Keeping Construction and Tendering Contracts Separate

Author: Corbin Devlin 

Tender documents are often "living" documents. A problem arising on one project prompts a construction owner to insert a new contract term to address the problem on subsequent projects. This is good practice in itself, a sort of continuous improvement process. But a common result of this process is that contract terms are put in the wrong place. In particular, there is a recurring problem with tender documents that intersperse construction terms with proper tendering terms. For example, it is common to see conditions such as "Contractor will use only materials ABC in performing the Work" or "Installation by XYZ certified installers" right in the invitation to tender. These terms and conditions belong in the construction agreement, not in the invitation to tender.

What's the difference where these terms are placed? Isn't the invitation to tender incorporated by reference into the construction agreement anyhow?

The legal problem is that the invitation to tender (Contract A) creates a binding agreement between each bidder and the construction owner. Each bidder (and the construction owner) has a contractual obligation to respect the terms of the invitation to tender – and a contractual right to enforce the terms of the invitation to tender. On the other hand, the construction agreement (Contract B) is binding on only one bidder - the successful bidder - and construction owner. The terms that should bind each and every bidder are terms such as “Bids submitted later than 4 p.m. on closing date will be rejected.” But the owner only requires the successful bidder – not each bidder - to actually perform the work. So it is only the successful bidder that requires to comply with construction specifications such as, for example, "only materials ABC to be used in construction" or "materials to be installed by XYZ certified installers."

What is the harm in binding all bidders to such terms? After all, the owner wants to ensure that all bidders are bidding on the same thing. Frankly, the harm is that this practice causes lawsuits. A few years ago the Double N Earthmovers case (Double N Earthmovers Ltd. v. Edmonton (City of), 2005 ABCA 104) went all the way to the Supreme Court of Canada because of a related problem. The City of Edmonton prescribed certain equipment specifications for the work – and this requirement was found in the tender documents. One of the unsuccessful bidders sued when the City ultimately entered a construction agreement that allowed for different equipment specifications. The City was held not liable. But if the equipment specifications were not embedded in Contract A (the invitation to tender), but instead placed in Contract B where they belong, then this lawsuit might have been avoided.

I'm writing this article because the Double N case does not illustrate an isolated incident. I have seen numerous disputes that could have been avoided but for the confusion caused by construction agreement terms embedded in tendering documents. The owner who specifies "XYZ certified installers" probably does not contemplate that an unsuccessful bidder might have the right to enforce this specification. But placing that specification in the invitation to tender may have that effect.

Of course, the fix to this problem is relatively simple. As mentioned, the proper place for construction terms and conditions is in the construction agreement. Something like the requirement to provide “XYZ certified installers" should be located in the scope of work appendix. The proposed construction agreement, or maybe (depending on circumstances) just the scope of work appendix, should be an attachment to the invitation to tender. The invitation to tender should specify that the successful bidder will enter a contract on the attached terms and conditions, or for the attached scope of work. And the invitation to tender should expressly reserve the owner’s right to negotiate the construction agreement terms with the successful bidder.

Top 3 Ways Project Documentation Fails

Author: Corbin Devlin 

Documentation is key to resolving construction disputes. Was there a change in site conditions? What instructions were given on site? Was a change approved? Was the owner given notice?  This is just a small sample of the issues that come into dispute – and that depend on proper documentation to resolve. Here’s the top 3 reasons project documentation fails:

1. No documentation habit: Construction companies – and construction owners - have personalities just like people do. It still surprises me when small companies have excellent documentation habits, and large companies have weak documentation habits. But I have learned it is not a question of financial resources; it is a question of human resources. Personnel well-educated regarding construction disputes – and in particular personnel who have lived through a number of disputes – come to learn the importance of documentation, and how to properly document a project, event or dispute.
2. No systems: Not all personnel involved in a project are going to have the aforementioned training and experience. So it is key to have systems in place to ensure that documentation is maintained, even by those who may not understand the reasons for it, and even when there is no dispute in sight. Many sophisticated construction contractors and owners have excellent (albeit complex) management systems in place. Remarkably, some don’t. But even smaller or less sophisticated contractors and owners can implement good systems; e.g. designating who is responsible for what project documentation, setting standards for documenting site conditions and events, and recording (and retaining) all project communications.
3. Not reading the contract: No documentation habit or system is going to save the owner or contractor who does not read or understand the contract requirements. One of the best practices I recommend is to ensure that key personnel (e.g. project managers and superintendents) create a summary of every significant contract – in other words, reduce the contract to a page or two of bullet-points. This ensures that key personnel actually read the contract, and provides a useful reference throughout the project. Notice requirements and timelines should be a highlight of any such contract summary.

