Deference to the Project Consultant

By Corbin Devlin

A recent decision of the Alberta Court of Appeal serves as a stark reminder that the Consultant appointed in a CCDC contract wields considerable authority to determine the rights of the parties.

The Court’s Decision

In ASC(AB) Facility Inc v Man-Shield (Alta) Construction, 2019 ABCA 379, the Court considered a dispute regarding the amounts owing for work performed pursuant to a CCDC2 fixed price contract.  The Consultant determined that the Contractor did not perform some of its work to contractual requirements and that the Owner could deduct the value of that work from amounts otherwise owing to the Contractor.  The Contractor sued for the contract value, asking the Court to find that Consultant erred in deducting various deficiency costs when certifying the final payment due to the Contractor.

In the summary trial decision in 2018, Justice Antonio stated: “…CCDC2 makes it clear that the Consultant was empowered to make decisions, in real time or as close to it as possible, in order to keep the project moving. The Consultant had access to the work site and the expertise to evaluate the work he saw. He was regularly involved with the parties, the work, the contract, and the parties’ interactions under the contract. He has expertise in relevant areas. The parties chose this person, equipped with these advantages, to make decisions about the state of completion of the work and any resulting contractual obligations. This Court lacks those advantages. Therefore, as a matter of contractual interpretation, precedent, academic rationale, and practicality, this Court will defer to the Consultant’s determinations on questions of fact, unless they reveal significant errors.  The same will apply to the Consultant’s interpretation of the contract…”

The Contractor appealed this summary trial decision.  The appeal decision was issued in October 2019.  The Court of Appeal agreed with the summary trial judge, ruling that deference to the Consultant’s decisions is appropriate “absent demonstrable and significant error or compelling evidence to the contrary.”

In the result, there was insufficient evidence for the Court to determine the value of various alleged deficiencies (this was only a summary trial, without live witnesses). So, the Court directed a full trial of certain issues. But the Contractor lost the argument that the Court should disregard the Consultant’s valuation of deficiencies. 

Practical Implications

Considering these comments, it is imperative to ensure at the outset that the Consultant appointed in a CCDC contract is appropriate to fulfill the important role of neutral decision-maker under the contract.

It is often a fallacy that “the parties” choose the Consultant; although the contract is (in theory) a negotiated agreement, in many cases the Contractor has no input on the designation of the Consultant by the Owner.  Sometimes, this is due to inequality of bargaining power; other times, this is due to the Contractor (actually, both parties) paying insufficient attention to this important element of the contract.

Pursuant to the CCDC contracts, the Owner pays the Consultant.  In most cases, Consultants are professionals with reputational concerns, and they properly fulfill their role as neutral decision-maker, regardless of who pays them.  But we have also seen cases in which the Consultant shows significant bias in favour of the party who is paying their fee accounts.

We have also seen circumstances in which the project Consultant is lacking necessary experience or qualifications to properly fulfill the role.  Remarkably, we have also seen several cases in which the Consultant is named in the contract, but not actually engaged and paid by the Owner to properly fulfill the role.  Such unfortunate circumstances often lead to a departure from the contractual payment certification process, leaving the parties in unpredictable territory when a payment dispute arises.

Such circumstances tend to present a greater risk to the Contractor than the Owner.  But it is a risk to both parties that legal disputes are more likely to ensue if the project Consultant is not suitable or properly supported to perform the role. 

The ASC case serves as a reminder to take due care in the selection of the Consultant - and to heed the decisions and interpretations made by the Consultant during the course of the project.

UPDATED: Trends in Prompt Payment Legislation

Editors note: As this topic evolves, our team will continue to provide updates and commentary. Our most recent article pertaining to this subject can be found here.

By Richard Wong and Corbin Devlin

There is a trend across Canada in establishing regimes to provide prompt payment to contractors and subcontractors for construction work performed and a regime to resolve disputes over the non-payment of that construction work. Recently, Bill C-97, Budget Implementation Act, 2019 No. 1, which includes the Federal Prompt Payment for Construction Work Act, received Royal Assent. This legislated a new regime related to Federal real property or Federal immovables in Canada, and for those contractors or subcontractors who undertake that work for the Federal Crown (or pursuant to a contract a service provider has with the Federal Crown). The Federal Prompt Payment for Construction Work Act will come into force upon a day fixed by order of the Governor in Council.

The Federal Prompt Payment for Construction Work Act is modeled (although different in several respects) after the Ontario regime, which made technical amendments to the Ontario Construction Act. British Columbia, Saskatchewan, Manitoba ,Quebec, Nova Scotia and New Brunswick have also taken steps towards implementing prompt payment regimes. Public consultation with interested parties and development of regulations will assist in tailoring final legislation that will hopefully address the needs of the industry in each province. 

