ConstructionBreakfast for the Mind

June 11, 2014

Delay Claims

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Dennis SchmidtPartner

What is “Delay”?

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• In this presentation we are speaking of Delay under a Construction Contract

• Working definition:

A “Delay” is any event that delays the performance of the Work

What is a “Delay Claim"?

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• A “Delay Claim” is usually a claim by the Contractor for an adjustment to either the Contract Time (i.e. time to complete the Work) or Contract Price, or both, as a result of a Delay event

• i.e. a Delay Claim is a claim by the Contractor for time and/or money as a result of a claimed Delay

Construction Contract

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• Contractor’s right to time and/or money (and Owner’s obligation to grant time or pay money) are contractual rights

• Question: what clauses should a good Construction Contract include to deal with the risk of Delay?

• Most important clauses in a Construction Contract:1. Scope of Work2. Pricing3. Schedule

Most Important Contract Clauses: Scope of Work

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• Clear understanding/description of Scope of the Work to be performed

• leads to understanding of when/why there is Delay Claim

Most Important Contract Clauses: Pricing

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• What is included in the Price?

• Fixed price?• Cost-plus?• Unit Price?

• Reference point to measure impact of Delay (i.e. in $$)

Most Important Contract Clauses: Schedule

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• Too simplistic to just include start and finish dates

• Identify critical dates and milestones

• Difficulty with Schedule is that is it out of date almost the day it is drafted

• Include a clause that requires the Contractor to update, to include permitted time extensions – so that it is an accurate representation of Contractor’s actual Work plan

Objective of Delay Clauses

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• It is clear that in any reasonable Contract:

• Contractor is responsible for its own Delays• Its own inefficiencies• Self-imposed interruptions in performing the Work

• Owner is responsible to pay the Contractor for Owner-caused Delays• Lack of approvals/information• Unauthorized interference• Failure to provide Place of Work

Objective of Delay Clauses – cont’d

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• Focus of Delay Clauses are not on these “obvious” Delay circumstances – good contracts deal with other “external” Delays – ones not caused by either the Contractor or the Owner

• Nothing is for free:• A Delay that neither party considered when the Contract was formed

is likely to cause trouble • Not a good strategy to be intentionally silent of likely Delay• Best to assume that competent Contractor will include contingency

in Price for all potential risks

Objective of Delay Clauses – cont’d

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• If that is true, then on one analysis the Owner always pays (and perhaps should pay?)

• Then the objective of good contract clauses is to minimize the cost of the delay

• Best way to minimize cost is to give responsibility for the cost to the party that, as between the parties, is best able to manage the cost

Responsibility Allocation – Competitive Procurement

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• Owner’s strategy is to:

• Identify the Delay risks

• Estimate what the Owner’s cost of assuming the risk would be

• Offering the Delay risk to Bidders/Proponents to learn what price the Contractor would require to be included in the Contract Price to cover the risk

• May be difficult to do direct negotiation after the fact on price/cost of a Delay risks

Allocation of Risk

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• Proper allocation of Risk is key

• Decisions to allocate Delay Risk cannot be made in a vacuum (e.g., in a standard form Contract)

• Allocation of Risk MUST consider unique Scope/Pricing/Schedule of each project and Contract

Standard Form Contracts

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• Standard form Construction Contracts:

• Does include a regime to deal with Delay, but it is generic

• Best for repeat users

• Not appropriate for big or unique projects

Negotiating the Right Contract Terms: Schedule

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• Procurement documents should request bidders to provide a comprehensive explanation of the proposed methodology for the performance of the Work that is consistent with the bidders’ proposed organizational framework

• The bid should include:• A preliminary Work plan• A preliminary Schedule indicating the durations of the major steps in

the performance of the Work

• High level Schedule (including any critical milestone dates) should be agreed before executing the Contract

Contractual Strategies for Schedule

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• Make detailed Schedule (and updating) a contractual requirement