Sometimes there is no documentation of a disputed event. This puts the parties on a level playing field. But it is far more challenging to resolve disputes without documentation; if it comes down to “he said, she said,” then outcomes may be unpredictable. Sometimes both parties have excellent documentation. In such cases disputes are more likely to come down to technical issues or issues of contract interpretation – they can still be contentious, but much easier to resolve. Sometimes one party has excellent documentation and the other has none. This tilts the playing field. Don’t lose the war of documentation.

The Top Ten Things That Go Wrong With Lien Registration

Author: Corbin Devlin 

Missing the lien deadline – This is number one because lien rights evaporate if a lien is not registered on time.  It is not always straightforward to determine the lien deadline.  The Alberta Builders’ Lien Act says correcting something improperly done, or doing something omitted to be done earlier, does not extend the lien period; as a consequence, the lien period can start running before the last day of work.  And a Certificate of Substantial Performance can affect the timing of lien rights.

Leaving it too late –  A related but distinct problem.  Although there may be good business reasons to postpone the decision to register a lien until close to the deadline, this is risky.   For example, it can take some time and effort to determine the proper legal land description for some industrial and infrastructure projects.  And sometimes the registry office will reject lien registrations for unexpected technical reasons; when this happens on the last day of the lien period, it may be too late to submit another lien for registration.

Liening the wrong lands – It is often necessary to rely on information supplied by others to determine the legal description of the lands.  Experience tells us  such information is not always reliable.

Liening the wrong interest in land – If the work is being performed for a tenant, or anyone other than the true (fee simple) owner of the lands, it is necessary to clearly indicate on the Statement of Lien not only the proper description of the lands, but also which interest in those lands is being liened.  (See Marco Baldasero’s blog post of 10-Sep-2014 for additional comment on lien rights when work is done for a tenant.)

Missing a transfer of lands – A sale of the project lands during construction can jeopardize lien rights.  Unregistered lien rights may be lost when the title is transferred, unless the purchaser meets the statutory test to qualify as an “owner” for lien purposes.

Naming the wrong owner – A simple but too common error.  For example, it is quite common for a contractor to think that the company they are dealing with is the landowner when in fact the lands are owned by a separate, related company.

Failing to fully exercise lien rights – Lien rights may extend to multiple parcels of land associated with an integrated project: Smoky River Coal Ltd. (Re), 1999 ABQB 492. Liens may attach to minerals if the construction work relates to the recovery of a mineral.  But these issues have to be addressed before the lien deadline.

Claiming too little – It is another common mistake to register a Statement of Lien for only the amount currently due.  The holdback and other contract amounts not yet due can and usually should be included in a lien.  And interest may be claimed in a Statement of Lien if the relevant contract provides for it.

Failing to consider the business consequences of lien registration – Registering a lien can disrupt project financing and damage customer relations.  I sometimes see lien claimants scramble to discharge the lien they just registered, when they realize the real world repercussions of lien registration.

Ignoring lien rights – On the flip side, lien rights are often the only form of security for payment available to a contractor, subcontractor or supplier.  In the right circumstances, lien rights are invaluable and must not be overlooked.

Liening the Landlord for Tenant Improvements

Author: Marco Baldasaro

When a tenant requests work from a contractor, there are two ways in which the registered owner of the lands in question can be called upon for payment, even though the registered owner was not the person making the direct request for the work done: the lien claimant can provide notice pursuant to s. 15(1) of the Builders’ Lien Act, RSA 2000, c B-7 (“BLA”) or the lien claimant can show that the registered owner is an owner as defined in s. 1(j) of the BLA.

