2021-02-19

LAW AND ETHICS IN

ENGINEERING PRACTICE
(CEN 800)

FACULTY OF ENGINEERING AND APPLIED

SCIENCE
RYERSON UNIVERSITY

Paul Ivanoff
Legal 1: 33684466v7

Overview
• Introduction to Bonds and International
P f
Performance G
Guarantees:
t Ch
Chapter
t 26
• Introduction to Arbitration and ADR, and
ADR on International Projects: Chapters 28
& 29
• Introduction to Lien Legislation: Chapter 30
• Introduction to Risks in Construction:
Chapter 25

1
 2021-02-19

Introduction to Bonds and International

Performance Guarantees: Chapter 26

Security of Payment and

Performance
• Bonds
• Letters of Credit
• Guarantees

2
 2021-02-19

Bonds: what are they?

• Commonly used on construction projects and equipment
supply
l contracts
t t
• Bonds are agreements where a bonding company (surety)
guarantees that contractor will perform obligations
• If contractor defaults, then the surety indemnifies the
owner against loss arising from the contractor’s failure to
perform
• Bonds are not insurance
• bonding company will seek compensation from contractor
• Contractor’s shareholders usually provide guarantees to the
surety
5

Types of Bonds
• Bidd Bond
o d
– Used in tendering situations
– Generally, the principal under the bond is a contractor;
the obligee under the bond is the owner
– Contractor submits bid to owner along with bid bond
– If contractor’s bid is accepted but contractor fails to
enter into contract,, contractor must ppay
y the owner the
difference needed to retain someone else
– If contractor fails to pay the owner, then surety has to
pay the owner under the bid bond

3
 2021-02-19

Types of Bonds…

• Performance Bond
– This bond indemnifies the owner (obligee) if the
principal doesn’t perform it’s contractual obligations
– If contractor in default under the contract, owner will
notify surety and demand surety to step in and make
arrangements for the contract to be completed
– If contractor disputes with owner’s claim of default,
resolution of matter could be prolonged

Types of Bonds…
• Labour
abou and
a d Material
ate a Payment
ay e t Bond
o d
– Generally, purpose of Labour and Material Payment
Bond is to guarantee payment to subcontractors and
suppliers of a contractor
– Where contractor fails to pay subcontractor,
subcontractor may pursue a claim against surety under
the Labour and Material Payment Bond

4
 2021-02-19

Bonding Relationship

OWNER
BOND

INDEMNITY SURETY
CONTRACTOR (BONDING
AGREEMENT CO )
CO.)

SUB-
CONTRACTOR

Letters of Credit
• More common outside of Canada
• Pursuant to a contract, Contractor delivers letter of
credit for agreed upon amount to owner
• Letter of Credit may be drawn upon if contractor
defaults
• May
M bbe close
l tto a blank
bl k cheque
h
• Usually affect contractor’s credit capacity
• Often referred to as “Performance Guarantees” in
international work
10

5
 2021-02-19

Letter of Credit

OWNER

LETTER OF
CREDIT
CONTRACTOR
AGREEMENT

BANK SUB-
CONTRACTOR

11

Guarantee

OWNER
GUARANTEE

PARENT
CONTRACTOR
COMPANY

SUB-
CONTRACTOR

12

6
 2021-02-19

Introduction to Arbitration and ADR, and ADR

on International Projects: Chapters 28 & 29

13

Mediation and Arbitration

With a Particular Emphasis on the CCDC Rules for Mediation

and Arbitration of Construction Disputes

14

7
 2021-02-19

What are the Objectives of

Mediation?
• A neutral third party attempts to guide
the parties toward a mutually
beneficial resolution of their dispute.
• Ideally, the mediation will result in a
settlement agreement.
• Even if the parties are unable to reach
a settlement of the ultimate issue, they
may be able to narrow the issues for
trial. 15

Is Mediation Voluntary?
• Mediations are ggenerally
y voluntary,
y, unless:
– A contract includes a mediation clause
– An action has been commenced in Toronto and is
subject to the Mandatory Mediation Rule
In addition:
• Any party may withdraw at any time without
reason (Rule 11.1).
11 1)
• Unless the parties have agreed otherwise, the
costs of the mediation are shared equally by
the parties (Rule 12.1).
16

8
 2021-02-19

How is a Mediator Selected?

• By agreement of the parties (Rule 55.1).

