Selected Contract Issues

• Agency and Authority

– An agency relationship is formed between two parties
when one party (the agent) agrees to represent the
other party (the principal). Some of these
relationships are fiduciary others are not.
– Agent (A/E) – person authorized to act on behalf of
another party – the principal (owner)
– Express/Actual Authority
• Agent has been expressly told (usually via contract – written
or verbal) he/she may act on behalf of a principal
– Implied Express/Actual Authority
• Implied actual authority is an authority an agent has by
virtue of being reasonably necessary to carry out his
express authority. As such, it can be inferred by virtue
of a position held by an agent
• This implied authority is usually defined in general
terms to include authority to do what is usual,
customary and necessary
• For example an architect has been given the authority
to review and approve draw requests, by virtue of
actual implied authority the implication is that the
architect has the authority to reject the draw request
– Apparent Authority
• Apparent authority (also called "ostensible authority") exists
where the principal's words or conduct would lead a
reasonable person in the third party's position to believe
that the agent was authorized to act, even if the principal
and the purported agent had never discussed such a
relationship. For example, where one person appoints a
person to a position which carries with it agency-like powers,
those who know of the appointment are entitled to assume
that there is apparent authority to do the things ordinarily
entrusted to one occupying such a position. If a principal
creates the impression that an agent is authorized but there
is no actual authority, third parties are protected so long as
they have acted reasonably. This is sometimes termed
"agency by estoppel" or the "doctrine of holding out", where
the principal will be estopped from denying the grant of
authority
• The agency relationship between A/E and
Owner is a commercial arms length
relationship
• No fiduciary duty arises
• The architect has a service to provide / sell
and the owner purchases it.
• The architect looks after his / her own
interests first.
• Indemnities
– “hold harmless”
– One party agrees to bear the financial loss “risk” of
another party in the event that certain specified
events occur
– Essential premise is that the party bearing the loss
“indemnitor” is taking responsibility for its failures
and compensating the “indemnitee” for any losses
incurred by its failure brought on by claims from a
third party to the contract.
– CCDC 2 Does not expressly exclude liability for design
errors. Errors by contractor and designer may be
borne by each party in full.
– Change order – A formal document that alters
some conditions of the contract documents. The
change order may alter the cost, time, scope,
quality etc.
– Change orders that increase scope, cost are extras
– Change orders that decrease scope, cost are
credits
– Increase in time can be either an extra or a credit.
At same time a decrease in time can be an extra or
a credit. It all depends on circumstances of the
change
– Reasons for changes
• Change in scope – design
• Unforeseen conditions
• Design errors
• Building inspector interpret codes
• Cost savings measures – Value Engineering
– If you have a change order that adds scope to a
project A and an identical project B where that
scope is already included, but now a change order
is issued to reduce the scope of project B to match
original scope of project A, will the value of the
change order to reduce the scope of project B be
the same value as the change order to increase
the scope of project A? Why or why not?
• Extras for design negligence
– Arise when different interpretations of the building code occur
between designer and reviewer / enforcement.
– Owner bears costs unless designers interpretation was reasonable
– Contingencies cover design errors unless grossly negligent

• Impact Costs
– The costs associated indirectly resulting from changes.
• Schedule biggest impact – contractors should always ask for time
extension!
• Large source of conflict in change order negotiations
• Both parties try to put qualifications on change orders – contractor tries
to reserve the right to later asses impact costs, owner wants to know the
total cost before work begins
• It is hard to asses all impacts at the time of pricing
• Who bears the risk?
• Who pays for the risk?
 – Timing and Pricing of Changes and Performance
Under Protest.
• No work can begin until a change notice/directive is
issued under standard construction industry contracts.
– Risks?