Section 15(1) Notice

Section 15(1) of the BLA states as follows:

15(1) When the estate on which a lien attaches is a freehold estate for a life or lives or a leasehold estate then, if the person doing the work or furnishing the material gives to the person holding the fee simple, or that person’s agent, notice in writing of the work to be done or materials to be furnished, the lien also attaches to the estate in fee simple unless the person holding the estate, or that person’s agent, within 5 days after the receipt of the notice, gives notice that the person holding that estate will not be responsible for the doing of the work or the furnishing of the materials.

K & Fung Canada Ltd v NV Reykdal & Associates Ltd, [1997] AJ 741, aff’d 1998 ABCA 178 (“NV Rykdal”) is the leading case on the meaning of notice in writing for the purposes of s. 15(1). In NV Rykdal, a tenant entered into a contract with a contractor, who agreed to provide all work, labour, services and materials necessary for leasehold improvements and exterior renovations. All invoices were directed to the tenant. The tenant subsequently ceased carrying on business, leaving over $250,000 in invoices unpaid. The landlord terminated the lease and took possession of the premises. The contractor filed a lien against the premises without giving any written notice to the landlord under the BLA. It argued, however, that correspondence collectively received and sent by the contractor and its agent to and from the landlord and the tenant could be construed as requisite notice for the purposes of s. 15(1).

The court observed that while the notice requirement under s. 15(1) must be in writing, it is not necessary that the notice be in a specific form. As such, the statutory requirement may be satisfied by the delivery of certain documents, the cumulative effect of which is to put the landlord on notice. The court cited the Alberta Court of Appeal in Beyersbergen Construction Ltd v Edmonton Centre Ltd (1977), 78 DLR (3d) 122) as authority for the proposition that even the submission of detailed plans and specifications to the landlord will not constitute notice unless the necessary implication of giving such information is to give written notice that the landlord would be liable pursuant to s. 15(1). Courts will consider whether the notice in writing expressly or by necessary implication informs the landlord or its agent that the lienholder will claim a lien against the fee simple estate.

Landlord as Owner

The test for whether a landlord constitutes an owner for the purposes of s. 1(j) of the BLA was summarized by the court in Royal Trust Corporation of Canada v Bengert Construction Ltd, Coyes and Coyes (1988), 85 AR 210 (CA) (“Royal Trust Corp”) as follows:

To bring the person sought to be charged within the definition of owner, the lien claimant must establish three elements. First it must be shown that the person has “an estate or interest” in the land, and secondly that he has requested, expressly or impliedly, that the materials be furnished or the work done and finally at least one of the remaining elements must be present: the work must have been done or the materials furnished on his credit, on his behalf, with his privity and consent or for his direct benefit.

Whether the conduct of a landlord constitutes an implied request to have the work done has been canvassed extensively by Alberta courts. In Royal Trust Corp, the court observed that whether a request has occurred must be decided on the facts of each individual case. The court noted that a request does not necessarily involve direct communication by the owner to the contractor. It does, however, involve something more than mere knowledge or consent. The court observed that in ordinary language the word ‘request’ indicates the idea of an active or positive proposal, as contrasted with mere passivity or acquiescence.

In Lighting World Ltd v Help-U-Build (Edmonton) Inc, 1998 ABQB 930 the court observed that in order for there to be an implied request for the purposes of s. 1(j), there must be some active participation by the owner in the construction. In that case, the court noted that the parties to the agreement to lease had come to an understanding that the tenant would be responsible for the improvements that it required in order to utilize the premises in the intended manner. While the landlord was aware that the construction was ongoing and a representative of the landlord occasionally visited the premises to observe the state of construction, the representative did not provide any direction to any contractor or the tenant as to how the construction should be done. Neither the landlord nor its representative participated in in the drawing of any plans or the approval of any work. Though the landlord loaned money to the tenant for the purposes of the renovations, there were no terms or conditions attached to those loans dictating who was to perform the renovations or how they were to be done. The court concluded that the landlord was not an owner within the meaning of the BLA, observing at para 22 that

the mere fact of knowledge that construction will ensue when a landlord leases premises does not constitute an implied request that the construction be done by any particular trade, sub-trade or contractor.

