes of the borrower in order to enforce repayment of the debt.

Labour and material payment bonds and performance bonds can also provide the lender with an additional level of security, as lenders will often ask to be named co-obligees (ie, the party to which the bond is owed if there is a default), such that they can call upon the performance bond in the event of a default.

Also, construction lenders will typically ask to be named as loss payee in connection with property insurance or liability policies that issued in respect of the construction project.

4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Provincial construction lien legislation generally provides for a priority scheme as between construction or building mortgages and construction liens. These statutory priority schemes will determine who gets to realise upon the security first in the event of a default: the construction lien claimant or the lender/mortgagee. As such, construction lenders in Canada should take care to protect their construction mortgages by reviewing the timing of the registration of their mortgage on title to the property and the timing of each of the related loan advances, in light of the priority provisions of the applicable construction lien legislation.

In addition, provincial legislation will generally govern the creation of and enforcement of security interests in the nature of mortgages, debentures and financing agreements. Regarding financing agreements in respect of property other than real property, all Canadian provinces have enacted personal property security legislation, which governs the creation, perfection and enforcement of security interests in personal property.

5 Bribery and corruption

5.1 What measures are in place to combat bribery and corruption in your jurisdiction?

Canada is a signatory to the Organisation for Economic Co-operation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which calls on member states to "take effective measures to deter, prevent and combat the bribery of foreign public officials in connection with international business transactions", and to "criminalise the bribery of foreign public officials".

In connection with the convention, Canada enacted the Corruption of Foreign Public Officials Act, which makes it an offence to bribe foreign officials to induce them to influence a foreign state action in awarding construction and engineering contracts.

In addition, the Criminal Code, which is federal legislation, criminalises fraud; but also creates a series of bribery and corruption offences that relate specifically to government procurement - for example, with respect to the bribery of public officials and frauds that are perpetrated on the government.

With respect to corruption, the federal Competition Act has provisions that criminalise common forms of bid rigging, including bid suppression, bid rotation and market division. Section 45 of the Competition Act makes it illegal for competitors to conspire, agree or arrange to:

  • fix, increase or control prices;
  • allocate sales, territories, customers or markets; or
  • fix, maintain or restrict the production or supply of a product.

Similarly, Section 47 of the Competition Act makes it a criminal offence for two or more persons to engage in bid rigging by agreeing that one party will:

  • refrain from bidding;
  • withdraw a submitted bid; or
  • agree with the other parties on bids submitted.

Under the federal government's Integrity Regime, which is aimed at fostering ethical business practices and upholding public trust in the procurement process, any person or entity that has been convicted of a crime under federal anti-corruption legislation is no longer eligible to be awarded a government construction contract.

6 Standard form contracts

6.1 Which standard form contracts are typically used for construction projects in your jurisdiction? Does this vary depending on whether international parties are involved?

Standard form construction contracts are widely used in Canada on a variety of construction projects. The Canadian Construction Document Committee (CCDC) - an industry organisation that "develops, produces, and reviews standard construction contracts, forms and guides" - develops most of these standards forms (though there are other bodies in Canada, such as the Canadian Construction Association, that also develop standard form contracts).

Commonly used standard form CCDC contracts include the following:

  • The CCDC 2 – 2020 Stipulated Price Contract establishes a single, pre-determined fixed price for the construction project;
  • The CCDC 3 – 2016 Cost Plus Contract establishes an agreement to pay the contractor's costs, plus either a percentage of actual costs incurred or a fixed fee; and
  • The CCDC 14 – 2013 Design-Build Stipulated Price Contract establishes an agreement between the owner and a single design-builder to perform design services and the construction work for a single, pre-determined fixed price.

Certain types of standard form contracts are also used for design and consulting services, including those developed by:

  • the Royal Architecture Institute of Canada;
  • the Association of Consulting Engineers of Canada; and
  • the Ontario Association of Architects.

The federal government, the provinces and many municipalities also have their own standard forms. In particular, a number of provinces utilise standard form public-private contractual templates.

6.2 What are the advantages and disadvantages of using the different standard forms?

The standard form contracts that are in wide use in Canada - including the CCDC contracts referred to above - are the result of a transparent, collaborative and consultative process that involves representatives from across the construction industry. As a result, their terms:

  • are well known and understood by industry participants;
  • have regularly been interpreted and applied by the courts; and
  • cover many of the key issues that could arise during a construction project.

Standard form contracts are also more cost effective and can reduce or in some cases eliminate the need for negotiation on the contract terms.

However, standard form contracts do not fit all projects - especially larger and more complex ones, where owners typically choose to use a bespoke form of contract. Additionally, some owners view the CCDC contracts as failing to adequately allocate risk to contractors and as such, will not infrequently modify their terms though the introduction of supplementary conditions.

6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?

Other factors that influence the decision to use standard form contracts include:

  • the complexity of the project;
  • the cost of the project; and
  • the financial position of the owner.

6.4 Where standard form contracts are used, do parties typically modify their provisions?

Some owners may view CCDC documents as overly protective of contractors and, as such, will modify the standard form contract by introducing supplementary provisions that are aimed at reallocating risks or imposing specific duties on the contractor, including, for example, by:

  • establishing a higher standard of care;
  • creating specific indemnities in favour of the owner; or
  • requiring the contractor to assume the risks of conducting due diligence and site investigation.