• Change directives are used when the change affects or
will affect the critical path of the project and no
agreement can be made on the scope, time or cost of
the change. CCDC G.C 6.3
• Subcontract issues
– General contractors do not have expertise to do
entire job – they must subcontract portions of the
work
– Subcontract Formation Through the Bidding Process
• Subcontractors named in the bid – becoming common for
the larger portions of the contract
– Mechanical / Electrical / drywall
– Pay-if-Paid Clause (Pay-When-Paid)
• Shifting of risk from GC to subs
• Pay-if-paid is related to the owner non payment
• Pay-when-paid is related to the timing of making the
payment
• GC owes a duty to the subs to try to obtain payment
• Generally the GC cannot shift the risk if the sub has
performed the work in accordance with the contract
documents
– GC still owes the subcontractor the payment
• In order to shift the work the contract must state “payment
by the owner to the Prime Contractor is a condition
precedent to any obligation on the part of the Prime
Contractor to pay the subcontractor”
• Incorporation by reference
– The subcontract incorporates the terms and
conditions of the prime contract by referencing it
in the subcontract
– Typically the subs do not see the prime contract
– Who bears the risk?
• One-Tier Payment Bonds
– L&M bond supplied by prime contractor – 50% of
the prime contract
– Only one tier below the prime contractor is
covered – those in direct contract
• Unforeseen Conditions (Differing Site
Conditions)
– If during the contract the Contractor encounters
on the Site physical conditions which … could not
reasonably have been foreseen when tendering by
an experienced contractor and which will …
substantially increase its Costs … the effect of such
conditions … shall be treated as if it was a
Variation
– cause of large number of disputes in projects
– Must also be not reasonably foreseen
• The contractor cannot claim and misinterpretation of
contract documents as unforeseen
 – Claims are usually initiated by the contractor in a
request for change order
– Shifting the risk with clauses
– Claims are prevalent in
• Renovations
• Subsurface conditions
– Who should bear the risk?
• Specifications and Drawings
– Specifications
• Show you the quality of the project workmanship and
materials
– Drawings
• Show you the quantity of the project materials
– Front end of specifications (Div 0 and 1)
• Written with aid from legal
• Outline the allocation of risk and obligations
• Div 0 – Bid documents
• Div 1 – General Conditions
– Contract documents are read as a whole
– Performance Specifications
• Set out the operating parameters
– Standard Specifications (prescriptive)
• Set out to prescribe in detail the final product
• Specific Contracts and Clauses
– Canadian Construction Documents Committee
(CCDC)
• Standard lump sum (2), cost plus (3), unit price (4),
design build (14 & 15) contracts
– Canadian Construction Association (CCA)
• Construction management (5)
– CCDC 2 stipulated sum (lump sum) contract is
most widely used in construction industry in
Canada
– Public-private partnership (P3) contracts are
becoming popular for public projects
• Build, operate, turnover (BOT)
• Standard forms
– Why use?
– Disadvantages
• Sometimes hard to shoehorn a project to fit the contract type – reliance on
the standard form
• Stipulated Price, Fixed Price, Lump Sum
– All goods and services included
– all the contractors profit and overhead is included in the price
– Designer must carefully define and fully detail the work
– Detailed drawings and specifications form the basis of the contractors
price
– Used when scope is clearly defined
– Owner engages consultant to oversee the entire project
– Advantages to the owner
• Knows the total amount ahead of time to be paid upon completion of project
• All work is inspected by consultant before $ is released
• Budget project from start to finish
– Advantages to the contractor
• Can budget project from start to finish
• Cost savings measures can mean more profit
– Disadvantages to the owner
• Must ensure all drawings and specifications are correct
and complete
– Disadvantage to the contractor
• Most risk
• Responsible for losses
• Responsible for the performance of all subs and
suppliers
• Cost-Plus Contracts
– Contractor is paid for all costs of goods and
services (direct and indirect costs) plus a fixed fee
or percentage fee
– Used when scope is not clearly defined
– Direct costs
• Labour
– Wages
– Stat payments
– Benefits
– Expenses
– Board and lodging
• Materials
– Quantity
– Quality
– Seasonal demand
– Location
– Discount
• Equipment
– Depreciation
– Maintenance
– Mobilization
– Demobilization
– Operation
• Job Overhead
– Supervision
– Permits
– Security
– Temp services
– Clean up
– Close out
– Indirect Costs
• Operating Overhead