Conversely, the Alberta Court of Appeal observed in Acera Developments Inc v Sterling Homes Ltd, 2010 ABCA 198 (“Acera Developments”) that active participation by a liened party in the work being done can operate to bring that liened party within the definition of “owner” through demonstrating an implied request to do work. In Acera Developments, the court found that there was sufficient interaction between the builder and the developer to support the conclusion that the construction proceeded at the owner’s implied request. The court found that the landowner was actively involved in the supervision of the construction and that the lien claimant was contractually bound to construct improvements to a specific standard and scope contractually determined by the landowner. Based on this involvement of the landowner, the court concluded that the work in question could be implied to have been performed at the request of the liened party.

Based on the foregoing, the determination of whether a landlord will constitute an “owner” for the purposes of the BLA will turn on whether it can be demonstrated that the landlord actively participated in the work performed by the lien claimant. The court can be expected to examine the extent to which the landlord approved plans, selected contractors and subcontractors, controlled funding, and provided supervision or inspection.

Conclusion

The contractor or supplier working for a tenant should consider its lien rights against the landlord as a routine matter of due diligence. There are lots of situations where the right to lien a lease (the tenant’s interest) provides inadequate security for payment. Since the right to lien the landlord’s interest is not automatic (unless the landlord is very actively engaged in the construction), the contractor or supplier should use a s. 15(1) notice when appropriate.

On the other hand, the landlord should be cautious regarding the extent of its involvement with contractors hired to perform work for their tenants. The landlord can unwittingly expose itself to lien liability, even though the landlord usually has no control over the risk (i.e. no control over the lien holdback).

 

Problems with Posting Security to Discharge Liens

Author: Corbin Devlin 

Posting Alternate Security is Standard Practice

It is common practice for an owner or general contractor to put up cash or a lien bond in order to discharge a lien from the land title.  This is often required to be done quickly, as the registration of a lien can disrupt construction financing or hold up a transfer of the land.  Many contracts also specifically require the contractor to discharge subcontractor liens within a matter of days.

Posting alternate security is rarely a step that invites any controversy.  Generally, one would expect that security in the form of cash or a lien bond is as good or better than a lien against the land.  As a consequence, lien claimants usually consent to replacing the land with alternate security in the form of cash or a bond.  If lien claimants object, it is usually because they are getting leverage out of having a lien on title, and discharging that lien reduces their bargaining power.

Troubling Developments

Recent case law alerts us that, in the right circumstances, claims by both Canada Revenue Agency and Factors may have priority over lien claims – even in respect of money specifically paid into court as alternate security for the claims of lien.

For example, if security paid into court is subject to claims by Canada Revenue Agency (e.g. an Enhanced Requirement to pay issued by CRA to collect unremitted source deductions or GST) or subject to a prior factoring of accounts, then both the CRA and the Factor may claim priority over the lien claimants, effectively snatching that security away from the lien claimants.  The case law regarding the priority of CRA has been around for a while; the case law regarding the priority of Factors is relatively recent: Van T Holdings Inc. v. KCS Equipment Ltd., 2012 ABQB 335. (Discussing these priorities in greater detail is a subject for another day.)

A new practical problem for construction owners and contractors has arisen because of this priority issue.  The courts have recently shown a reluctance to remove liens from title (i.e. on applications to post alternate security).   It seems the courts have been persuaded that the reasoning of these recent cases (giving priority to CRA and Factors) is only applicable if the lien is discharged from title.  Lien claimants have argued they should not be required to give up their lien against the lands, because alternate security might be less secure (i.e. subject to these other claims).

Until the courts come to grips with this situation, owners and general contractors may face a significant practical problem.  A lien must often be discharged quickly for legitimate practical reasons, particularly to ensure continuing project financing.  There is an opportunity for mischief by a lien claimant who wants to delay the discharge of lien; i.e. objecting to the discharge of lien on the basis that alternate security is not so secure.  The courts have shown a willingness to delay the discharge of liens to address this issue.  Should the owner or general contractor be required to present evidence in court that its’ tax remittances are up to date, and that it has not factored its’ accounts, before it can get a lien discharged from title?