7 Contractual issues

7.1 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application?

Choice of foreign law or jurisdiction clauses are valid and enforceable under Canadian contract law.

7.2 What formal, substantive and procedural requirements typically apply to construction contracts in your jurisdiction? Are there any mandatory terms? What terms are typically included? Are any terms prohibited?

Parties to construction contracts in Canada typically cannot contract out of the applicable construction lien legislation. By way of example, Section 5 of Ontario's Construction Act states that "every contract or subcontract related to an improvement is deemed to be amended in so far as is necessary" to conform to the provisions of the Construction Act. Accordingly, parties to a construction contract in Ontario cannot contract out of certain mandatory requirements, such as the requirements:

  • for owners to retain a percentage of the contract price as statutory holdback;
  • to adhere to the prompt payment regime and summary procedure for adjudicating construction disputes; and
  • for a public sector owner to obtain a surety bond where the contract exceeds a specific amount.

Additionally, the Supreme Court of Canada has held that all contracts - including construction contracts - include implied and mandatory terms requiring a general duty to act honestly in the performance of contractual duties and in good faith in respect of the exercise of contractual discretion.

7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?

Risk is typically allocated by way of the construction project delivery method and through the terms and conditions of the construction contract. A fundamental concept of the Canadian common law is freedom of contract and, as such, parties are free to allocate risk on the terms and conditions that they please (subject to their implied contractual duties and provided that such terms and conditions are not illegal or inconsistent with laws of public order).

Under a stipulated price contract, for example, the contractor bears the risk of:

  • ensuring that it controls its costs (as the price is fixed);
  • adhering to a construction schedule and timeline for the delivery of the completed project; and
  • performing the construction work in accordance with industry standards.

By contrast, the owner will typically take on the risk associated with changes to the scope of work or that arise as a result of unforeseen site conditions.

In most public-private partnership contracts in Canada, risk is allocated based on a party's ability to bear and control for that risk. The private partner will typically be responsible for, and bear the cost and risk of:

  • design and construction of the project, including any defects in the design and construction; and
  • the proper management, resourcing and scheduling of the project.

By contrast, the public partner is usually responsible for risks that it can manage - for example, with respect to:

  • obtaining certain permits, licences and approvals;
  • providing owner-supplied materials or equipment; and
  • coordinating with other third parties or public entities.

7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?

Exclusion of liability clauses are enforceable in Canada and are common in construction contracts. Canadian courts have long recognised that parties can agree to contractually limit liability in either contract, tort or both, where the contract clearly indicates that the parties intended to waive, limit or negate that liability. A party that wishes to rely on an exclusion of liability clause must ensure that the clause is drafted clearly and in plain language such that it will be enforceable.

However, the Supreme Court of Canada has also held that under certain circumstances, limitation of liability clauses are unenforceable. According to the Supreme Court of Canada's decision in Tercon Contractors Ltd v British Columbia, a party arguing that a limitation of liability clause is unenforceable must meet the following three-part test:

  • As a matter of interpretation, does the exclusion clause apply to the circumstances as established by the evidence?
  • If the exclusion clause applies, was it unconscionable and thus invalid at the time the contract was made?
  • If the exclusion clause is held to be valid at the time of contract formation and applicable to the facts of the case, should the court refuse to enforce the exclusion clause because of an overriding public policy?

Additionally, parties to contracts in Canada can agree to cap liability at a specific amount. In the construction industry, these caps are most commonly found in contracts for design or engineering services; and the cap is usually tied to the price paid for the services or the amount of professional liability insurance coverage available to the architect or engineer. Limitation of liability provisions are also commonly found in large civil works or infrastructure contracts, including provisions waiving liability for consequential damages.

7.5 In the event of delay to the project, what consequences will this typically have for the parties?

Delays to the project will often have an impact on the overall project schedule, including contractually scheduled dates for substantial or final completion; and may also affect the price and scope of the work and result in other consequential losses.

The consequences of delay usually depend on a number of factors, including:

  • the terms of the contract;
  • the nature of the delay; and
  • the party that is responsible for causing the delay.

The contractor will typically be liable for any losses suffered by the owner as a result of contractor-caused delays (eg, as a result of the failure to properly schedule and coordinate the supply of labour and materials to the project). Some construction contracts include liquidated damages provisions; and owners may also be entitled to offset losses incurred due to contractor negligence or breach of contract against other amounts owing to the contractor under the contract price.

Conversely, if an owner is responsible for causing delay - for example, by providing incomplete or erroneous design specifications under a design-bid-build project delivery model - the contractor is typically limited by the terms of the contract to:

  • seeking reimbursement for direct costs incurred as a result of the delay and/or;
  • seeking extension(s) of time to the overall project schedule.

Most construction contracts will include strict notice provisions that require the contractor to give the owner timely notice of its claim. Contractors should pay careful attention to these notice requirements, as notice provisions are valid and enforceable under Canadian common law and courts will relieve a party from its failure to comply with a notice provision only in limited circumstances.

7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?

Force majeure provisions are enforceable under Canadian law and are regularly included in Canadian construction contracts. Force majeure provisions excuse a party's performance when its failure to perform is the result of an extreme and unforeseen circumstance that is outside the party's control. Common examples of force majeure that can be found in construction contracts include:

  • acts of God (eg, storms, earthquakes or floods);
  • wars or invasions;
  • pandemics;
  • acts of terrorism; and
  • work stoppages due to labour strikes.

