In infrastructure construction litigation in 2023, disputes are arising from the design-build public-private-partnership model, courts are developing the rules with respect to settlement disclosure requirements, and dispute resolution boards are offering a collaborative method of addressing and avoiding conflict, lawyers tell Lexpert.
The developing requirement of settlement-agreement disclosure
In the last few years, a stream of court decisions dealing with the disclosure of settlement agreements has been impacting the construction litigation field, says Laura Delemere, a construction lawyer and partner at Borden Ladner Gervais LLP in Toronto.
In December 2010, the Ontario Court of Appeal released its decision in Aecon Buildings v. Stephenson Engineering Ltd., 2010 ONCA 898. The dispute arose from the construction of the Brampton Performing Arts Centre and allegations by Aecon that construction delays breached the city’s $46 million contract.
At the outset of the litigation, Aecon and Brampton reached a partial settlement agreement in which the city agreed to bring claims against another contracting party, and Aecon agreed to limit its damage claims to the amount Brampton recovered through those claims.
The city added the third party to the litigation, and that third party added three fourth parties – including Stephenson Engineering, the appellant at the Court of Appeal. Aecon and Brampton did not disclose their settlement agreement until it was specifically requested months later. While Stephenson was unsuccessful in its summary-judgment motion arguing the agreement was champertous and an abuse of process, the court did rule that Aecon and Brampton had an obligation to disclose the agreement to the other parties in the litigation.
“What it set out was if you enter into a settlement agreement, and it entirely changes the landscape of the litigation – that’s the wording of the court – you must immediately disclose that agreement to the other parties in the litigation,” says Delemere.
“That was rather a large statement.”
She says the decision raised uncertainty in the construction industry around what counted as changing the landscape of the litigation, as well as how immediate the disclosure must be.
“The requirement to disclose a settlement in the context of a construction dispute can sometimes be challenging,” says Bruce Reynolds, co-managing partner at Singleton Urquhart Reynolds Vogel LLP in Toronto. “Often it is not a live issue if all parties are aware of the anticipated settlement because they have participated in the without-prejudice process of reaching that settlement.”
In lien actions where an owner has not paid the general contractor, which has caused its subtrades and suppliers to bring claims, the general contractor needs cooperation and input from those subtrades and suppliers to achieve a settlement which resolves all the issues, says Reynolds.
“However, parties nevertheless must proceed with caution given that a failure to disclose can be fatal.”
He notes that in Southside Construction v. City of Windsor, 2022 ONSC 2241, the Ontario Superior Court found that failure to disclose “was an abuse of process and therefore grounds for a permanent stay of proceedings.”
“This is an area that has been quite an important trend in litigation, generally, but also in the construction field,” says Delemere. “And it has been repeatedly before the courts, especially in the past couple of years.”
Whenever lawyers and their clients discuss settlement or settlement agreements, she says, they should ask the questions: Does this affect any relationships between parties in litigation? Are we required to disclose this? And if so, when?
“It's really not a one-size-fits-all rule of when to disclose. It really will come down to the facts of the case.”
Delemere adds that there is not “one overarching decision” that provides guidance. There are multiple decisions that all consider specific examples of when one might or might not need to disclose. “Lawyers need to stay on top of those sorts of incremental developments.”
Design-build leading to disputes
On just about every one of Mark Crane’s infrastructure files, he is seeing evidence that the design-build public-private-partnership (P3) model inevitably gives rise to disputes almost immediately. Crane is a partner at Gowling WLG in Toronto and a member of the firm’s commercial litigation, construction and infrastructure, energy, and insurance professional liability groups.
This model of infrastructure construction begins with a competitive bidding process, where the proponents are bidding based on a “preliminary design.” The bids represent the amount the proponents estimate the project will cost them to execute. But their estimations are based on a design that represents only about 30 percent of the project.
“The difficulty with this model is that complex projects are difficult to estimate and to bid on at any time – least of all when you’re doing so with only the benefit of a 30 percent design,” says Crane.
Generally, the lowest bid prevails, and the successful proponent will enter a fixed-rate contract with the owner. The proponent has typically partnered with a design consulting firm – which is the party Crane typically represents – and the owner has largely shifted the risk of the project onto the proponent, a contracting joint venture.
Estimating costs on a 30 percent design, combined with the incentive within a competitive bidding process to bid as low as possible, ultimately results in disputes, says Crane. The proponent’s bid is imbued with “optimism bias,” which accompanies their enthusiasm to be the successful proponent. He says there is also a “lack of sophisticated estimating” on materials, quantities, and labour due to the partial design on which it is based.
“There’s some evidence to say that they are carrying [these contracts] out, sometimes, with very little to low profit, and they carry inadequate contingency in their bid.”
This inevitably leads to disputes between the contractor and its design team, which may arise in good faith, but the contracting joint venture often sees the design team’s professional liability policy as “an opportunity to access additional revenue to backfill their lack of contingencies,” says Crane.
Crane is seeing owners turn away from the design-build model toward a progressive design-build, where the fixed costs, fixed price, and shifting of risk are postponed until the design reaches around 60 percent completion.
“At which point, there would be more of an opportunity to be more realistic or more accurate with your estimating and expected costs,” he says.
“There are some views that the progressive-design-build model may go some way to reducing some of the risks and the shortfalls that are inevitably faced by contractors and designers in design-build projects.”
While parties have been searching for new and different approaches to allocating risk and avoiding disputes in recent years, the right model depends on the particular project and the players involved, says Delemere.
“There’s no one right approach to risk allocation or to delivering a project.”
The best way to successfully deliver a project and reduce disputes is for parties to ensure that, whichever model they choose, they are familiar with it and think ahead of time about whether it is the best fit for the type of work the project requires; the type of contractors, owner, and other parties engaged; and the resources they have, she says.
P3 projects are “enormously complex,” says Duncan Glaholt, founder of the construction law firm Glaholt ADR Inc. They often have 40–50 schedules’ worth of contract provisions and 1,500 pages of rules and conditions, he says.
Glaholt says dispute boards come in to assist with the most important aspect of a P3 project: collaboration.
“Dispute boards are being used more frequently in recent years on Canadian projects,” says Sharon Vogel, partner at Singleton Reynolds and co-chair of the firm’s construction and infrastructure practice group.
“These boards are usually set up at the outset of a project and track the progress of a project throughout its evolution, such that there is continuity and knowledge on the part of board members to address problems as they arise,” she says. “They add an expense to the project but employing them can result in savings in dispute resolution costs.”
According to the Dispute Resolution Board Foundation, they are also referred to as dispute avoidance boards, dispute review boards, dispute review panels, and dispute avoidance/adjudication boards, among other terms.
Project partners establish the dispute board – composed of impartial professionals – at the beginning of the project. It monitors the project’s progress, encourages the avoidance of disputes, and helps resolve them when they do occur. Dispute boards can take various forms. These include a one-person or three-person board. There is also the option of a dispute resolution advisor, who is an independent consultant without decision-marking power who helps parties address and avoid potential areas of dispute. Another form is the dispute board panel, which is used on large and complex projects with multiple contracts or alternative delivery methods. And an ad-hoc board is a dispute board that is not established until later in, or at the end of, the project.
“First, they can provide an informed but completely independent perspective on an issue,” says Glaholt. “Second, they can allow the parties to access technical expertise that might otherwise be unavailable to help understand a problem better and come up with solutions. And third, they present a protected and safe environment for the parties to engage in dialogue that is focused on the project as opposed to the positions taken by the parties.”