Alberta, however, has not (yet) followed this trend. Although Alberta Infrastructure has been implementing prompt payment clauses in its various contracts since 2016, no significant steps in Alberta have been taken towards a prompt payment regime in comparison to the other noted provinces. With that said, various Alberta industry associations have discussed their interest in implementing a prompt payment regime. Update December 2019: We are informed that Service Alberta has commenced an engagement for a review of the Builders Lien Act, with a view to implementing prompt payment rules for Alberta.

This does not mean that Albertans are not affected by prompt payment legislation. Once in force, those involved in Alberta projects within Federal jurisdiction will be subject to the Federal Prompt Payment for Construction Work Act. This covers any construction projects situated on federal government lands, generally administered by either Public Services and Procurement Canada or Defence Construction Canada.

The regulations of the Federal Prompt Payment for Construction Work Act are in the process of being developed, subject to input from the public, and will expand upon the general guiding provisions. For example, delivery of a “proper invoice” to the Crown (or service provider), triggers payment to be paid to the contractor within 28 days; triggering payment of the contractor to pay subcontractors within 35 days; and subcontractors to pay sub-subcontractors within 42 days. This chain of triggering events continues in increments of seven days.

There are also deadlines triggered that require formal notice of a description of the work and reasons for a party who refused to pay all or part of an invoice. In particular, the Crown (or service provider) has 21 days to provide a contractor with formal notice of non-payment; a contractor has 28 days to provide subcontractors with formal notice of non-payment, and so on. Similar to the payment increments, the chain for formal notice of non-payment continues in increments of seven days.

Where payment is not received within the legislated timelines, the contractor or subcontractor is entitled to seek a determination from an adjudicator. Unless the parties agree otherwise, the adjudicator’s determination is binding on the parties. There is a 21 day timeline to provide notice of adjudication from the later of the date a certificate of completion is received by the contractor or from the date payment is required.

Considering this, contractors and suppliers engaged on Alberta projects within Federal jurisdiction should be aware of the new Federal prompt payment regime. We will update you when the Federal Prompt Payment for Construction Work Act comes into force and when any developments occur with respect to a Provincial prompt payment regime in Alberta.

Contract Strategy

By Corbin Devlin
 
Selecting the right construction contract model for a particular project can be the difference between harmony and discord among project participants, and the difference between the financial success and failure of the project. Too often, we see litigation arise because of different expectations or understandings as to risk allocation, which is primarily a factor of contract strategy.

Contract Models

What does contract strategy mean? It is the selection (and perhaps customization) of the contract model or models to be employed on a particular construction project. For example: 

1. The Design-Bid-Build model, often described as the “traditional” model of construction, involves an owner contracting with one or more professionals for project design, followed by a competitive process to engage a general contractor, and then a separate contract between owner and general contractor. 
2. The Design-Build model, on the other hand, involves the owner contracting a single entity (Design-Builder) to complete design, procure the necessary services and materials, and complete construction. 
3.  The Construction Management model involves the owner contracting a construction manager to handle construction management activities (and often procurement) on the owner’s behalf. Construction Management is further broken down into “construction manager as agent” and “construction manager at risk” contracting models.
4.  Integrated Project Delivery (such as CCDC 30) is an alternative contract model in which the owner contracts with other project participants (for both design and construction) in a collaborative team with shared risks and rewards. 

These are several of the most common contract models, but there are numerous potential variations on each of these models. In addition to industry standard forms, there are of course infinite variations possible when owners or contractors introduce custom contracts, or unique supplemental conditions to the standard forms. In addition to the question of contract strategy as between owner and contractor, there is a similar (but usually more constrained) question of contract strategy for contractors and construction managers in their contracts with trade contractors. Whether we are talking about a prime contract or a subcontract, it is worthwhile noting that the contract pricing mechanism (i.e. stipulated price vs unit rate vs cost plus fee, etc.) is an important part of the contract model, but the question of contract strategy is much broader than just the selection of the pricing mechanism.

Risk Allocation

The allocation of responsibilities and risks varies significantly among the different contract models. For example, in a Design-Bid-Build model where the contractor is engaged on a stipulated price basis, the owner is generally contracting to obtain a completed project within the allocated time, for the agreed price. But the owner carries risks associated with accurately defining project scope and specifications, and associated with potential gaps or changes in design. With a Design-Build model, the owner carries relatively less risk associated with the definition of project scope or incomplete design, but the owner gives up a degree of certainty as to project price and schedule. Key factors which affect the selection of the right contract model include complexity of the project, the capabilities of each project participant, the owner’s objectives and priorities, project constraints (time, budget, etc.) and particular project risks.