If a party wishes to rely on a force majeure provision, it must provide evidence which establishes, on a balance of probabilities, that the force majeure event made it impossible for that party to comply with its contractual obligations.

Canadian common law courts also recognise the common law doctrine of frustration, which holds that if performance of the contract becomes legally or practically impossible, absent the fault of either party and as a result of an event that was neither contemplated nor reasonably foreseen, the contract has been frustrated and the parties are thus relieved from their contractual obligations.

In the wake of the COVID-19 pandemic, owners and contractors have sought to rely on force majeure provisions and/or the common law doctrine of frustration in order to excuse contractual performance. A body of case law is currently developing in Canada around these issues.

7.7 What scope do the parties typically have to make material variations to the works?

Parties may make material variations to the works and typically do so through either change orders (or variations) or change directives, as provided in the construction contract.

Typically, a change order will be issued to document an agreement between the owner and the contractor to vary the scope of work or some other aspect of the contract. The change order will also document any agreed upon changes to the price or schedule resulting from the variation.

In contrast, owners will typically issue a change directive without a prior agreement between the parties - usually in circumstances where time is of the essence and the change needs to be made quickly, without negotiation. After delivery and implementation of the change directive, the parties will identify the impact caused by the variation on, among other things:

  • the project schedule;
  • the scope of the works; or
  • the contract price.

Most construction contracts will outline a procedure to determine the costs and impacts of change directives, first through negotiation and then, if the negotiations fail, through a dispute resolution process.

7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?

No specific mandatory requirements contractually define substantial or final completion of a construction project in Canada. Completion is defined by the terms of the contract and will usually occur when the contractor has satisfied the owner that the contractual requirements have been met. In many cases, the contractor will have to provide the owner with documentation (including close-out logs, certificates, maintenance manuals, permits or as built drawings), or perform testing and commissioning of the completed project, in order to satisfy the owner that it is safe or ready for use and occupation. Many contracts will require a third party, such as the owner's consultant or architect, to certify that substantial and/or final completion has been achieved.

Importantly, under the applicable provincial construction lien legislation, achieving the substantial completion (and subsequently the completion) of the project will entitle the contractor to the release of holdback amounts that are being retained by the owner. However, the owner will not be required to pay out such holdback if there are deficiencies in the works that preclude the project meeting the requirements for use or occupancy.

7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?

Under Canadian common law, the innocent party may terminate the contract only as a result of a repudiatory breach by the other party. Repudiatory breaches generally arise when a party has:

  • breached a term that is vital to the performance of the contract (ie, a condition); or
  • declared or indicated an intention to refuse to perform the contract.

Prior to terminating a construction contract, parties should obtain legal advice to determine whether they are doing so under legitimate and defensible grounds, so that they can understand the legal consequences associated with termination of the contract.

Parties regularly limit or enhance common law rights of termination through express provisions in the construction contract. For example, construction contracts:

  • typically provide that the insolvency of a contractor is grounds for termination; or
  • may:
    • provide for a termination for convenience clause (whereby the owner can terminate the contract at its convenience); or
    • set out a specific set of defaults that give a party the right to terminate the contract.

The parties to a construction contract in Canada cannot contract out of the remedies provided by lien legislation and, as such, unpaid contractors or subcontractors may still enforce a lien despite the termination of their respective contract or subcontract.

7.10 How are delay or liquidated provisions dealt with in your jurisdictions?

Construction contracts in Canada typically include liquidated damages provisions that come into effect after a contractor has failed to meet a particular contractual milestone. However, under current Canadian common law, penalty clauses are unenforceable on the grounds of public policy; and liquidated damages provisions are enforceable only to the extent that they represent a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach.

8 Subcontractors and suppliers

8.1 Are there any particular issues which arise when dealing with subcontracts and/or subcontractors which are different from the issues discussed elsewhere?

General contractors will typically enter into standard form subcontracts with subcontractors, such as those developed by the Canadian Construction Document Committee. Subcontracts are typically back-to-back agreements, in respect of which the general contractor subcontracts its obligations under the main contract for a specific element of the scope of work by incorporating those obligations into the subcontract. Pay-when-paid clauses are sometimes used in subcontracts and their enforceability will depend on their terms and may vary by jurisdiction.

8.2 Are there nominated subcontractors in your jurisdiction?

It is possible to require a general contractor to use nominated subcontractors in its bid or proposal.

9 Payment

9.1 Are there any statutory or other requirements which govern how parties are paid?

Under most standard form contracts, payment by the owner to the general contractor will become due upon the submission of requests for payment which are made based on a percentage of completion of based the works or the achievement of specific milestones. These requests for payment are then certified by a registered professional, such as an architect or an engineer, which acts as the ‘payment certifier' under the contract, following the issuance of which payment will fall due within a stipulated number of days.

From a statutory perspective, some Canadian provinces have incorporated or are in the process of incorporating mandatory prompt payment regimes into their existing construction lien legislation. Also, the federal government of Canada recently enacted the Federal Prompt Payment for Construction Work Act.