• Tie to payment application

• Deemed default

• Liquidated Damages

• Bonus

Contractual Strategies for Schedule: Make Contractual Requirement

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• Sample clause: The Contractor will within seven days of the Effective Date, or by such later date as the parties may agree to in writing, prepare and submit to the Owner a revised and expanded work schedule (the “Work Schedule”), satisfactory to the Owner, acting reasonably, that is based on the attached [the preliminary work schedule included in bid] and complies with the milestone dates, if any, as set out in the Contract Documents, and that includes: (i) the planned order and duration of the major activities of the Work; and (ii) resource (manpower and equipment) loading that will be utilized by the Contractor for the performance of the Work. The Work Schedule will contain sufficient detail to permit the Owner to be able to understand and monitor the progress of the Work.

Contractual Strategies for Schedule: Tie to Payment

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• Tie the Schedule up-dating to payment application:

• If scheduling is of critical importance for a project, require Contractor to provide Owner a current and updated Schedule with each payment application

• Current and updated Schedule helps identify potential Delays early and increases chance of minimizing impacts before they get out of control

Contractual Strategies for Schedule: Deemed Default

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• Expressly require Contractor to perform the work in accordance with the updated Schedule

• Failure to comply is a breach of Contract – obligation to accelerate to re-gain Schedule

• Can provide that failure to maintain Schedule is a default

• Owner’s strategy here is not to try to force the Contractor out but to trigger right to bonding – (which typically only responds to “default”) assuming a bonded project

Contractual Strategies for Schedule: Deemed Default cont’d

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• Sample clause:

The Contractor will perform the Work in compliance with the then current Work Schedule, as may be updated under this Contract. If, for any reason, the performance of the Work falls behind the schedule for the Work set out in the then current Work Schedule, then: (i) if, in accordance with the Contract Documents, the delay entitles the Contractor to an extension of the time for the performance of the Work, then the Contractor will, as part of the Work, include such extension in the next update to the Work Schedule as provided under this Contract; or (ii) if, in accordance with the Contract Documents, the delay does not entitle the Contractor to an extension of the time for the performance of the Work, then the Contractor will, as part of the Work, take all such steps as are required to bring the Work back into conformity with the then current Work Schedule. Failure to comply with the requirements of this Section will be deemed to be a default by the Contractor under the Contract.

Contractual Strategies for Schedule: Liquidated Damages

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• Triggered by missing a pre-determined milestone date

• Should be enough to hurt, but not kill and compel to keep to the Schedule

• A response to expensive and complex Delay claims

• Can be effective in some cases, but rarely offer the protection anticipated

• Must be “a genuine covenanted pre-estimate of damages” to be enforceable

Contractual Strategies for Schedule: Bonus

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• Common misconception that must have Bonus if have Liquidated Damages

• Owner can do what it wants – no duty to provide a Bonus

• Can offer Bonus to give Contractor an incentive to keep on Schedule (just like Liquidated Damages are a deterrent)

Delay Nuances: Add Express Contract Clauses

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• Float/Critical Path

• Concurrent Delays

• Force Majeure

• Acceleration

• Written Notice

Float

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• Float vs. Critical Path - Who owns float?

• Owner argues: no effect on critical path, so no extension

• Contractor argues: float was its contingency which is lost, exposing it to increased risk of delay to critical path later

• Canadian courts have not provided a clear answer

• Intensely fact specific, depends on issues such as the type of delay;effect the delay has on the work; contract wording

• If important to either party, expressly address in the contract

• (Generally Contractor has “control of the Work” and therefore probably owns float)

Concurrent Delay

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• Clarify how multiple and overlapping delays are to be treated

• Sample clause:With respect to concurrent delays:

a) if two or more events occur concurrently that each entitle the Contractor to an extension of the time for the performance of the Work under the Contract Documents, then for the period of any concurrency the Contractor will be entitled to claim an extension with respect to only one of the concurrent events;

b) if an event where the Contractor is delayed by Owner occurs concurrently with a Force Majeure Event, then during the period of any concurrency the Contractor will be entitled to claim an extension with respect only to the Force Majeure Event;

c) if an event where the Contractor is delayed by Owner occurs concurrently with an event where the Contractor is delayed by its own acts or omissions, then during the period of any concurrency the Contractor will not be entitled to claim, nor will the Contractor make any claim for, an extension with respect to the event where the Contractor is delayed by Owner; and

d) if a Force Majeure Event occurs concurrently with an event where the Contractor is delayed by its own acts or omissions, then during the period of any concurrency the Contractor will not be entitled to claim, nor will the Contractor make any claim for, an extension with respect to the Force Majeure Event.