1)
• If the parties are unable to agree, by a
neutral appointing authority or a judge of
the Superior Court (Rule 5.2).
• The mediator must be impartial
p and
independent of the parties and will
ideally have knowledge of relevant
construction industry issues (Rule 5.3).
17

What is the Role of the Mediator?

• Facilitates communications between

the parties.
• Identifies issues.
• Explores possible bases (common
gground)) for agreement.
g
• Explores consequences of not settling
(e.g. costs, business relationships).

18

9
 2021-02-19

How does the Mediation Proceed?

• The CCDC Rules provide timeframes for the expeditious resolution of
disputes but these can be extended by agreement of the parties (Rule 9.5).
disputes, 9 5)
• Each party will generally go to its own breakout room.
• Mediator will try to obtain an Offer, usually from Plaintiff/Claimant first.
• A caucus may occur at any point throughout the process and any party may
request a caucus (Rule 9.3).
• “Shuttle Diplomacy”. Mediator will shuttle between rooms meeting with
parties and attempting to obtain the information that he or she will use in an
attempt to bring the parties to a resolution.
• Session could last one or more days.
• The mediator may not disclose anything that is said to him or her without the
consent of the party who disclosed it to the mediator. (This may be modified
by agreement of the parties).
19

What happens if the parties do not

reach a resolution?
• Continue with private negotiations, arbitration or
litigation.
• The rights of the parties are not affected.
• The mediator shall terminate the mediation (Rule
11.2).
• If a mediator terminates a mediation without an
agreementt having
h i been
b reached,
h d the
th parties
ti may agree
to request a recommendation of settlement from the
mediator (Rule 11.3).
• This recommendation is not binding on the parties,
but could entrench positions.
20

10
 2021-02-19

What happens if the parties do

reach a resolution?
• Memorandum of Understanding or
Minutes of Settlement.
• Ideally, the parties will sign a
settlement agreement.

21

What are the general rules with

respect to confidentiality?
• All matters must be kept confidential by the mediator
and the parties (including their counsel), except where
the disclosure is necessary for implementation of any
agreement reached or is required by law (Rule 4.1).
• No transcript is kept of the proceedings (Rule 4.3).
• The parties are prevented from relying on (or
i t d i as evidence)
introducing id ) in
i any subsequent
b t proceeding
di
any documents, disclosure, admissions, views in
respect of a possible settlement or proposals or
recommendations made by the mediator (Rule 13.1).

22

11
 2021-02-19

Advantages of Mediation

• Interest-based
Interest based resolution
resolution.
– Can result in “Win-Win” situation.
• May facilitate early resolution.
– May save legal costs and time.
• Parties retain a high degree of control.
• Opportunity for each side to explain its
view of the story.
23

Advantages of Mediation (cont’d)

• Opportunity for Creative Solutions.

Solutions
• May facilitate an ongoing relationship.
• All aspects of the mediation are privileged
and private.
• No legal precedent (i.e. could be a concern
in similar fact situations).
• Less risky than arbitration/litigation.
24

12
 2021-02-19

Arbitration: what are the objectives

of Arbitration?
• A decision by a neutral decision maker that
all parties agree to be bound by.
• A fair hearing in which the parties are free
to choose the procedure that best meets their
needs.

25

How does an arbitration differ from

a mediation?
• Arbitration involves a hearing and generally
involves legal arguments and evidence.
• In arbitration, the parties agree to be bound by the
decision of the arbitrator. In mediation any
resolution is voluntary and any party may
terminate the mediation at any time without
reason.
• Arbitration is generally counsel-driven, whereas a
mediation may be client-driven.
26

13
 2021-02-19

Is Arbitration voluntary?
• Parties may voluntarily enter into arbitration.
• Parties
P i may bbe required
i d under
d contract to
submit to binding arbitration.
– Under CCDC 2, either party may refer dispute to arbitration.
– Where an arbitration clause exists in a contract, courts will
generally uphold the clause.
Costs
– Under CCDC 40, the costs will be borne by the unsuccessful
party unless
l theh arbitrator
bi considers
id it i appropriate
i to
apportion the costs between parties (Rule 19).

27

What are the Specific Rules

governing Arbitrations?
• Canadian Rules – CCDC Rules.Rules
• International Rules – ICC Rules
(International Chamber of
Commerce).
• Generally,
y, arbitrations are subject
j to
the rules of procedural fairness.

28

14
 2021-02-19

What qualifications should the

arbitrator have?
• According to Rule 88.5,
5 the arbitrator
must be:
– Impartial and independent of the parties.
– Qualified (i.e. an experienced and skilled
arbitrator).
– Should ideally have knowledge of the
relevant issues, such as construction
industry issues.