By way of example of a prompt payment regime, Ontario's Construction Act sets out specific payment milestones which are triggered upon the contractor's submission of a ‘proper invoice'. Generally, the owner must pay the general contractor within 28 days of receipt of the invoice and, in turn, the general contractor must pay its subcontractors seven days later (and so on down the chain of subcontractors). Importantly, the Construction Act specifically provides that the payer of the invoice has the right to offset outstanding debts, claims for defects in the work performed by the payee, or other back charges, by deducting from the amount due to the contractor under the invoice.

9.2 Are ‘pay when paid' clauses valid? In what circumstances?

Pay-when-paid clauses are sometimes used in Canada. Their enforceability will depend on their terms and may vary by jurisdiction.

The Canadian courts have recognised that these clauses can result in an unfair risk transfer when owners decline to provide payment in a timely manner, or at all. Subcontractors that are subject to ‘pay when paid' clauses can be put in the unfortunate position of having to finance construction projects by performing work while they wait for payment from general contractors that are able to take benefit from the protection of the pay when paid clause.

Given the potential unfairness of pay when paid clauses, Canadian courts will typically interpret them strictly and, as such, they must be drafted in a clear and precise manner to ensure they will be enforceable.

9.3 How are retentions typically dealt with?

Provincial lien legislation requires owners to retain a portion of the contract price from each payment to the contractor. In Canada, this retainage is referred to as a ‘holdback', the purpose of which is to protect subcontractors and suppliers that supply services and materials to the improvement.

By way of example, under Ontario's Construction Act, each payer upon a contract or subcontract is required to retain a holdback equal to 10% of the price of the services or materials supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired, have been satisfied or have been discharged. In addition, Ontario's Construction Act also establishes a ‘finishing holdback', which requires the payer to retain a holdback equal to 10% of the price of the remaining services or materials to be supplied in circumstances where the contract has been substantially completed but finishing work must be performed. Some contracts also include contractual retentions - for example what is known as a ‘maintenance holdback', which is intended to guarantee the performance of warranty obligations.

10 Health and safety

10.1 What key health and safety requirements apply to construction projects in your jurisdiction?

Federal and provincial labour and employment legislation imposes specific health and safety requirements on all construction projects in Canada.

In Ontario, for example, "O. Reg. 213/91: Construction Projects" - a regulation passed under the Occupational Health and Safety Act - imposes significant health and safety requirements on construction projects. Under the regulation, ‘constructors' must ensure that:

  • the project has a health and safety representative; and
  • specific health and safety measures are in place, including:
    • emergency procedures;
    • procedures for inspecting machinery, equipment and other systems to ensure that they do not endanger any worker; and
    • procedures for identifying and detecting hazardous conditions.

In addition, provincial health and safety legislation and the associated regulations will often impose specific requirements to ensure that work is performed on the construction site in a safe manner, including imposing requirements with respect to:

  • protective clothing and equipment;
  • fall protection; and
  • the performance of work in specific physical conditions or while exposed to specific hazards (eg, in compressed air or tunnels, or at heights).

10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?

In Ontario, by way of example, all employers or constructors under the Occupational Health and Safety Act must immediately report to the Ministry of Labour, Training and Skills Development if there has been a workplace incident or illness, including those resulting in death, injury or an occupational illness. Within 48 hours of the incident, the employer or constructor must also provide a written report that contains information specified by regulation to the Ministry of Labour, Training and Skills Development. Employers must also report to their joint health and safety committee or health and safety representative, and to the worker's union (if there is one).

Further, under most provincial legislation, employers must report workplace accidents causing injury to the relevant workplace compensation board.

Pursuant to provincial regulations in Ontario, constructors on construction projects must report certain types of accidents, even if there are no resulting workplace injuries, including cases where:

  • a worker falls a vertical distance of three metres or more;
  • there has been a premature or unexpected explosion, fire, flood or cave-in; or
  • a utility strike has occurred.

10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?

Provincial health and safety legislation typically imposes significant fines, and even jail time, in the event of a breach.

For example, under Ontario's Occupational Health and Safety Act, anyone that contravenes or fails to comply with a provision of the legislation or its regulations or an order or requirement of a health and safety inspector is guilty of an offence and, on conviction, is liable to a fine of not more than C$100,000 or imprisonment for a term of not more than 12 months, or both. If a corporation is convicted of an offence, the maximum fine that may be imposed is C$1.5 million.

Generally, provincial health and safety regulations do not impose specific consequences for directors, officers, managers or employees as a result of a breach. However, Section 32 of Ontario's Occupational Health and Safety Act is unique in that it requires directors and officers to ensure that the corporation complies with the legislation, its regulations and the orders of health and safety inspectors. Directors and officers in Ontario can potentially become liable for a breach of these requirements.

10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?

Construction contractors in Canada should be careful to clarify the extent of their health and safety responsibilities at the outset of a project. In Ontario, for example, a ‘constructor' - that is, a "person who undertakes a project for an owner and includes an owner who undertakes all or part of a project by himself or by more than one employer" - has specific responsibilities under the Occupational Health and Safety Act, including the duty to ensure that the health and safety of workers on the project are protected.

Further, all construction contractors should ensure that their workers and supervisors complete:

  • basic health and safety training programmes (which are usually offered by the relevant provincial ministry of labour;
  • safety training that is specific to the construction industry (including with respect to general construction work, work at heights or work with hazardous materials or chemicals); and
  • training relating to workplace violence and harassment.