Practical Resolutions

For the moment, there is a risk that routine discharges of lien could be delayed.  But the courts must eventually accept that fairness and practicality requires a mechanism for quick discharge of liens.  If there is to be any objection to discharging a lien based on allegations of priority issues, surely the lien claimant has to show some facts to support the allegations; i.e. a factoring of accounts, or a debt to CRA, or at least a hint of insolvency.

More significantly, I doubt the premise that a lien against the land is more secure than cash security or a lien bond.  After all, the ultimate remedy for a lien claimant is to have the court foreclose and sell the land to realize on the lien.  If there is a debt owed to CRA or a Factor, these priority creditors would exert their claims against the proceeds of sale of the land, if necessary to realize their claims.  In my view these priority cases provide no basis for the court to balk at discharging liens from title.

(Factoring is a sale of accounts receivable to a party known as a Factor.   The seller obtains a cash advance on the accounts receivable from the Factor, and the Factor pays the seller a discounted price relative to the face value of the receivables.  The Factor then owns the accounts receivable and collects from the account debtors.)

The Importance of Keeping a Diary

Author: Corbin Devlin 

Construction disputes often get resolved in favour of the party with the best records.  Right and wrong may have little to do with it when only one party has the advantage of a daily record to support its’ version of events.  A good diary, in addition to serving a practical purpose, is sometimes key evidence in a contract dispute.

Why keep a diary?

• What appears to be a routine discussion, instruction or decision may become a key issue down the road, in a dispute.
• Individuals can legitimately have very different perceptions of the same events and discussions, particularly as memories fade.  And sometimes witnesses bend the truth. What seems to have been a point of agreement on site may be hotly disputed months or years later in the context of litigation.
• Diaries are admissible in court and can be used to assist witnesses to refresh their memory of events.
• The courts place more weight on a contemporaneous record – such as a diary - than on the testimony of a witness (if that testimony is unsupported by any record).
• A good diary can be essential to proving facts in court or arbitration.

Do’s and Don’ts

• Do – require your project managers, superintendents and perhaps others to keep a diary.
• Do - use the diary to record the progress of the work, meeting minutes, instructions and decisions, events and disagreements, equipment and personnel on site… what is important may vary depending on the nature of the work, the nature of the contract, and the other daily project records (it is not necessary to repeat information that is already recorded).
• Don’t - record disparaging remarks or profanity.  It is too common that diaries include embarrassing comments; remember that the diary is a business record and may be viewed by others. Personal remarks on the other hand (e.g. “KFC for lunch again today…) are fine and may even lend credibility to the record.
• Do - implement a policy of retaining work diaries along with other project records.
• Don’t - rely on the fact that the other party is recording meeting minutes – unless you receive, review and correct the minutes.
• Do - ensure that your or your lawyer get your hands on the diaries kept by the other party when you are in a dispute.
• Don’t – rely on a diary as a substitute for documentation required by the contract (e.g. notice of claims, documentation of changes).

In court or arbitration, a good record of events - such as a superintendent’s diary – is invaluable.  It can level the playing field if both parties have kept such records.  It can determine the outcome if not.

No Setoffs Allowed Against the Statutory Lien Holdback? Think Again

Author: Corbin Devlin 

Confusion Over Lien Rights
 
Lien claimants – and their legal counsel – sometimes make the mistake of believing they can compel the project owner to pay the lien fund into court (and out again to the lien claimants). The legislation is actually permissive – the owner (or a mortgagee authorized by the owner) may pay the lien fund into court in order to discharge liens from title. There is no mechanism in the Builders’ Lien Act for lien claimants to compel the owner to pay the lien fund into court. Of course, if the lien claimants have valid liens, their ultimate recourse is to foreclose on the land, which may compel the owner (as a practical matter) to pay the lien fund into court, at risk of foreclosure. But this practical compulsion should not be confused with legal compulsion.

Understanding the Lien Fund
 
The lien fund consists of two parts: 1) 10% of the value of work performed and materials supplied, plus 2) any additional amounts owing. The case law makes it clear that the “first part” of the lien fund (i.e. the holdback) is not subject to setoffs. This only means that subcontractors and suppliers (not in a direct contract with the owner) have at least 10% of the value of the work as security for amounts owing to them, despite any setoffs the owner may have against the contractor (the party having a direct contract with the owner). 