Often Overlooked

Too often contract strategy is not given the consideration it deserves. An owner or contractor may use a form of contract recommended to them, or employed successfully on some past project, without thinking about the particular risk profile of the current project and the relative advantages of different contract models. We have seen many cases where disputes arise due to a fundamental difference of expectations, or a misunderstanding by one of the parties, regarding the contractual allocation of risks. This may result from a front-end failure to consider the suitability of the chosen contract model to the project at hand, or a simple misunderstanding of the risk allocation inherent in the chosen contract model.

Resources

There are resources available to assist owners and contractors alike with selecting the right contract model for their project. For example:

1. CCDC 10 provides a good discussion of the suite of CCDC contracts and some of the key risk allocation issues under each one. This document is valuable both as a primer on the subject of contract strategy and as a guide for selecting among the alternative forms offered by CCDC.
2. For a more advanced discussion of contract strategy considerations and best practices, the Construction Owners Association of Alberta has published a Contracting Strategy Best Practice, including useful tools such as a work process flow diagram for developing a project contract strategy.

Although the COAA Contracting Strategy Best Practice is targeted at owners on major industrial projects, both owners and contractors on any substantial construction project can benefit from this resource. I had the pleasure of participating in the development of this guide for a short time as a member of the COAA Contract Strategy Committee. I am thankful to the other committee members, all of them experienced contract management professionals for major construction owners and contractors, for allowing me to learn more than I was able to contribute. For better or worse, lawyers are rarely engaged in a project before the contract model has been chosen.

The Path to an Appeal of an Arbitration Award May Not Be So Straightforward

By Sarah Levine and Corbin Devlin

It is a relatively straight forward and well understood concept that at the outset of parties entering into a contract for services, they may choose to have any dispute that arises to be dealt with by alternative dispute resolution (“ADR”), such as an arbitration process, and include a clause in their agreement to that effect. What is perhaps not so straightforward is what recourse a party may have in the event it does not agree with the arbitral award rendered. The type of appeal that may be brought from the decision of an Arbitrator is often very limited, depending on what your Arbitration Agreement says and how that wording interacts with the Arbitration Act of Alberta (the “Act”).

Standard Arbitration Language

The standard form construction contracts provide for both multi-stage alternative dispute resolution and mandatory arbitration, and the standard CCDC language used with respect to arbitral awards provides that: “the final award is final and binding on the parties”. This begs the question – what if we take issue with the Arbitrator’s award? At first glance this language would appear to preclude any right of appeal. But even with this restrictive language there is arguably some room for appeal to the courts.

Whether or not a party can appeal is largely dependent on the basis for the appeal: in other words, is it on a question of law, fact, or mixed fact and law. The distinction is important, because the Act permits an appeal an arbitral award on a question of law if the agreement is silent on that point - but only with leave of the court. On the other hand, if the agreement states the parties may appeal an arbitral award on the basis of a question of law, fact, or mixed fact and law, they can do so without seeking leave.

There is a lack of clarity in the Alberta case law as to whether an Arbitration Agreement requires explicit language setting out the parties’ appeal rights pursuant to the Act, and what that language must look like. Consequently, aside from the standard form contracts, we see many different provisions purporting to limit – or expand – the parties’ right to appeal.

The Arbitration Act

It is helpful to appreciate the wording of the Act, which must be read in tandem with the parties’ agreement in order to determine what a party’s appeal rights are. The Act provides as follows:

Appeal of award

44(1) If the arbitration agreement so provides, a party may appeal an award to the court on a question of law, on a question of fact or on a question of mixed law and fact.

(2) If the arbitration agreement does not provide that the parties may appeal an award to the court on a question of law, a party may, with the permission of the court, appeal an award to the court on a question of law.

(2.1) The court shall grant the permission referred to in subsection (2) only if it is satisfied that

     (a)  the importance to the parties of the matters at stake in the arbitration justifies an appeal, and
     (b)  the determination of the question of law at issue will significantly affect the rights of the parties.

(3) Notwithstanding subsections (1) and (2), a party may not appeal an award to the court on a question of law that the parties expressly referred to the arbitral tribunal for decision.

The State of the Law in Alberta 

There is a line of case law in Alberta, stemming from a 1998 decision of the Court of Queen’s Bench in Seneviratne v. Seneviratne, 1998 ABQB 289 (Seneviratne) that requires the grounds upon which an appeal of an arbitral award can be brought to be stated in the Arbitration Agreement. In that case, the Arbitration Agreement stated that the parties had the right to appeal “in accordance with s. 44 of the Act”. The court in Seneviratne held that this was not specific enough to permit a party to appeal without leave. The court held that s. 44(1) requires the parties to identify the right of appeal as being either on a question of law, fact, or mixed fact and law. A broad reference to the appeal section, section 44, of the Act is insufficient to create a general right of appeal.