Contractors should also ensure that they have:

  • appointed a health and safety representative; and
  • implemented:
    • a health and safety policy; and
    • a specific programme or set of standard operating procedures to implement their health and safety policy.

10.5 Which bodies are responsible for enforcement of health and safety obligations?

Typically, the provincial ministry in charge of labour and employment will be responsible for enforcing health and safety obligations. These ministries employ health and safety inspectors that are responsible for, among other things:

  • conducting proactive investigations of construction sites to ensure compliance with health and safety requirements;
  • investigating complaints, accidents and fatalities;
  • addressing possible violations; and
  • enforcing the relevant health and safety legislation and its regulations by issuing fines or orders.

10.6 What is the general approach in regulating the construction sector from a health and safety perspective?

In Canada, the general approach to regulating the construction sector is to aggressively protect the health and safety of workers through a robust health and safety regime with a series of powerful enforcement mechanisms.

The relevant government officials strictly enforce requirements under the applicable health and safety legislation regardless of any costs, delays or other impacts to the construction project. As such, participants in the Canadian construction industry should ensure that all applicable health and safety legislation, regulations, guidelines and policies are very carefully met at all times throughout the course of their project.

11 Environmental and sustainable development issues

11.1 What environmental authorisations are required for construction projects in your jurisdiction? Do these vary depending on the type of project or the location of the site?

In Canada, both the federal and provincial governments regulate environmental law. Generally, provincial environmental laws will apply, except for projects that take place within or affect areas of federal jurisdiction (eg, fisheries) or on property that belongs to the federal government.

Legislation and regulations will typically require certificates of approval for a variety of projects, such as projects that may threaten waterways or fisheries, or where the lands in question are historically contaminated. Depending on the nature and location of the project, owners or contractors will have to obtain these permits and authorisations from either the federal or provincial government, and in some cases from both.

By way of example:

  • projects that involve the disposal of non-hazardous substances into the sea require a federal permit under the Canadian Environmental Protection Act and the Disposal at Sea Permit Application Regulations;
  • projects that include activities related to taking water will require a provincial permit; and
  • in Ontario, permission from the provincial Ministry of the Environment, Conservation and Parks is required if:
    • the activities of the project release contaminants into the air, land or water; or
    • the project stores, transports or disposes of waste.

Various environmental assessments may also be required. For example, the federal Impact Assessment Act applies to select projects, including projects carried out on federal lands. Under this act, project owners must file an impact statement with the Impact Assessment Agency of Canada, which includes a description of:

  • the project;
  • the environmental, health, social and economic conditions in the project area; and
  • all consultation activities commenced by the project owner.

The Impact Assessment Agency of Canada will assess the project impacts and submit recommendations to either the minister of the environment or a review panel.

11.2 What is the process for obtaining environmental authorisations?

Environmental permits are generally obtained by applying to the applicable government authority that governs that specific permitting process and is responsible for awarding the permit or authorisation. Generally, applicants will have to provide information about the nature of the project and may also have to provide some mitigation or management measures.

While only some permitting regimes allow for an appeal process, in all cases the decision to grant or refuse a permit can be reviewed by the courts through an application for judicial review.

11.3 What environmental requirements must the contractor observe while the site is operational?

As the global construction industry generates significant solid waste, wastewater and air pollution, contractors must observe various legislation, regulations, policies and guidelines regarding pollution, waste disposal or spill and soil management.

By way of example, Section 14 of Ontario's Environmental Protection Act stipulates that "a person shall not discharge a contaminant or cause or permit the discharge of a contaminant into the natural environment, if the discharge causes or may cause an adverse effect". These duties apply to supervisors of the project, owners, contractors and individual workers with control of any material categorised as a ‘contaminant'. Under this act, ‘contaminant' is defined broadly to include any solid, liquid, gas, odour, heat, sound, vibration, radiation or combination thereof, resulting directly or indirectly from human activities, that causes an adverse effect. The permissible concentration of contaminants depends on the use of the land and will vary depending on the zoning and the proximity of the land to environmentally sensitive areas.

Environmental requirements common in construction projects include:

  • the prohibition against spills and the notification of spills;
  • waste audits; and
  • soil management rules.

In Ontario, a construction project may require:

  • an environmental compliance approval (ECA) to discharge contaminants into the air;
  • an ECA to discharge contaminants into surface water; and
  • an ECA for waste management activities.

11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?

Breach of the applicable environmental legislation, regulations or permits/approvals can expose project proponents in Canada to:

  • liability for monetary fines;
  • the loss of environmental permits (which would potentially put a stop to the project); and
  • potential criminal prosecution.

Various environmental laws provide for both summary and criminal convictions for offences, and state that any committed or continued breach that occurs over time will be considered a separate offence for each day on which the breach occurred. Thus, offenders may face both large monetary fines and criminal convictions simultaneously. Monetary penalties can be very costly for corporate polluters.

Canadian regulators will hold polluters responsible for clean-up costs of the pollution or contamination, and may seek further penalties in addition to these costs. Thus, parties remain liable for any consequences (including fines) set out in the applicable environmental legislation.