Force Majeure

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• Sample clause for construction contract:

means an event beyond the reasonable control of a party and includes any work stoppage (including strike, lock-out, picket or other labour dispute of personnel not engaged by the Owner or the Contractor), war, invasion, insurrection, civil or social unrest, riot, armed conflict, act of foreign enemy, revolution, terrorist act, interference by military authorities, nuclear explosion, contamination by ionizing radiation, epidemic or quarantine restriction, earthquake, tidal wave or other natural calamities, that prevents, delays or interrupts the performance of any obligation under the Contract, provided such event does not occur by reason of: (i) the negligence of the party claiming Force Majeure (or those for whom it is in law responsible); or (ii) any act or omission of the party claiming Force Majeure (or those for whom it is in law responsible) that is in breach of the provisions of the Contract, but Force Majeure does not include: (x) a party’s lack of funds; (y) the bankruptcy or insolvency of any Subcontractor; or (z) a shortage or unavailability of labour, equipment or materials unless such shortage or unavailability is caused by a Force Majeure.

• Many contracts take more nuanced view – allocated these risks, or deal with them, separately

Acceleration

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• Acceleration:

• Acceleration to recover Contractor Delay is at Contractor’s sole cost (i.e., not entitled to time or money)

• Acceleration to recover from Owner Delay (or at Owner’s election) is at Owner’s sole cost

Written Notice

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• Require the party claiming Delay to notify the other party in writing within 7 days of the occurrence of the event of Delay

• The notice requirement can give rise to controversy:• Too easy for busy Contractor to miss the notice requirement• Draconian result if Contractor loses right to payment for Delay• Alternate:

• Theory is that failure give notice prejudices the Owner – loses opportunity to take alternate action rather than incur Delay costs

• Another, more balanced, approach is for Contractor to lose right to claim for any Delay that occurred prior to the notice, but be entitled to claim for time after notice

Delay Records

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• A significant practical risk is the absence of records in support of parties’ positions relating to Delay

• Very expensive to litigate or arbitrate causes and costs of Delay after the fact, particularly with no or limited records

• Best party to keep records is the Contractor

• Therefore, one approach is to specify that a pre-condition of advancing a Delay claim is the accurate retention of records: events of Delay and particular resulting costs (hours worked; equipment etc…)

Delay Records

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• Sample clause:

The Contractor will keep daily records of the (Delay), including labour, equipment and materials, prepared contemporaneously with the (Delay), and submit such records to the Owner on a rolling two business day basis.

Case Commentary – Krupp Canada Inc. v. JV Driver Projects Inc. 2014 ABQB 259

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Morgan DeaconAssociate

Background

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• Dispute Arose between Krupp Canada Inc. (“Krupp”) and JV Driver Projects Inc. (“JV”)

• Krupp is a designer, and installer of ore crushers, stockpiling systems and oil sands processing equipment

• JV is an industrial construction company that executes large-scale industrial projects in mining, energy development and petrochemical sectors

• Dispute arose out of construction of slurry preparation plant on the Kearl Oil Sands Project

Contract / Lien Amounts

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• Base contract and acknowledged changes was $38,322,150.28 and Krupp paid JV $37,844,668.64

• JV claimed Builders’ Lien for $52,246,550

• Krupp admits that $6,791,1460.04 is properly the subject matter of the Builders’ Lien

• Krupp says that the remainder of the $52 million lien, approximately $46 million, is not properly the subject of a Builders’ Lien

In Personam Rights to Damages

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• Krupp’s position was that JV may have an in personam right in damages for the balance but it cannot obtain the security by the Builders Lien Act