29

What powers does an arbitrator have?

• Subject
j to the rules of procedural
p fairness,, the arbitrator mayy
conduct the arbitration in any manner the arbitrator considers
appropriate (Rule 10.1).
• The CCDC Rules set out specific actions that the arbitrator
may undertake, such as make rulings on his or her jurisdiction
or make an interim order (Rules 10.1-10.4). (e.g. motions
regarding delivery of documents).
• The parties should decide if the arbitrator has jurisdiction to
award interest, costs, etc. The CCDC Rules provide a default
rule that the arbitrator may award legal fees to the successful
party (Rule 19).
• The arbitrator may retain one or more experts to provide the
arbitrator with a written report on specific issues (Rule 15).
30

15
 2021-02-19

What are the rules with respect to

confidentiality of the hearing?
• All oral hearings are conducted in
private and all written communications
and documents shall be kept strictly
confidential by the arbitrator and the
parties (Rule 13.2).

31

What are the advantages of arbitration

(as compared to traditional litigation)?
• Entitled to choose decision maker.
– Can select a decision maker with specialized expertise
rather than a judge.
• All aspects of the arbitration are private.
• No legal precedent.
• May be able to advance to the hearing more
quickly.
• Often
Of perceivedi d as bbeing
i less
l expensive.i
– But consider costs of arbitrator, facility, court reporter, etc.
• Often perceived as being quicker because of limited
rights of appeal.

32

16
 2021-02-19

What are the disadvantages of arbitration

(as compared to traditional litigation)?
• Less effective discovery process; may make
for a longer hearing.
• Limited rights of appeal.
• Potential for significant costs to losing party
(e.g. paying the fees of the arbitrator).
• You
Y may wantt a public bli decision
d i i or precedent.
d t

33

Arbitration Agreements

• usually a clause in a larger contract

• may be a stand alone agreement
• agreement may define:
– arbitrator(s) - number, identity, qualifications,
how chosen
– rules and procedure
– timing

34

17
 2021-02-19

ADR on International Projects

• Arbitration Clauses usual
• in Ontario the International Commercial
Arbitration Act applies
• provides even less flexibility to courts to intervene
• Often international contracts encourage non-
bi di ADR methods
binding th d

35

Dispute Review Boards

• The Dispute Resolution Board Foundation
notes that a DRB consists of:
– “a board of impartial professionals formed at the beginning
of the project to follow construction progress, encourage
dispute avoidance, and assist in the resolution of disputes for
the duration of the project”.
• Panel of “Standing Neutrals”
• Provides
P id preliminary
li i rulings
li upon
disagreements and claims as they arise
• Created either in the construction contract or
the onset of the Project
36

18
 2021-02-19

Dispute Review Boards (cont’d)

• Typically 3 panellists,
panellists one appointed
by each party and the chair appointed
by the two appointees.
• Typically decisions are non-binding.
• Costs shared byy the pparties

37

Introduction to Lien Legislation: Chapter 30

38

19
 2021-02-19

What is a lien?
• Powerful remedy: a charge against the land that
was improved by the construction
• Gives subcontractors and suppliers claim against
owner, even where no privity of contract with the
owner exists
• Created by Statute
• very technical since statute based

39

What is a lien? (cont’d)

• legislation requires the lien to be registered

against title to the lands
• registration of the lien makes it difficult for the
owner to sell the lands without paying out the
lien
– ultimate
li remedy:
d lien
li claimant
l i may force
f the
h sale
l off the
h
land to have the lien paid
• in some instances, the lien does not attach to
the lands
40

20
 2021-02-19

What is the Purpose of a Lien?

• common on construction projects for work to be
performed prior to payment
– progress payments usually made for work
performed in the previous payment period
– consequently, work is performed on credit
• other types of security commonly used when
goods/services are provided on credit do not
work in the construction industry (e.g., a car can
be reclaimed, but it is hard to reclaim drywall
which
hi h has
h been
b installed)
i t ll d)
• provide security of payment for contractors,
subcontractors and suppliers in the construction
pyramid

41

Who may lien?

• Section 14(1):
A person who supplies services or materials to
an improvement for an owner, contractor or
subcontractor, has a lien upon the interest of the
owner in the premises improved for the price of
those services or materials.
• only certain services or materials
• must be supplied to an improvement
42

21
 2021-02-19

What can you lien for?