This certainly does not mean, as I have heard argued from time to time, that the owner is liable to pay the 10% holdback to a contractor regardless of any issues in dispute between them. A contractor having a direct contract with the project owner, trying (by court application) to compel the owner to pay him the “first part” of the lien fund, despite the existence of a legitimate dispute as to the amount owing, is most certainly barking up the wrong tree. Whether the application to “compel” the owner to pay the lien fund is made by the contractor or a subcontractor or supplier of any tier, the legislation simply does not permit it. Further, where the issues in dispute are solely between owner and contractor (parties having a direct contractual relationship), the lien fund is largely irrelevant; the question is the proper amount(s) owing between them, and lien rights do not likely come into play unless the owner is unable to pay any amounts owing after judgment.

Subcontractors’ Advantage
 
However, a subcontractor (or a supplier; i.e. any lien claimant who does not have a direct contract with the project owner) may have more success. The subcontractor still cannot compel the owner (by court application) to pay the lien fund into court. But the subcontractor can take other steps that will compel the owner to act. That is, despite the existence of any dispute between the prime contractor and project owner, the subcontractor can apply to court to prove its’ lien valid, followed by other legal steps leading to foreclosure on the lands, which will almost surely compel the owner (not legally, but as a matter of practical necessity) to pay the lien fund into court, or at least expedite the resolution of any dispute between the owner and the contractor.  In this sense, the subcontractor may be able to compel the owner to pay the lien fund into court, where the prime contractor cannot.

Can a Lien Include Damages Due to Delay?

Author: Corbin Devlin

In Krupp Canada Inc v. JV Driver Projects Inc, 2014 ABQB 259, Master Robertson addressed the question whether damage claims – in particular delay claims - can be included in builders’ liens.  The issue has been considered by the Alberta courts before, but Master Robertson contributed to the jurisprudence with a thorough review of the authorities and a considered discussion. 

Krupp was applying to court to reduce the amount of a claim of lien by JV Driver – specifically, disputing that damages for delay were properly included in the lien.  Krupp thereby sought to reduce the security that Krupp had previously paid into court to have the lien discharged. After extensively reviewing the case law on the issues, the Master summarized the law as follows:

1. Where the lienholder has done work on or in respect of an improvement, or furnished material to be used in or in respect of an improvement, then that person has a lien for so much as ”remains due to him”, either pursuant to an agreed price or on a quantum meruit basis;
2. If the amount the lienholder claims remains due is for damages in tort, or for breach of contract but not relating to work actually done on or in respect of the improvement (or, in the case of materials, materials that were used in or in respect of the improvement), then there may be a damages claim, but it is not properly part of a lien; and
3. If it is not clear whether the claim is properly the subject of a lien, then on the standard used for summary judgment applications the amount to be posted as security should be the higher amount and the issue left to the trial court or, perhaps, to a later application before trial once further facts have been learned in the questioning process.

The Master declined to reduce the lien amount as it related to damages for delay. In essence, paraphrasing point 2 above, the Master concluded that a damage claim (including a delay claim) can legitimately form part of a claim of lien, provided the claim is “relating to work actually done on or in respect of the improvement (or, in the case of materials, materials that were used in or in respect of the improvement).” The question is whether the damages claimed relate directly to the work that is the subject of the lien. The Master gives an example; a claim for lost productivity or delay is a legitimate lien claim if the lost productivity or delay occurred on the project that is liened; on the other hand, a claim for damages for a contractor’s inability to do work elsewhere, or for inability to do the work for which it was contracted, would not support a claim of lien.  

As JV Driver was claiming various damages (not just damages due to delay), the court also considered the burden of proof on such an application. Master Robertson concluded (as indicated in point 3 above) that the party seeking to discharge or reduce a lien claim has to satisfy the court “that there is no genuine issue of material fact requiring a trial.” If there is any doubt on the issue, the court will decline to reduce the lien claim (and the security paid into court) until the question can be resolved at trial – whether the lien claim is disputed on the basis that the damages are not properly the subject of a claim of lien, or on any other basis. To the extent that the Master was unsure whether all of the damages claimed by JV Driver did or did not relate directly to the work, the doubt was resolved in favour of the lien claimant, JV Driver.

