Construction Contracts - Risk Management 101 · LIQUIDATED DAMAGES Unenforceable Penalties • LD’s must be a genuine pre-estimate of damages • If the amount is not a genuine
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Construction Contracts - Risk Management 101Liquidated damages and notice provisions
LDs for Interim Milestones• LD clauses establish agreed sums payable on failure to achieve a
specified contractual obligationT diti ll LD t l bl di b i• Traditionally, LDs most commonly were payable on a per diem basis for failure to achieve the scheduled completion date
• Increasingly, LDs are being included in respect of interim schedule il tmilestones
• Some clauses deduct the LDs from progress payments. Such LDs are potentially fertile ground for course of construction disputes
Unenforceable Penalties• Factors relevant to challenging LD clauses:
• If estimating probable damages on breach is difficult at the time• If estimating probable damages on breach is difficult at the time of the negotiations, it is reasonable to settle on a lump sum in advance (supports enforcement)
• If the amount does not bear any relationship to the loss likely to be suffered, it may be a penalty. e.g. $5,000/day for late delivery to site of equipment where delivery on the scheduled date is not
th iti l th ( t f bl lt )on the critical path (supports unenforceable penalty)
Is a Challenge Viable?• Law is well established that there is jurisdiction to declare LDs
unenforceable if they are penalTh i l k f th it dd i th f bilit f i t i• There is a lack of authority addressing the enforceability of interim LDs but the principles are the same
• The discrepancy between likely loss and the penal amount must be t i l if th LD t i 10 ti th bl ti t dmaterial – if the LD amount is 10 times the reasonably estimated
actual loss, the case is there to be made – this is the best argument• If the Owner has not calculated actual loss and is using interim LDs
l i ti th th t ti l f h ll i tas a penal incentive, then the potential for challenge exists.
Alternative Solution• Attempt to negotiate relief where interim LDs become payable• Example, if the Contractor is back on schedule by the next Schedule
Mil t i l i d LD ll d ( dMilestone, previously incurred LDs are cancelled (and any associated deduct or holdback is reversed or released)
Technicore Underground Inc. • Clearway Construction entered a contract with the City of Toronto for
construction of 5.88 kilometres of water main piping• Clearway subcontracted with Technicore to perform the underground
tunnelling (using a tunnel boring machine)• A flood occurred during the tunnelling on August 2-3, 2006• The affected work was delayed and completed on December 22,
20062006• February 9, 2007, Technicore claims $800,000 from Clearwater• March 6, 2007 Clearwater claimed the $800,000 as well as
$400 000 of its own costs (expressly reserving its rights to claim$400,000 of its own costs (expressly reserving its rights to claim payment for work not specifically mentioned)
Technicore Underground Inc. • April 4, 2007: The City denied Clearwater’s claim• July 30, 2008: Technicore sued the City for damages due to the
fl d Th Cit b ht thi d t l i i t Cl tflood. The City brought a third party claim against Clearwater• Clearwater defended and counterclaimed against the City for
indemnity for the Technicore claim and for additional damages of $1 000 000$1,000,000
• August, 2010 Clearwater revised its claim and added new claims in excess of $3,000,0000
Technicore Underground Inc. • The Notice Provision:• The Contractor shall submit detailed claims as soon as reasonably
ibl d i t l t th 30 D ft l tipossible and in any event no later than 30 Days after completion of the work affected by the situation. The detailed claim shall:
• a) identify the item or items in respect of which the claim arises;• b) state the grounds, contractual or otherwise, upon which the
claim is made; and• c) include the Records maintained by the Contractor supporting
Technicore Underground Inc. • The City successfully obtained partial summary judgment dismissing
over $3,000,000 of Clearwater’s claims. The motion judge held that the Notice provision was a condition precedent to the August 2010the Notice provision was a condition precedent to the August 2010 additional claim due to expiry of the time limit
• Clearwater appealed – the appeal was dismissedH ld th N ti l did t h t l t t th t if it• Held: the Notice clause did not have to expressly state that if it was not complied with, the contractor could not advance the claim
• SCC authority (Corpex, 1982) followed – the Notice clause provides b fit t b th ti d t b li d ithbenefits to both parties and must be complied with
Technicore Underground Inc. • Clearwater argued there was no prejudice to the City• Ontario CA – proof of prejudice was not a requirement under the
l i ticlause in question• At para 51:• “Accordingly, there was no onus on the City to lead evidence of
prejudice. As owner, the City is assumed to have been prejudiced by a multimillion dollar claim being made years after the Contract permitted and long after the City could consider its position and take t t t t it fi i l i t t ”steps to protect its financial interests.”
Technicore Underground Inc. • Clearwater argued that the City did not raise any issue regarding the
timing of the March 2007 claim and waived or varied the terms by its conductconduct
• Held: there was no evidence that the City communicated an “unequivocal and conscious intention to abandon its right to rely upon the Notice provision or otherwise waiver strict compliance withupon the Notice provision or otherwise waiver strict compliance with its terms
• There was no pattern of conduct that indicated an intention not to be boundbound
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