“Supply
pp y of Services” includes:
a) the rental of equipment with an operator, and
b) where the making of the planned improvement is
not commenced, the supply of a design, plan,
drawing or specification that enhances the value of
the land (eg. Soils Report, Subdivision Plan, etc.)
“Materials” includes every kind of movable
property
property,
a) that becomes, or is intended to become, part of the
improvement, or that is used directly in the
making of the improvement,
b) equipment rented without an operator

43

What can you lien for? (cont’d)

• General Examples of
Lienable Services:
– All Basic Construction
Work
– Supply and installation of
Equipment
q p ((If Attached))
– Engineering Services
– Architectural Services
(Since 1997 Amendment)

44

22
 2021-02-19

How do you enforce a Lien Right?

• if a supplier of services or materials has not been
paid, they can enforce their lien rights
• usual way to enforce the lien right is to “preserve”
and “perfect” the lien and then proceed with the
lawsuit commenced by perfecting the lien
• the lien is preserved by the registration in the land
registry office of a claim for lien on the title to the
premises
– certain instances where the lien may not attach to the premises (e.g.,
interest of the Crown), different mechanism to preserve the lien

45

How do you enforce a Lien Right?

(cont’d)
• the lien must be preserved before the time period
for expiry of the lien
• perfect the lien by starting a lawsuit to enforce the
lien right and registering a Certificate of Action on
title
– the lien must be perfected within 90 days after the
period for preserving the lien ended
– certain instances where the lien may not attach to the
premises (e.g., interest of the Crown), different
mechanism to perfect the lien
46

23
 2021-02-19

How do you enforce a Lien Right?

(cont’d)
• if a lien claimant is successful in proving its lien,
the lien claimant’s ultimate remedy is to sell the
land
• complicated provisions establishing the
maximum amount of the lien
• essentially, three step process to enforce a lien
right
1) preserve the lien
2) perfect the lien
3) proceed with the lawsuit commenced by perfecting the lien

47

Substantial Performance
• Two Part Test
1. the work must be ready for the purpose
intended (the “Qualitative Test”)
2. the cost of completing incomplete items and
rectifying known defects must be less than an
amo nt calculated
amount calc lated as:
a) 3% of the first $1,000,000 of Contract Price, plus
b) 2% of the next $1,000,000 of Contract Price, plus
c) 1% of the remainder of the Contract Price

(the “Quantitative Test”)

48

24
 2021-02-19

Example
Contract Price = $3,500,000
$3 500 000

Quantitative Calculation:
3% of $1,000,000 = $30,000
2% off $1
$1,000,000
000 000 = $20,000
$20 000
1% of $1,500,000 = $15,000
$65,000
49

Substantial Performance of the Work

• the certificate is signed
g byy the payment
p y certifier or
by both the contractor and the owner if there is no
payment certifier
• the certificate is then published in a construction
trade newspaper – the Daily Commercial News
• the work is not totally complete
– there
h is i a definition
d fi i i for
f totall completion
l i in
i the
h Act
A for
f
contractors
– lesser of 1% of the contract price and $5,000
– difficult to achieve with large projects

50

25
 2021-02-19

When does a Lien Expire?

• the legislation sets out the time periods

for the expiry of liens
• depends on:
1) whether the lien claimant is the contractor
(direct contract with the owner) or any other
person
2) when the services and materials were provided
3) whether a certificate of substantial performance
was published

51

Expiry of Liens – Contractor

Certificate Published
P blished
for services or materials supplied on or before
the date of substantial performance, the lien of a
contractor expires 60 days after the earlier of,
i publication of the certificate of substantial
i.
performance of the work, and
ii. the date the contract is completed,
abandoned or terminated
52

26
 2021-02-19

Expiry of Liens – Subs/Suppliers

Certificate Published
for services or materials supplied on or before the date
of substantial performance, the lien of any other person
expires 60 days after the earlier of,
i. publication of the certificate of substantial performance of
the work,
ii the
ii. th date
d t the
th person last
l t supplies
li services
i or materials,
t i l
iii. the date the contract is completed, abandoned or terminated,
and
iv. the date the subcontract is certified as complete, where the
services or materials were supplied under that subcontract
53

Holdback and Trust

Obligations

• What are Holdback Obligations?

• What are Trust Obligations?
• What does it mean to Vacate (Discharge)
a Lien?