11.5 What environmental requirements apply to new buildings?

Several building codes require performance standards to be demonstrated prior to occupancy. Project proponents should carefully review municipal regulations. For example, the city of Toronto in Ontario has introduced a tiered Green Standard that requires all new construction to meet the Tier 1 standard, with voluntary Tiers 2 to 4 that provide certain tax incentives. In British Columbia, the city of Vancouver also has specific green building regulations in place that include incentives such as green building rebates. Parties may also agree to meet certain standards – such as Leadership in Energy and Environmental Design (LEED) standards.

11.6 Which bodies are responsible for enforcement of environmental obligations?

At the federal level, Environment and Climate Change Canada is the regulatory authority that exercises jurisdiction over specific environmental areas, such as fisheries, nuclear energy, migratory birds and species-at-risk legislation. Under the Canadian Environmental Protection Act (CEPA), enforcement officers can:

  • carry out inspections to confirm compliance with the law;
  • provide direction regarding corrective measures to be taken; and
  • conduct investigations of alleged environmental breaches.

Review officers are appointed by the minister of environment to review an environmental protection compliance order. The attorney general holds authority for all litigation relating to the CEPA. While enforcement officers can lay charges for offences under the CEPA, the attorney general ultimately decides whether to proceed with prosecution of the charges. The courts make the final ruling(s) regarding prosecutions, injunction applications and civil suits under the CEPA, deciding what remedies to order or penalties to impose.

Provincial legislation details the liabilities imposed on parties responsible for the creation of environmental hazards. In Ontario, the primary legislation is the Environmental Protection Act, which is administered by the Ontario Ministry of the Environment, Conservation and Parks. In British Columbia, the primary legislation is the Environmental Management Act, which is administered by the British Columbia Ministry of the Environment and Climate Change Strategy. Both federal and provincial legislation maintain strict enforcement regimes that allow for various types of orders and the prosecution of environmental offenders.

11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?

The federal and provincial governments maintain compliance regimes that authorise the issuance of various types of orders and the prosecution of environmental offenders. Most environmental regulators in Canada have appointed investigation and enforcement officers with widespread powers. For example, officers are commonly granted broad powers of entry and powers to conduct environmental testing.

The enforcement of environmental legislation varies depending on the severity of the breach. Where possible, Canadian regulators enforce environmental legislation through voluntary agreements and specific orders to comply. However, regulators will hold polluters accountable for the clean-up costs of pollution or contamination, and may seek additional penalties.

11.8 What is the impact of Net Zero in your jurisdiction?

Canada has committed to net zero carbon emissions by 2050 and the construction sector will have a significant role to play. LEED has provided a framework for high-performance buildings and spaces, and reduced greenhouse gas emissions through strategies impacting land, energy, transportation, water, waste and materials through its environmental certificates. LEED Zero was introduced as a complement to LEED, verifying the achievement of net zero goals in existing buildings.

Further, the Canada Green Building Council has released a Zero Carbon Building Standard, providing a framework to help buildings achieve zero carbon in design and in annual operations. Used by a broad range of buildings - including office towers, arenas, warehouses and schools - the Zero Carbon Building Standard balances the rigour required to ensure zero carbon and the flexibility needed to encourage widespread adoption.

12 Insurance

12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?

A wide range of insurance coverage is available for construction projects in Canada, including in the following principal areas:

  • builder's risk insurance, which covers physical losses or damage on the construction site as a result of an insured event;
  • wrap-up liability insurance, which provides blanket liability coverage to all participants in a construction project; and
  • professional liability insurance for designers, consultants and engineers.

It is compulsory for every employer in Canada to maintain coverage with the applicable provincial workers' compensation insurance plan.

12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Reinsurance is a fundamental part of the Canadian insurance industry, but the insurance legislation in each jurisdiction should be reviewed.

12.3 Is it possible to obtain insurance for fitness for purpose design obligations?

Contractual obligations in respect of issues such as fitness for purpose are typically not underwritten; but there are certain builder's risk policy wordings that may be available which cover certain design defects.

12.4 What other forms of insurance feature in construction projects in your jurisdiction?

Other forms of insurance that feature in construction projects in Canada include:

  • commercial general liability policies;
  • boiler and machinery and contractor's equipment insurance;
  • delayed completion/force majeure/liquidated damages insurance; and
  • pollution insurance/insurance for environmental hazards.

13 Employment

13.1 What legislation must employers and contractors be aware of when hiring labour?

Canadian labour and employment laws are governed by both the common law (or the Civil Code in Quebec) and statutory employment legislation. With respect to the latter, the federal and provincial governments have passed a wide variety of laws, regulations and codes that, among other types of workers, govern the employment of construction workers. These laws, regulations and codes mandate minimum conditions that employers must provide for their employees, including with respect to:

  • working hours and overtime pay;
  • vacations and statutory holidays;
  • parental leave; and
  • health and safety.

Pursuant to Canadian employment legislation, in the absence of ‘just cause' (which is a very high bar to meet), employers may not terminate an employee ‘at will'. Rather, if an employer chooses to terminate an employee because, for example, his or her services are no longer needed, the employer must provide the employee with:

  • a statutorily mandated notice period (a continued period of employment after termination which provides the employee with time to find new employment while still being paid); or
  • pay in lieu of notice.

All construction industry employers must obtain coverage for their workers through the applicable provincial workers' compensation plan.

Failure to comply with the applicable employment laws, standards and codes can result in, among other things:

  • prosecution;
  • fines;
  • various orders from the government ministry responsible for enforcing employment standards; and
  • civil actions by employees.