– Office staff
– Office rent
– Office equipment
– Comms
• Profit
– Cost to the owner
– ROI
– Owners Advantages
• Can get construction started earlier – fast track
• Flexibility in scope and changes
 • Owners Disadvantages
– Unknown final costs
– Excessive risk
– Burden of cost tracking
• Advantages to the Contractor
– As long as fee is adequate there is little risk
• Disadvantages to the contractor
– Project can go on for extended period of time if scope creep occurs –
then the fee may not be adequate
• Unit Price
– CCDC 4
– Is a contract in which the builder offers to perform all the
work shown on the drawings and described in the
specification as per the enclosed schedule of unit prices
– The manners in which the units are to be applied are
normally stated in the specifications
– This allows for fast track construction – can start
construction prior to completion of design drawings
– Owners Advantages
• Owner can add work, delete work form contract
• Payments are periodic and are paid when the unit of work is
completed
• Unit price offers open competition
– Owners Disadvantage
• Does not know the ultimate end costs until completion
• Units may go up or down from estimate either costing more
for the material overall or more for the unit of material
• Must track materials used carefully
– Contractors Advantages
• If quantity is larger than estimated greater profit
• Possibility of more work
– Contractors Disadvantages
• Total price of contract could be reduced if scope is reduced
• The unit price is fixed in tender – risk of cost fluctuations
– Guaranteed Maximum Price (GMP) (Maximum
Upset Limit)(Target Cost)
• Cost plus format – GC gives a guaranteed max cost plus
a fee (fixed or %)
• Owner offers inducement for cost savings - % of
difference between actual cost and GMP
• D&S must be complete enough to allow GC to give GMP
• Owners advantages
– Project can start before the 100% D&S
– Risk is evenly distributed
– Maximum cost is known (provided scope does not change
significantly)
• Owners disadvantages
– Changes in scope can nullify GMP
• Contractors advantages
– Can budget because the GMP
– Inducement offers opportunity for extra $
• Contractors disadvantages
– Fee must be adequate
– GMP must be accurate – if cost exceeds risk borne by GC
• Construction Management
– CCA 5 contract form
– CM at risk / CM not at risk
• CM at risk – the construction manager is responsible for cost and
time – Guaranteed maximum price contract – cost plus form of
contract.
– Advantages
» GMP so owner knows the cost up front
» Known schedule
– Disadvantages
» D & S must be complete or near complete to obtain GMP
» Typical fees are higher
• CM not at risk – the construction manager is not responsible for
cost and time – strictly acts as an agent of the owner.
– Advantages
» Project can be fast tracked or started w/o complete D&S
– Disadvantages
» No GMP
» No fixed schedule
• Design Build
– CCA 14 (CCDC document 14 / 15)
– Owner enters contract with one entity to perform
both the design and construction of the project
– Advantages
• Fast tracking can be achieved
• More options to the owner to choose from during tender
phase
– Disadvantages
• Can encourage use of substandard materials and
workmanship if DBB is behind schedule and /or over budget
• Few contracts fully define the roles and responsibilities of
the parties
• Public-Private-Partnership (P3)
– P3s are a long-term performance-based approach
for procuring public infrastructure where the
private sector assumes a major share of the
responsibility in terms of risk and financing for the
delivery and the performance of the
infrastructure, from design and structural
planning, to long-term maintenance
• Advantages
– P3 projects involve greater consideration of whole life cycle:
P3s put into an integrated contract the entire life-cycle --
design, build and operate and maintain; this ensures that
overall cost and risk is considered; for example, design takes
into account of cost to build, maintain and operate and avoid
white elephants
• Advantages
– P3 projects engage the expertise of the private sector: The
private sector has the experience and expertise to deliver large
projects. They bring innovation and learnings from other projects.
Many Canadian and international firms have developed
significant expertise developing and executing P3s, which can be
employed for the benefit of taxpayers
– P3 projects ensure private sector capital is at risk, bringing
capital market discipline and incentives: Most importantly, P3
projects require private sector capital to be at risk. The public
sector pays only when the infrastructure is available and
performs. This generally means that no payments are made until
the infrastructure is built and a substantial portion is paid over
the life of the asset, if it is properly maintained and performs.