• JV argued that no security needed to be posted for the portion of the claim that related to damages

Change Order Wording

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• In the course of the project, 23 change orders were issued and signed by JV. The change orders added $13 million to the Contract price. The wording of the charge orders was critical to the Master’s decision:

The adjustments include, to the extent reasonable [sic] foreseeable by contractor, all direct costs, overhead costs, general and administrative expenses, profit and all other effects (direct, indirect and consequential, including impacts and "ripple effects")

General Contract Provision (10.3)

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• The Master’s reasons turned a lot on specific provisions in the General Contract

Unless the Contract provides otherwise, Company shall issue a Change Order when it

• (i) revises the Specifications or elements of the Work already complete or being performed in accordance with the Specifications

• (ii) requires additional services of Contractor, or• (iii) directs omission of part of the Work previously authorized, provided in each circumstance that

either or both of the following Change Order criteria are satisfied• a) Contractor's costs for performing the Work are affected.• b) The time required for performing the Work is affected.

Core Issue

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• Master Robertson commented that the issue, brought to its elemental level:

“are amounts that might be claimed as damages amounts due in respect of work on the improvements to the land, and therefore the proper subject matter of a lien?”

What is not the proper subject matter of the lien?

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• The Court acknowledged that review of the case law made clear that, at a basic level, “damages” were not a proper subject matter of a lien

• “Damages” were breach of contract in respect of work that the claimant had not been able to do and for which it had not billed not for damages in relation to work done for which it wanted compensation

Conclusion

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• Krupp claimed there was some duplication between the original contract price and the change orders

• The Court said that was an issue for Trial

• The Master declined to reduce the lien amount because the Change Order amounts were not damages but became part of the Contract price by virtue of the Change Order process

From Tickets to Fines to Jail Time: Increasing Penalties for Occupational Health and Safety Breaches

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Cristina WendelPartner

What are the consequences of breaching occupational health and safety requirements in Alberta?

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• Tickets

• Administrative penalties

• Orders

• Prosecutions

• Occupational health and safety

• Criminal Code

Tickets

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• As of January 1, 2014

• Can be issued to workers or employers

• Specific listed contraventions only

• Range from $100 - $500

• Similar to traffic tickets

Administrative Penalties

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• As of October 1, 2013

• Can be issued against any party regulated by the OH&S legislation

• Up to $10,000 per violation per day

• Amount determined by the OH&S Officer

• 30 days to pay

• May be appealed to OH&S Council

Orders

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• Compliance Order (s. 9 of the OH&S Act)

• Stop work Order (s. 10 of the OH&S Act)

• Stop use Order (s. 11 of the OH&S Act)

Prosecutions – OH&S

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• S. 41(1) OH&S Act – a person guilty of an offence under the Act is liable for:• First offence –

• Fine of not more than $500,000 and if a continuing offence, up to an additional $30,000 per day the offence continues; or

• Imprisonment of up to 6 months; or • Fine and imprisonment.

• Second or subsequent offence –• Fine of not more than $1,000,000 and if a continuing offence, up to an additional

$60,000 per day the offence continues; or • Imprisonment of up to 12 months; or• Fine and imprisonment.

Prosecutions – OH&S

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• S. 41(2) – a person who fails to comply with a stop work order is liable to a fine of not more than $1,000,000 or imprisonment of up to 12 months or both.

• S. 41(3) – a person who knowingly makes a false statement or knowingly gives false information to an Officer engaged in an inspection or investigation is liable to a fine of not more than $1,000 or imprisonment of up to 6 months or both.