One of the main thrusts of the court’s reasoning in coming to this conclusion, and one that many of the subsequent cases that follow the Seneviratne case hearken back to, is one of the foundational principles underlying the arbitration process and its legislation. That foundational principle is the concept of autonomy (i.e. if the parties have agreed to have their disputes resolved by arbitration, the courts will generally respect that decision and stay out) as reflected in the limits to appeal contained in the Act. The courts have emphasized that parties who deliberately agree at the outset of their contractual relationship to be governed by an ADR process in the event of a dispute, rather than the regular litigation process, should be held to that, and that unless it is explicitly set out in their agreement that they intend to involve the courts, and how/on what grounds, then “the ability to appeal is severely limited”. This principle is followed in several Alberta cases, such as Arnason v. Arnason, 2011 ABQB 393 and Heredity Homes (St. Albert) Ltd. v. Scanga, 2009 ABQB 237.

Takeaways 

The takeaway from these cases and the specific wording of the Act is that parties entering into contracts and contemplating ADR as a process for dispute resolution should also turn their minds to the requisite language with respect to appeal rights of any arbitral award issued, in order to ensure that the wording is specific enough to reflect their wishes. For example, the parties may expressly agree to have their disputes resolved by arbitration, but may nevertheless agree that the arbitral decision is subject to appeal to the courts on questions of law, on questions of fact, on questions of mixed law and fact, or all of these grounds. Addressing this question may seem like a tall order at the outset of a contractual relationship, given that at that point no dispute has even occurred, let alone the issuance of an arbitration award and the contemplation of an appeal of one, but it will certainly do the parties well to deal with that at the outset, rather than receiving a nasty surprise about the limits of your arbitral appeal rights when that time comes.

Without more, the standard CCDC language (“the final award is final and binding on the parties”), in the context of the Alberta Arbitration Act, only permits an appeal of an arbitral award on a question of law, and then only with leave of the court. This is a severely limited right of appeal, because construction disputes generally relate to questions of fact, or questions of mixed law and fact. Most construction disputes relate to issues of contract interpretation, which the courts consider to be questions of mixed law and fact. This very limited scope of appeal is in keeping with the principle of autonomy referenced above.

Red Flags That Your Lien Rights May Be Worthless

By Corbin Devlin

In some circumstances, builders’ lien rights are worthless. Contractors are well advised to look out for these circumstances before entering a contract, and seek alternate security for payment if necessary.

Public highway projects – Public highways are exempt from liens pursuant to the express provisions of Alberta’s Builders’ Lien Act. (Fortunately, the Public Works Act provides a measure of alternate protection, provided the project qualifies as a public work.)

Irrigation district lands – For historical reasons, lands held by an irrigation district are also immune to liens, per the express provisions of the Act.

Provincial government lands – By operation of the Interpretation Act, lands held by the Crown in right of the Province are not lienable. (However, subsidiary interests in Crown lands, such as a private lease of Crown mineral rights, may be liened.)

Federal government lands – Lands held by the federal government are not subject to provincial lien legislation, by operation of federal/provincial division of powers.

Crown agency lands - The federal/provincial immunity to liens extends to lands held by Crown agencies. What constitutes a Crown agency depends on the degree of control exercised over the agency by the Crown; legal advice may be required to determine if a particular agency is immune to lien claims.

Municipal reserves – Municipal governments are not generally immune to liens. However, municipal reserves, school reserves, environmental reserves, conservation reserves, and public utility lots are immune to liens pursuant to the Municipal Government Act.

Areas of federal jurisdiction (e.g. airports) – Pursuant to the doctrine of federal paramountcy, provincial legislation (such as the Builders’ Lien Act) may be inoperative where it conflicts with federal legislation in respect of a subject that is within exclusive federal authority. Airports are an obvious example of a matter within exclusive federal authority. However, that is not to say that all liens relating to airport development projects are invalid. This is a complex area of law, and legal advice is recommended to determine if lien rights exist in respect of any project that may be within federal jurisdiction.

Developers without a legal interest in the lands – Some recent cases have highlighted the fact that lien rights do not exist if the party requesting the work does not have a legal interest in the lands, such as where a developer contracts to begin construction but fails to complete an agreement to purchase the project lands, for example Georgetown Townhouse GP Ltd v Crystal Waters Plumbing Company Inc. Particularly in the case of new developments, trade contractors may want to make inquiries to determine if the developer actually owns the project lands.

No equity – As a very practical matter, lien rights may exist but may prove worthless if there is no equity in the project lands (i.e. if the lands are fully encumbered, such as by a prior registered mortgage that equals or exceeds the land value).

This is not an exhaustive list, but it represents the most frequent circumstances we encounter. Advance consideration as to the existence or adequacy of lien rights can sometimes prevent a total failure of payment.

It is worth noting there may be certain provisions of the Builders’ Lien Act that apply even if the project lands are not subject to lien rights; e.g. trust provisions.