54

27
 2021-02-19

What is a Holdback?
• all ppayers
y on contracts and subcontracts under which a lien
may arise must retain a holdback equal to 10% of the price
of the services and materials
• the holdback must be maintained until all liens which may
be claimed against the holdback have expired or have
otherwise been satisfied in accordance with the legislation
• the holdback obligation applies at all levels within the
construction pyramid
• lien claimants may claim against the holdback through the
lien provisions

55

What is a Holdback? (cont’d)

• the contract should set out the process to

certify substantial performance and pay the
holdback
• it is recommended that a certificate of
substantial performance is published since it
creates a “bright line” for the expiry of liens
subject to work performed after substantial
performance
56

28
 2021-02-19

What is a Trust Obligation?

• tthee legislation
eg s at o creates
c eates a “statutory”
statuto y trust
t ust
– fiduciary relationship between the trustee (i.e., owner,
contractor, subcontractor) and beneficiary (i.e., persons
who have supplied services or materials)
– special duty owed by the trustee to the beneficiary
• extends protection to the trades who have supplied
services or materials to the project, parallel to the
holdback and lien provisions
• essentially, trustees can’t spend funds for their
own use until persons who have supplied services
or materials have been paid

57

Construction Act: Summary

• Lien a Powerful Collection Remedy

• lien rights expire if not enforced under
the legislation
• holdback obligations under the
l il i
legislation
• Many Technical Requirements – Legal
advice should be obtained
58

29
 2021-02-19

Introduction to Risks in Construction: Chapter 25

59

Introduction
• Many different Project Delivery Systems
• Determine risk allocation for the Project
• Consider which Project Delivery System matches
the risk profile for the Project and meets the other
requirements
q of the Project
j Participants
p
(examples of risks: Health & Safety issues, ability
to fast track, owner’s level of involvement)

60

30
 2021-02-19

Project Delivery Systems

• Design-Bid-Build
Design Bid Build (general contractor)

• Construction Management (not at risk)

g
• Design-Build

61

Design-Bid-Build
Owner

General Contractor Consultant

Subconsultant Subconsultant

Subcontractor Subcontractor

62

31
 2021-02-19

Features of the Design-Bid-Build

System (general contractor)
• The
Th owner can keep
k its
it involvement
i l t fairly
f i l limited
li it d
• Easier to acquire a fixed price from the contractor because design is
complete when contractors bid
• The number of contractor initiated change orders which affect the
price should be relatively limited
• The consultant and the contractor bear any risk of nonperformance of
the subconsultants and the subcontractors, respectively
• Contractor retained by the owner to undertake the Project is the
“constructor” under the Occupational Health and Safety Act

63

Features of the Design-Bid-Build

System (general contractor) (cont’d)
• May not be conducive to fast tracking (as construction
cannot begin until all design work has been completed)
• Until prices are received from potential contractors
pursuant to the procurement process, the owner may not be
fully aware of its final costs
• May not be conducive to having input from the contractor
during the design
• If the project fails to perform in accordance with the
owner’s expectations, it may be necessary to assess
responsibility between the consultant and the contractor

64

32
 2021-02-19

Construction Management
(not at risk)

Construction Owner Consultant

Manager

Trade Contractor Trade Contractor Trade Contractor

No. 1 No. 2 No. 3
(Civil) (Mechanical) (Electrical)

65

Features of the Construction

Management System (not at risk)
• Very conducive to fast
fast-tracking
tracking
• The construction manager can be retained
early in the design development process and
provide very advantageous construction
advice during design development
• Owner enters into trade contracts with each
trade contractor

66

33
 2021-02-19

Features of the Construction

Management System (not at risk)
(cont’d)
• The ultimate
ltimate cost to be paid by
b the owner
o ner will
ill not
be determined until such time as the last
component of work is procured for construction

• Pursuant to the Occupational Health and Safety

Act once the owner undertakes the Project with
Act,
more than one contractor, the owner takes on the
role of “constructor”

67

Design-Build
Owner’s Owner
Consultant
C l

Design-
Builder

Design Subcontractors
Consultant

68

34
 2021-02-19

Features of the Design-Build System

• Where time of delivery, performance or output of
the project are critical to the owner, single point of
responsibility makes one person responsible for
such matters for both design and construction

• Conducive to “fast-tracking”

• The designer and the contractor work together as a

team

69

Features of the Design-Build

System (cont’d)
• It is very difficult to adequately and fully
define the scope of the design-builder’s
obligations prior to the design being
completed
eg ) will likely only have a summary of the
eg.)
owner’s requirements

70

35
 2021-02-19

Conclusion

• Questions

71

36