This is a favourable decision for lien claimants; in simple terms, the court confirmed that delay claims (and other damage claims) can be included in builders’ liens, and the court resolved that a lien claimants’ security will not be reduced before trial unless there is “no genuine issue” to be tried.

 

Termination for Convenience Clauses Often Inadequate

Author: Corbin Devlin

Termination for convenience clauses often get short shrift in negotiations, perhaps because termination seems like an unlikely prospect at the early stages, when resources are being committed to a project and all parties are motivated to get construction underway.  

The Case for the Owner

Owners reasonably require termination (or suspension) for convenience clauses for projects of all kinds. The economics of a project may change, causing the owner to terminate (or suspend) the project. In theory, without a termination for convenience clause, the owner can still terminate a project, but then the owner is likely liable to the contractor for breach of contract damages, including lost profits. While contractors might consider this fair, the reality is that industry practices and market conditions permit construction owners to allow for termination for convenience, and include contract terms to address it.  

The Case for the Contractor

The basic termination for convenience clause gives the owner termination rights and protection against claims for loss of profit. And most such clauses provide for the contractor to be paid for work performed.  But additional terms are required to reasonably protect the contractor. First, the contractor should reasonably expect to be paid direct costs resulting from early termination, such as demobilization.  Second, the contractor requires compensation or protection for subcontracts, supply contracts and perhaps other costs committed for the project (e.g. equipment leases); I find it remarkable this point is often omitted from termination for convenience clauses. The owner likely requires that subcontracts mirror the termination convenience provisions in the prime contract, which may be enough to address subcontracts. But additional considerations pertain to supply contracts and equipment leases; it may not possible for a contractor to cancel a material order or an equipment lease without loss, and the contractor should address this risk in the construction agreement. As for suspension for convenience clauses, the most common and glaring omission that I see is a failure to include some time limit – a contract cannot be suspended indefinitely; after some reasonable time there must be a mechanism for the contractor to bring the contract to an end.

The Problem with Unit Prices and Stipulated Price Forms

Author: Corbin Devlin

A Common Mistake

A surprisingly common mistake made by owners and contractors alike is to use a stipulated price contract form for a unit price contracting arrangement. That is, I frequently see contracts that attach a schedule of unit prices to a form that is otherwise clearly intended for use with a stipulated (lump sum) contract price. This creates uncertainty in the contract terms, which increases the chances of dispute and litigation.

The Difference Between Them

The terms and conditions of unit price and stipulated price contracts are generally very similar. After all, a unit price is a stipulated price; i.e. the price (per unit of measurement) is fixed, subject only to determination of the total quantity of work. On the other hand, there are a couple of important terms required in a unit price contract, beyond the schedule of unit prices, that are not found in a stipulated price contract. A unit price contract requires provisions for measurement of quantities (What is the basis of measurement?  Who is responsible to determine quantities for payment?), and for certifying progress payments (usually based on estimated quantities, subject to adjustment upon completion). A unit price contract may also have unique provisions relating to changes in the work (e.g. Are unit prices subject to adjustment if the quantities of work are substantially increased?).   

The Potential for Dispute

It is not uncommon to have some disagreement over final quantities in a unit price contract.  Such disagreement can turn into litigation when there are no clear contract provisions relating to the determination of quantities for payment. Quite simply, a contract that refers to an overall stipulated price, and then attaches a schedule of unit prices, may be ambiguous. Ambiguity as to a key contract term (price) may invalidate a contract. Attaching a schedule of unit prices does not obviously make it a unit price contract; it is equally possible to have a lump sum contract that attaches a schedule of prices intended to apply only to changes in the work. The parties may have it clear in their minds which of these scenarios is intended. I have unfortunately seen it come to pass, more than once, that one party believes they have signed a unit price contract while the other party believes it to be a lump sum contract (with unit pricing only for changes in the work). The contract documents can often be interpreted either way. Use of the right contract form could have avoided dispute and legal expense in these cases.