• S. 41.1 OH&S Act – alternative penalties

• Victim fine surcharge – 15% of the amount of the fine

Alberta OH&S Sentencing TrendsSource: http://work.alberta.ca/occupational-health-safety/5538.html

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CalendarYear

Number of Prosecutions

Completed

Total Penalties(fines, alternate penalties

& victim surcharge)

Range of Court Penalties(fines & alternate

penalties)

2013 7 $2,615,750 $35,750 - $1,500,000

2012 10 $3,332,500 $70,000 - $1,250,000

2011 20 $3,457,750 $10,000 - $400,000

2010 11 $1,737,250 $10,000 - $400,000

2009 7 $457,225 $4,025 - $100,750

2008 22 $5,083,000 $45,750 - $425,000

2007 12 $1,720,000 $70,750 - $350,000

2006 10 $1,534,500 $40,000 - $500,000

2005 12 $554,050 $2,000 - $100,000

2004 9 $597,500 $10,000 - $120,000

R. v. Sureway Construction Ltd., 2013 ABPC 355

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Facts• Sureway was involved in a project in Edmonton installing a storm sewer pipe.

• The crew was working on installing a vertical manhole barrel weighing 11,000 kg to be connected to horizontal piping.

• The barrel was lowered into the excavation by an excavator and 5 workers were assigned to stand at the bottom to rotate and align the barrel.

• One worker was designated as the signaler to provide directions to the excavator operator.

• The operator opened the door to clarify something with the signaler and a gust of wind blew the door open.

• The operator reached for the door and his elbow struck a control which caused the excavator to rotate.

• One of the workers in the bottom of the excavation was struck by the swinging barrel. He sustained fatal crush injuries and was pronounced dead at the work site.

R. v. Sureway Construction Ltd.

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Charges and Sentencing Submissions• Sureway was charged under the OH&S Code with failing to use a tag line

where workers are in danger due to movement of a load.

• Sureway pled guilty to the charge.

• This was Sureway’s first offence under the OH&S Act.

• The parties entered a joint submission that the appropriate quantum for the fine was $275,000.

• Sureway asked the Court to exercise its discretion under s. 41.1 of the Act to allow it to pay the amount to a specified program rather than as a fine.

R. v. Sureway Construction Ltd.

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Sentencing Considerations• Guidance from R. v. Cotton Felts Ltd. (1982 Ontario Court of Appeal)

• Each case must be decided based on its own circumstances• Goal of deterrence is of “paramount importance”• Other factors include: size of the company; scope of the economic activity; extent of

actual and potential harm to the public; and the amount of the maximum penalty.

• Goal of deterrence relates not only to the accused but to other employers engaged in similar activities.

• While the financial status of the accused is relevant, it need not be minutely analyzed.

• Other factors: nature of the victim; degree of negligence; extent of attempts to comply with the legislation; degree of risk; remorse; prior record of non-compliance; extent of harm; economic impact of fine on offender; post accident activities; and reasonable foreseeability of harm that resulted.

R. v. Sureway Construction Ltd.

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Sentencing Considerations Applied• Mitigating factors - long established company; no prior record; death was felt throughout

company; accepted responsibility; aware of obligations and demonstrated resolve to avoid similar accidents in the future.

• Aggravating factors – foreseeable risks at the worksite; risk that resulted in death specifically dealt with in OH&S Code; fatality was the result of the employer’s failure to comply with the clear direction in the OH&S Code.

• Sureway’s post-accident conduct – reached out to family; constructed a memorial hockey arena in the deceased’s name; developed procedure to assist in managing hazards of manhole barrels; worked with manufacturer to create new design which permitted the use of a tag-line system; policies were revised. • But the Court stated the engineering and procedural changes could and should have

been done before the fatality – they were mandated or contemplated by the OH&S Act and Code.

• High monetary penalty was needed to achieve deterrence - $275,000 was appropriate, inclusive of the victim fine surcharge.

R. v. Sureway Construction Ltd.

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Alternative Penalties• Sureway proposed that the $275,000 be invested in an academic

proposal to enhance educational programming related to engineering safety and risk management or into a bursary or prize fund.

• Court found this was not appropriate under section 41.1 of the OH&S Act – death was not due to deficient engineering education and programming.

Recent Examples of the Alberta Courts’ Willingness to Impose Very Large Penalties

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R. v. SSEC Canada Ltd. – sentencing January 24, 2013

• Two workers were fatally injured, two were seriously injured and three received minor injuries when a tank roof support structure collapsed at the work site.

