Crisis and creativity in construction law conflict resolution

Adjudication and mediation are playing larger roles in resolving disputes on infrastructure projects
Crisis and creativity in construction law conflict resolution

Both legislation and a natural disaster have had an impact on how construction disputes in infrastructure are being resolved in Canada.

In December, the Canadian Construction Documents Committee published its first update to the CCDC 2 — the Stipulated Price Contract that is the industry standard prime contract between owner and prime contractor — since 2008. In the years since 2008, prompt payment legislation has been introduced in Canada and in a number of provinces, which has included recognition of the role of adjudication in resolving payment disputes.

And the delays and cost overruns caused by the COVID-19 pandemic since March 2020 have affected infrastructure projects, which may make the enhanced role of adjudication timely.

Disputes in projects are starting to come forward as the COVID period is drawing to a close, says Stuart Hankinson, a construction and infrastructure law partner at Singleton Urquhart Reynolds Vogel LLP in Vancouver.

“We’re seeing our phones ringing off the hook,” he says, “with ‘this cost me more, and this took longer; my project was supposed to be finished six months ago, and it’s not.’ So it’s easily foreseen, when you’re dealing with contractors and owners regarding how slow things are going during the COVID period, to have the post-COVID period filled with complaints about ‘it’s not ready yet.’”

“That’s what the disputes are now; it’s a lot of timing issues, and of course time equals money.”

Prompt payment and construction law reforms

The Federal Prompt Payment for Construction Work Act received royal assent in June 2019, and although it has not yet come into force, “it’s made a difference in the sense that it’s educated the industry somewhat,” says James MacNeil, managing partner of Boyne Clarke LLP in Halifax. 

“Atlantic Canada is still a little behind, but it’s certainly a hot topic here,” he says. The new legislation is “on everyone’s radar, and people are attuned to it; nobody’s going to get caught off guard” when it comes into force.

In Ontario, changes to the Construction Act (formerly the Construction Lien Act) that introduced prompt payment and adjudication — in the form of a 30-day process to resolve disputes — came into force on October 1, 2019. Litigator Paul Ivanoff says he hasn’t seen a big uptake in adjudication as a result, though. 

“I think parties have continued to rely on the courts and mediators to resolve disputes,” says Ivanoff, a partner and construction law lawyer at Osler, Hoskin & Harcourt LLP in Toronto. 

Osler partners Richard Wong and Roger Gillott have also published a summary of Canadian prompt payment and construction law reforms across Canada.

In Nova Scotia, the Builders’ Lien Act (amended) received royal assent in April 2019, but has yet to come into force. When it does, the current lien legislation will be renamed Builders’ Lien and Prompt Payment Act.

In New Brunswick, Law Reform Notes #42 (July 2019) and #43 (April 2020), published by the Office of the Attorney General, recommends that the reform of the Mechanics’ Lien Act and introduction of prompt payment and adjudication be done in two phases. In November, Bill 12, the Construction Remedies Act, passed second reading as part of the first phase; it would repeal and modernize the existing lien legislation by amending lien, holdback, trust, substantial performance and security bond provisions.

In Quebec, An Act to facilitate oversight of public bodies’ contracts and to establish the Autorité des marchés publics received royal assent in December 2017, amended the Act respecting contracting by public bodies and allowed the Conseil du trésor to implement pilot projects to facilitate payments to enterprises that are parties to certain public contracts and subcontracts.

Many of the western provinces have made similar progress. Released in November 2019, the Manitoba Law Reform Commission’s final report, The Builders’ Liens Act of Manitoba: A Modernized Approach, recommended significant reforms to lien legislation, including introduction of prompt payment and adjudication, as well as renaming the legislation The Construction Contract Remedies Act.

“We often adopt similar legislation as Ontario, but of course with Western Canada revisions as needed,” says John Martens, a partner in MLT Aikins LLP’s Winnipeg office. Saskatchewan and Alberta have each brought in their own legislation, he adds, which is not yet in force.

Saskatchewan’s The Builders’ Lien (Prompt Payment) Amendment Act, 2019 received royal assent in May 2019, and in August 2020 The Builders’ Lien Amendment Regulations, 2020 was filed to amend the existing regulations, elaborating on the prompt payment and adjudication regime.