14 Tax

14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?

Project proponents should be aware that their liability to pay Canadian income tax is based on their residency. Persons that are residents of Canada (including corporations) within the meaning of the Income Tax Act (ITA) are taxed on their worldwide income from every source. A non-resident of Canada is subject to Canadian tax on income or gains from a Canadian source, including business carried on in Canada. The amount of tax payable may be reduced through a tax treaty that Canada has entered into with the person's country of residence.

Parties to a project that are paid for their supply of services or materials are also liable for remitting a value-added goods and services tax/harmonised sales tax (GST/HST) to the federal government.

Contractors should be aware that generally, GST/HST becomes collectible on each progress payment on the earlier of:

  • the day the purchaser pays the progress payment; or
  • the day the progress payment becomes due.

GST/HST on the amount of the holdback becomes collectible on the earlier of:

  • the day the purchaser pays the amount of the holdback; or
  • the day the holdback period expires.

Additional issues that owners of construction projects in Canada should consider include:

  • how to efficiently structure their project through corporations or limited partnerships;
  • what types of deductions are allowable for tax purposes;
  • the applicability of depreciation and when it begins; and
  • whether an improvement is considered inventory versus a capital gain.

14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?

To prevent double taxation, the Canadian government has entered into tax treaties with various jurisdictions. As tax treaties vary, it is important to carefully review the relevant treaties and consult with a tax professional.

Additionally, all businesses in Canada - including in the construction field - can claim input tax credits to recover the GST/HST paid or payable on purchase and operating expenses relating to commercial activities.

The federal, provincial and municipal governments offer certain tax incentives to encourage construction. Most significantly, in order to encourage sustainable and development, the provincial and territorial governments, select municipalities, major electric and gas utilities, and some financial institutions offer financial incentives in the form of tax rebates and subsidies in exchange for the construction of sustainable/energy-efficient commercial and residential buildings.

14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?

Strategies that a party may consider in order to mitigate tax liabilities include:

  • choosing a tax-efficient method of structuring the project, including through the use of corporations, joint ventures, partnerships or trusts;
  • taking on an appropriate mix of debt and equity in order to finance the construction project;
  • applying for deductions and input tax credits, as applicable; and
  • taking advantage of tax incentive programmes that have been offered by the federal, provincial and/or municipal governments.

15 Technology

15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?

At present, Canada does not have a national BIM mandate, even though certain members of Canada's architecture, engineering, construction and facility management industries have called for one.

As such, no particular BIM standards or other requirements have been mandated in Canada; but BIM is becoming widely used in the industry.

15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?

Smart contracts in Canada remain in a developmental stage and are not widely used. At present, there are no special restrictions or regulations that apply to smart contracts, and it remains to be seen how Canadian courts will apply traditional common law contract doctrine to smart contracts.

15.3 What developments in digital technology do you see having a major impact on the construction industry?

BIM is expected to have a considerable impact on the Canadian construction landscape.

At present, BIM programmes are being offered at Canadian post-secondary institutions that offer education in construction and project management.

Leaders in the fields of architecture, engineering, construction and facility management also anticipate that BIM will play a significant role in the future. For example, according to the third annual Building Information Modelling Report, which was conducted by the Building Innovation Research Centre at the University of Toronto in collaboration with the Residential Construction Council of Ontario, the Toronto BIM Community and the AECO Innovation Lab, and which was developed based on surveys of more than 800 Canadian respondents in the fields of architecture, engineering, construction and facility management:

  • 94% of participants acknowledged that BIM is the future of project information and design practices;
  • 90% of participant organisations had adopted some level of BIM in their current operational workflow; and
  • 80% of the 10% that had not done so indicated that they had plans to implement BIM in the near future.

16 Disputes

16.1 In which forums are construction disputes typically heard in your jurisdiction?

Construction disputes in Canada are typically heard in either public or private forums.

With respect to public forums, there are no specialist courts in Canada that deal solely with construction matters; although in Toronto - Canada's largest city - there are specialised associate judges who deal specifically with construction lien matters. Construction litigation typically falls under the jurisdiction of the provincial superior courts of justice, which have the power to adjudicate civil matters, including claims for breach of contract and claims in tort.

Typically, the procedure for construction lien disputes is determined by the specialised procedural rules set out in the applicable provincial construction lien legislation. These rules are aimed at resolving construction disputes in an efficient and timely manner. Ontario's Construction Act also provides for an in-project dispute resolution and adjudication process that is tied to the statutory prompt payment regime.

Construction claims that do not involve liens (eg, with respect to deficiencies or for unpaid invoices that were not secured by a construction lien) will be governed by the procedural rules that apply to regular civil actions.

Private arbitrations, which are subject to provincial legislation governing arbitrations, are also widely used to resolve construction disputes in Canada. In fact, even public entities and government agencies will regularly participate in private arbitrations to resolve construction disputes. Certain large infrastructure projects also utilise dispute adjudication boards.

16.2 What issues do such disputes typically involve?

Construction disputes in Canada, as elsewhere in the world, can involve a wide variety of issues.

Claims by contractors or subcontractors, for example, usually relate to:

  • the unpaid supply of services or materials;
  • costs incurred as a result of having to perform extra work;
  • the costs of encountering unanticipated conditions; or
  • breach of the statutory trust and holdback obligations set out in the applicable provincial construction lien legislation.