This “skin in the game” means that taxpayers are not on the
financial hook for cost overruns, delays or any performance issues
over the assets life. It also means that the profit motive is
harnessed to ensure effective results. Finally, this requires the
private sector to raise both equity and debt capital, meaning that
there is substantial oversight by lenders and investors in both the
upfront due diligence and project execution. This is a discipline
that the public sector cannot match
 • Advantages
– P3 projects allow the public sector to focus on its core business: The
public sector’s core focus should be on the defining the output it wants
(i.e., x litres of clean water, y traffic capacity). Leave it to the private
sector to provide the most effective solution to deliver on those outputs
– In general, P3s produce value for larger public
infrastructure projects (they warrant the transaction costs
and attract sufficient private sector interest) and for
complex projects (the value of the risk transferred is higher
than the incremental financing costs).However, P3s are not
the solution in every case. P3s provide benefits but they
also involve costs. The cost of private sector finance is
higher than government borrowing, as it reflects risk
adjusted returns. In addition, P3s involve transaction costs
to structure (legal, financial).
– As a result, in order to ensure the best possible value for
the taxpayer, a detailed value for money analysis is
required to assess whether the costs exceed the benefits
– Professional Service Agreements
• Expressly define scope and outcomes
• Fixed price / cost plus / % of construction cost
• Limitation of Liability
– limits claims to the amount of insurance carried by the
designer
– Limits the amount of time to commence a claim
• Field reviews
– Owner wants more reviews to confirm / watch over the
construction
– Designer just wants to perform min reviews to confirm
general conformance – as mandated by legislation /
professional association
– Engineering Service Agreement
• Association of Consulting Engineering Companies
(ACEC) 31
• Note clauses for
– Level of inspection
– Copyright
– Limiting liability
– Architectural Service Agreement
• Royal Architectural Institute of Canada (RAIC) Doc 6
• Note clauses for
– Level of inspection
– Copyright
– Limiting liability
– termination
• Standard Clauses
– Scope of Work
• Must clearly define the services and material
• Often done with D&S
• Detailed as in lump sum
• Functional (20,000 m sq warehouse)
• Performance (quantity / quality requirements)
– Contract time
• “time is of the essence” – “time is the essence”
• Applies to both parties
• Penalties can be enforced due to delays
• Standard Clauses
– Changes
• Most contracts only allow changes to be in writing
• Alterations to the time / cost / scope / quality
• Impact costs!
• Major source of conflict – must follow procedures so as
not to create a waiver of rights (estoppel)
– Damages and Bonuses
• Penalty clauses – not enforceable – why?
• Liquidated damages – substantiated value
• No bonus clause is necessary to award damages
• Bonus clauses are good inducement to party to exceed
some aspect of performance in the contract
– Warranty
• Contractual promise to repair defects in goods and services
provided
• Customarily 1 year
– How long for structural defects in a new home (ON)
• Manufacturers warranty is separate from builders
• Warranty only valid as long as that company stays in
operation
– Termination
• Most contracts terminated by performance (substantial
performance)
• Breach (material/fundamental – multiple minor), frustration,
convenience (compensations $)
• This section will set out reasons for termination and
remedies.
– Indemnification
• One party (A) holds harmless another party (B) from
third party actions due to their actions (party A).
– Exclusion, Limitation or Waiver Clauses
• Exclusion
– “weasel”, “escape” clauses
– Often construed strictly against the drafter
– “the lowest bidder may not necessarily be the winning
proponent, all of the bids may be rejected……….”
– Cannot be ambiguous – must clearly define the events that
would give rise to the exclusion
– Tercon Contractors Ltd v. British Columbia 2010 SCC 4 (S.C.C.).
» Does the exclusion clause apply to the circumstances
» If so was it unconscionable at time of contract formation
» Is there a greater public good achieved if the exclusion
clause is overturned if valid and applicable
– Limitation Clauses
• Unlike exclusion clauses which remove remedies
limitation clauses limit remedies
– Limit time to bring claims
– Limit value of claims against insurance
– Limit type of claims
• Consequential damages limited – can only claim for the
value of the part – cannot claim for profit loss etc.
– Dispute Resolution
• Lays out the methods and process used to resolve
disputes
• Negotiate / mediate / arbitrate / litigate
– Project Financing
• Owner typically finances project via
– Reserve funds
– Lender
– Combination (most common)
• Consultant aids owner
– Assisting in feasibility study (prove value to lender)
– Providing proper design to meet project needs
– Create bankable contract documents
– Contract administration
– Cost validation / certification
Contract Risk