• SSEC pled guilty to three charges of failing to ensure the health and safety of a worker.

• Sentenced to a $1.5 million penalty -

• $200,000 fine; and

• $1.3 million payment to the Alberta Law Foundation to support an outreach and education program.

Recent Examples of the Alberta Courts’ Willingness to Impose Very Large Penalties

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R. v. Perera Development Corp. – sentencing June 4, 2012

• Dump truck driver was fatally injured when a 15 metre high wall of dirt and rock collapsed on him at an excavation site, crushing him inside the cab of the truck.

• Two related companies were convicted of multiple violations as employer and/or prime contractor.

• The judge described their conduct as “egregious and outrageous”.

• Perera Development Corporation was fined a total of $1.25 million plus the 15% victim fine surcharge.

• Perera Shawnee Ltd. was fined a total of $900,000 plus the 15% victim fine surcharge.

Jail Time for OH&S Offences?

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R. v. Roofing Medics Ltd. et al., 2013 ONCJ 646• A worker was fatally injured when he fell from a ladder while working on a

roofing project, landing on a fence.

• The worker was wearing a harness and a lanyard but the lanyard was not attached to anything.

• The corporation was convicted as an employer and the owner/operator was convicted as a supervisor for failing to ensure the worker used a fall arrest system and for furnishing an inspector with false information.

• He had initially told police that the worker had been helping him install roofing at his house as a friend. 7 days later, he told the inspectors the truth that the worker had been injured at the workplace.

Jail Time for OH&S Offences?

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R. v. Roofing Medics Ltd.• The court sentenced the owner to 10 days in jail for the fall arrest offence and 5 days in jail

for deceiving the inspectors. The following factors were key:• The court recognized that historically, jail sentences were the exception.• Individual deterrence was not a significant concern vis-à-vis the owner.• A jail sentence was necessary to deter others from ignoring the legislated fall protection

requirements –

“Others in the industry must pause to consider that each and every time they embark on a roofing project they may go to jail if one of their employees does not use fall protection gear. It is unacceptable for any roofer to be injured or to die as a result of a fall off a roof. These injuries and deaths can be prevented. Since the industry has not been able to accomplish prevention to date, it is appropriate for the Court to send a message that offenders will be dealt with harshly.”

• While the owner was not being made an example, it was clear in the industry and for the owner, that fines were not sufficient deterrence for these offences.

• The Court warned that in future cases, jail sentences could be longer and could become the norm.

Ways to Value Delays: Valuing damages arising from increased home office overhead expenses in delay claims

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Jonathan HillsonPartner

Presentation Overview

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• Discuss the home office expense component of a delay claim

• Discuss a method for calculating damages arising from increased home office expenses following delay

Delay claims

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• Common claim in the context of – among others - a stipulated price contract

• Many components to the claim• Extra charges to perform the work• Extra time to complete the work• Extra overhead charges as a result of the delay

The Eichleay Formula

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• Developed and used in the United States for many years

• Emerging in Canada

• Canadian Courts have said that the Eichleay Formula can be an appropriate method for quantifying a loss but that it may be necessary to adjust it to fit the specific circumstances of a business

The Eichleay Formula

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• 3 step process• Determine allocable overhead• Calculate the daily allocable overhead rate• Calculate the home office overhead damage

Determining Allocable Overhead

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• 3 step process• Begin with total company billings• Divide by total contract billings• Multiply by total home office overhead• The result is a project’s allocable overhead

Calculate the Daily Allocable Overhead Rate

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• 3 step process• Begin with the total number of days spent performing the contract –

including delay days• Divide by allocable overhead• The result is a project’s daily allocable overhead rate

Calculate the damages arising from increased home office overhead

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• 3 step process• Begin with the project’s daily allocable overhead rate• Multiply by compensable delay days• The result is the home office overhead damage

Liquidated Damages in Construction

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Tom SidesPartner

Agenda

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• What are Liquidated Damages?

• Enforceability

• Liquidated Damages vs. Penalties

• Limit on Damages Recoverable

• Mitigation

• Considerations in Drafting

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What are Liquidated Damages?