In Alberta, the Builders’ Lien (Prompt Payment) Amendment Act, 2020 received royal assent in December  2020. Its reforms to the Builders’ Lien Act would introduce prompt payment requirements, a new dispute resolution mechanism known as adjudication, an extension of lien registration periods, and renaming the existing legislation the Prompt Payment and Construction Lien Act.

On the West Coast, the British Columbia Law Institute published its Report on The Builders Lien Act that made 86 recommendations to simplify the Builders Lien Act and clarify some of the provisions.

Federal changes

The Federal Prompt Payment for Construction Work Act -- will provide for a one-year deferral period before it applies to existing contracts, and the government may choose to exempt federal projects individually or on a province-wide basis where a reasonably similar provincial legislation has been adopted.

CCDC 2 (2020) – the Stipulated Price Contract -- made changes to payment terms and the release of holdback which help to align contracts with prompt payment schemes. It also introduced the “Ready-for-Takeover” completion milestone, in which the definition of Substantial Performance of the Work has been shortened as compared to CCDC 2 (2008), but “fundamentally remains ‘as defined in the lien legislation applicable to the Place of the Work,’” Martens writes in an article with fellow MLT Aikins partner Daryl Chocoine.

Effects of COVID-19 on projects

The most common disputes concern delay and impact claims, and the new safety requirements and protocols, supply chain interruptions, and labour and travel restrictions that were imposed during the novel coronavirus pandemic exacerbated these. Materials have risen in cost, too; “the price of lumber, for example, which is essential to so many construction projects, has multiplied by several units,” says Hankinson, and all the base commodities such as steel and concrete have also risen, causing cost overruns.

“If you signed a contract in 2018-2019, then your contract has to have force majeure protocols in it to allow contractors and owners to resolve their own disputes regarding delays and extra costs in COVID. If not, contractors can have terribly difficult economic issues facing them.”

Not surprisingly, then, there continue to be a lot of disputes concerning scheduled delays, Ivanoff says: “who’s responsible for a project being late, the cost consequences, if any, and is the owner entitled to liquidated damages for late performance of work? We’re still seeing disputes of that nature. Each contract will dictate who’s responsible,” but the contractual and factual matters always need to be worked through.

And project disputes are now beginning to come to court, says Hankinson. “Courts generally went on hold in March of 2020, and that created a backlog of dispute resolution throughout the court system. It’s very busy” now. 

Pandemic restrictions also disproportionately affected indoor project workers, MacNeil says. “You could almost draw a line between those that work inside and those who work outside. Those working outside seem to be better adapted to social distancing [and] the pandemic restrictions.” Those working inside had to limit the number of people that could fit inside of a given room, and restrictions on movement — such as moving in only a single direction inside, and having to wear personal protective equipment — “really impacted those that had to work inside.”

How disputes are being resolved

A number of large infrastructure projects were working through the dispute resolution process when the pandemic hit in March 2020, Ivanoff says; “looking back, we did a very quick pivot to virtual dispute resolution. The transition was quite smooth, and quick.”

Today’s dispute resolution clauses encourage the parties to the contract to amicably attempt to resolve their disputes without litigation, says Hankinson. Senior members of the contracting parties who are not involved in the creation of the dispute are encouraged to sit down with one another in a boardroom to negotiate a resolution. If that doesn’t work, a commonly appointed mediator may be chosen, and a mediation expeditiously proceeds. “If that doesn’t work, then you try perhaps another mediator, and some [contracts] have dual mediator provisions. And then if that doesn’t work, you’re off to either a private arbitration or a court setting.”

That type of clause wouldn’t have been seen in a 1995 contract, Hankinson says; not “that emphasis on amicable negotiations between parties. It’s a very strongly held policy now; it was non-existent 25 years ago.”

Martens sees disputes being resolved early on in larger infrastructure projects as possible. On some larger Crown projects there is a process whereby a dispute starts with mediation and can work up to arbitration, which he says works well. 

“This is consistent with the new forms of contracts that we’re seeing: to have that attempt to have early resolution, followed by arbitration.”

Lawyer(s)

Stuart B. Hankinson James D. MacNeil Paul A. Ivanoff John B. Martens