In contrast, owners typically advance claims for deficiencies or delay, often by way of set-off against other amounts that may be due and owing to the contractor. Owners also typically advance claims for negligence by professional consultants that have performed design, architectural or engineering services.

Each claim made within the context of a dispute must be framed within a cause of action that has been recognised under Canadian common law or statute - for example, breach of contract, tort or breach of a statutory duty - or under the equitable doctrines of unjust enrichment and quantum meruit.

Ontario's Construction Act provides for the swift resolution of disputes that relate to, among other things:

  • the valuation of services or materials provided under the contract;
  • payment under the contract; and
  • the non-payment of holdback.

16.3 How are disputes typically resolved?

The vast majority of construction disputes proceed to private mediation and/or arbitration, and are usually resolved by way of a settlement agreement.

16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?

Alternative dispute resolution - specifically, mediation and arbitration - is common in Canada. Canadian courts regularly encourage parties to resolve their disputes privately and by mutual agreement, without accessing the courts; while the rules governing court procedures in some provinces require the mandatory mediation of certain disputes.

Arbitration and mediation processes have been highly successful in resolving construction disputes in Canada and, as noted above, are regularly used. In fact, many bespoke construction contracts for complex projects will mandate private mediation and arbitration or the use of dispute adjudication boards as part of the contractual dispute resolution process; while technical issues are often referred for resolution to an independent technical expert.

16.5 Is the use of dispute boards common in your jurisdiction?

Dispute boards, which can be appointed by the parties at the outset of a project, typically consist of a panel of independent experts that address disputes in real time over the course of the project. Dispute boards are not as commonly used in Canada as other alternative dispute resolution processes such as mediation and arbitration, but are becoming increasingly popular, especially in larger and more complex construction projects.

16.6 Have there been any recent cases of note?

Ontario recently amended its construction lien legislation to include a prompt payment regime, as noted above. Other Canadian jurisdictions either have followed suit or are in the process of reviewing and amending their construction lien legislation. As such, a body of case law is developing that will interpret and apply these changes, especially with respect to transitional issues between the old and new legislation.

In late 2020 and early 2021, the Supreme Court of Canada released two decisions - CM Callow Inc v Zollinger and Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District - that expand upon the duty of good faith and honest performance, which are implied terms to all contracts that are governed by Canadian law.

In Callow, the Supreme Court held that the duty of honest performance precludes one party to the contract from remaining silent if the other party is under a misapprehension about a particular state of affairs as a result of the conduct or deceptions of the first party. In Wastech, the Supreme Court held that the duty of good faith requires a party to exercise any discretion afforded to it under the contract reasonably.

Expansions of the duty of good faith and honest contractual performance will have an impact on the construction industry, as parties to a dispute will likely allege that there has been a breach of these duties in any dispute over contractual performance or obligations.

17 Trends and predictions

17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?

The COVID-19 pandemic has had, and continues to have, a significant impact on the construction industry in Canada. At the outset of the pandemic in March 2020, provincial governments implemented measures to shut down segments of the construction industry; while projects that were deemed ‘essential' by the government, such as major infrastructure projects, were allowed to continue operating.

Since the onset of the pandemic, owners and contractors have had to ensure that new health and safety standards are being enforced on construction sites, including in relation to physical distancing, sanitising and the provision and wearing of personal protective equipment.

In addition, various parties to construction contracts have attempted to argue that COVID-19 constitutes an event of force majeure or has frustrated their performance of the contract. Similarly, many contractors have advanced significant claims for delay or for extensions of time as a result of the impacts and restrictions imposed due to COVID-19.

17.2 How would you describe the current construction landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The Canadian construction industry is currently experiencing labour shortages, especially skilled labour shortages, supply chain issues and escalating costs.

With respect to labour shortages, job vacancies in the construction industry have been steadily rising since the commencement of the COVID-19 pandemic. The demand for construction labour remains high and is not expected to drop in the near term, particularly given the demand for the construction of new houses due to low interest rates. Supply has not kept up with demand, as some Canadians have declined to return to work as a result of health concerns related to COVID-19; government benefits programmes aimed at compensating those who were forced to stop working at the height of the pandemic have also increased demand.

At the same time, the costs of construction have been rising, mostly due to construction material shortages. Labour has also become increasingly expensive due to the disparity between demand and supply.

With respect to the regulation of the industry, the federal government has recently introduced prompt payment legislation, while other provinces across Canada either have now enacted prompt payment legislation and adjudication regimes or are reviewing their construction legislation to consider doing so.

18 Tips and traps

18.1 What are your top tips for smooth completion of construction projects in your jurisdiction and what potential sticking points would you highlight?

Each project must be considered based on its context and purpose. The allocation of risk should be fair and appropriate for the circumstances. Retaining local legal advisers early in the process can assist in ensuring that the contract is drafted so as to address local requirements. Retaining local designers is also important – and is a regulatory requirement.

Once construction is underway, ensuring that the contract is administered in accordance with its terms is important. Great care must be devoted to complying with contractual notice provisions. In terms of claims and disputes, employing dispute avoidance strategies can assist in ensuring that the project runs smoothly. On Canada's largest projects, dispute adjudication boards are being used more frequently to assist in ensuring that disagreements do not gridlock the project.

The co-authors would like to thank Max Reedijk for his contributions.

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.