Definition

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• Liquidated Damages: damages agreed to by the parties as an estimate of compensation for a specified breach of contract.

• Often most appropriate where the damages would be difficult to forecast or calculate … and certainty of result is a significant rationale … even where damages may be easier to calculate.

• Contractor’s perspective: A penalty for failing to achieve the impossible!!

Purpose of a Liquidated Damages Clause

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• Facilitate recovery of damages without the difficulty of proving actual damages.

• Security for promisee that the contract will be performed.

• Arguably reduces risk of under-compensation.

• Provides both parties with certainty, and manages expectations.

Common Uses

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• Usually found in contracts with specific completion dates or milestones.Most common where completion on-time is criticalEg: go-live date for a production facility is missed, resulting

in lack of throughput and revenue

• Also seen as pre-estimate of damages where end-product of contract fails performance criteria. Eg: facility fails to meet production requirements, LD’s

calculated as the shortfall between estimated and actual production.

Liquidated Damages Presumed Valid

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• Courts will presume that the Liquidated Damage clause is valid because:Assumed clause is product of parties’ negotiations. Courts reluctant to relieve parties of their bargains, even if

imprudent.

• Onus of establishing that the clause is a penalty (and thus unenforceable) rests upon party attempting to set the clause aside.

Entitlement to Liquidated Damages

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• Breach must be one for which the contractor was responsible.

• Usually a key issue in delay claims:

Who was responsible for the delay?

If owner contributed, Contractor will argue that liquidated damages don’t apply.

Very important to maintain an updated schedule … especially if contractor at date contract signed!

Waiving Entitlement

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• Owner may waive right to liquidated damages for delay by conduct

Eg. by ordering extras after the contractor is already in default

• If Owner grants extension of time, it does not waive right to liquidated damages if contractor fails again to complete within the extended period• Note standard contract language that waiver of one default does not

create precedent

• As a contractor, ensure Change Orders address extensions of time for performance … as well as adjustments to compensation!

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Enforceability

Enforceability: The General Rule

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• General Rule:Courts will only enforce a liquidated damages clause if the clause is reasonable.

• The most important factor a court will consider in determining whether a liquidated damages clause is reasonable is quantum.

Reasonableness Test

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• Most likely to be considered reasonable if liquidated damages represent a genuine pre-estimate of party’s expected damages that it will sustain in the event of a breach of contract.

• Must represent genuine intention that the stipulated sum approximates expected loss.Payments claimed must bear some relation to reality.

• Terminology used by the parties is not conclusive. Referring to clause as “liquidated damages” does not make

them so. Court will evaluate actual intent and quantification of loss.

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Liquidated Damages vs. Penalties

Liquidated Damages vs. Penalties

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• Penalty: sum stipulated is extravagant and unconscionable amount in comparison with the greatest loss that conceivably could be proved.Called In Terrorum – to terrorize the other Party into compliance with

contract terms.

• Essence of a penalty is a payment of money stipulated as a warning or to deter the offending party; essence of liquidated damages is a genuine pre-estimate of damages.

• Whether something is a penalty or liquidated damages is a question of fact based on terms and circumstances of each particular contract.

• Presumption of penalty when a single lump sum is made payable by way of compensationconsider imposing liquidated damages on daily or other periodic basis.

True Estimate of Damages

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• If the loss from breach could, at time contract was made, have been reasonably calculated, claiming a larger sum will be a penalty. If not a true pre-estimate of loss, more likely unenforceable.

• If loss could be reasonably calculated, a negotiated stipulated sum will be enforced as liquidated damages.

Liquidated Damages vs. Penalties

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• To the extent that a clause actually provides for a penalty, it is void and unenforceable, because a person cannot legally provide in a contract for the payment of a penalty:All a party is entitled to on a breach is to claim damages for the loss actually suffered.Liquidated damages not intended to put a party in a better position than if contract performed.

Liquidated Damages vs. Penalties

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• Generally, the determination of reasonableness is to be made at the time of the contract, not the time damages are incurred.

• No ability to revisit the actuality of the loss at a later point in time under Canadian law.This means that clause will likely be enforced even if circumstances changed so no actual loss was incurred.

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Limit on Damages Recoverable

Limit on Damages

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• Absent language to the contrary, liquidated damages operate as a limit on recovery

• Liquidated damages are not additional to any damages suffered by the party as a result of the delay.The party imposing the LD provision should not be able to obtain the benefit of the clause in inducing performance and then ignore it when it is advantageous to do so.

Limit on Damages

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• Converse is not true: absence of liquidated damages clause does NOT mean no damages owing.

• Critical issue: without a liquidated damages clause, breaching party could be exposed to far greater damages.

• Many contractors believe deleting liquidated damages clause protects them from delay damages. Not so – may still be liable for damages where contract

schedule breached. Only quantum becomes an issue.

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Mitigation

Mitigation

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• Generally the innocent party to breach of contract is required by law to mitigate its loss.

• Mitigation does not apply where the contract spells out a genuine pre-estimate of damages, in event of breach.

• The defendant cannot rely upon any alleged failure on the part of the plaintiff to mitigate its loss in a liquidated damages claim.

Hern Vehicle Leasing Ltd. (2000 Ontario)

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• “There is, however, authority for the proposition that a contract containing a liquidated damages clause that represents a genuine pre-estimate of damages is significantly different from a contract that does not contain such a provision. The requirement that a plaintiff attempt to mitigate its damages is not applicable when the contract that is breached contains a liquidated damages clause.”

• LD are like a debt because they become payable on breach, with no duty to mitigate.

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Considerations in Drafting

Drafting Considerations

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• A liquidated damages clause which expresses the parties’ genuine intention that the stipulated sum approximates expected losses, and which is reasonable under the circumstances, will be enforceable.

• Specify the type of breach and/or harm for which the clause is intended to compensate (e.g.: delay)

• If appropriate, provide a formula for determining the liquidated damages amount.

Graduated Damages

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• A clause which provides for damages on a periodic basis (e.g.: per day or week) more likely interpreted as liquidated damages than penalty.

• In building contracts, courts have upheld as liquidated damages a system of graduated sums which increase in proportion to the seriousness of the breach:Example, $X per week for delay in performance, or $X

more according to the number of items in question.

Sample Language

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• Liquidated damages means those damages, if applicable, agreed by the parties to be a genuine pre-estimate of damages in the event the performance guarantees are not met or the work is not completed in the contract time.

• Subject to the contractor’s obligation pursuant to Section X, liquidated damages shall be the owner’s sole remedy to claim from the contractor for any damages due to delay or failure to meet the performance guarantees.

• In the event that the performance guarantee set out in General Condition X is not met, the contractor shall be liable to the owner for damages in the amount of $X.

• For each day the Contractor surpasses the completion date in the Contract Schedule, the Contractor shall be responsible for damages in the sum of $X.

Incorporation into Subcontracts

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• Will a liquidated damages clause be imported into a subcontract under a general incorporation by reference clause?Likely not, but could be if expressed in subcontract as otherwise it is

really a pre-estimate of contractor’s damage if breach at the time the prime contract is entered into.

• The extent to which the terms of prime contract are incorporated by reference into a subcontract is a question of construction of the subcontract and the intention of the parties.

• The prudent approach is to build liquidated damages into the subcontract directly.

Incorporation into Subcontracts

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• Escalation clause from general contract incorporated into a subcontract because the subcontract specifically incorporated payment provisions of the general contract:Central Reinforcing Steel Services Ltd. v. Pigott Project Management Ltd. (Alta

CA)

• Arbitration clause from a general contract not incorporated into a subcontract because the intention of the parties, on the face of the subcontract and in the contract negotiations, was to not include the arbitration clause:Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (Ontario CJ)

Summary

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• Genuine pre-estimate of damages.

• Must be fair and reasonable.

• Typically, limited to the amount stipulated in the clause.

• Draft reasonably.

Questions?

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Thank you!