SNC-Lavalin

'::. ~ I' - ,'-..'.. ,- ~r ~'\ Project Number: 020871

: ~ ."1 SNC.NBDOT -30CC.O438'" '. .. J

~~ SNC-LAVALININC.. SNC L A"ITA LIN 455,Rene-LevcsqucBlvd.West

+ fi't' 1"1. Monlreal, Qnebec

Canada H2Z lZ3

) Tel.: (514) 393-1000

FR.'" (514) 861-5349

Fredericton, October 6, 2011 "

, 'f,';,;;:r£';~ ;s

TO THE ATTENTION OF:

"';-;"",:DISPUTE RESOLUTION BOARD "'~J 'f,"c!it

"c;"c,,~.111111.. -

11111111111

.11111111-

~""':'""C~

!&=:.') AND TO THE ATTENTION OF:- ""~r"~t~~;f1"¥;in~ rt:)1' ~

NEW BRUNSWICK DEPARTMENT OF TRANSPORTATION

PRINCESS MARGARET BRIDGE PROJECT }i ,~n t~~ ,,;c,' th~'~-~$"'~';

c/o Krista MacDonald, P. Eng. ..

Room 526, King Tower, Kings Place (440 King St.Fredericton, New Brunswick !m~~~ !~;';"c", -~,

,E3B 5H8

c/o: Project Manager 1"!~,i,'11~,";"~,':!; ;:~

1'"':" P,ro;;'r", ' , t

RE: Princess Margaret Bridge Project"Notice of Referral" for Non-Conformance Notice DBNCNO211 ~

Dear Sirs,

INTRODUCTORY NOTES:

1. Capitalized terms and expressions used but not otherwise defined herein shall have the meanings given tothem in the Project Agreement dated February 17, 2010 among Her Majesty the Queen in right,of the Province

)Member of the SNC LAVALIN Group

~ ~

, -t.

)of New Brunswick, as represented by the Minister of Transportation, and SNC-Lavalin Inc., relating to thePrincess Margaret Bridge Project.

2. Where there is a reference to section numbers without the associated document, the document in question is:"~": the Project Agreement.

~] 3. As noted in S. l(i) below, in its letter to the Province requesting that this Contractor NCN be withdrawn, theContractor requested that, in the alternative, the dispute resolution procedure be placed on hold until a laterdate, but the Province did not respond directly to this request. The request was motivated by:

a. the extreme exigencies of Project Completion, to which we are devoting all of our resources; ~b. the broad scope of our factual and legal arguments on the black letter of the contract as well as ,

broader principles of law and equity. These principles relate to (i) good faith, (ii) fair use of .,contractual discretion, (iii) the duty to cooperate in the pursuit of a common contractual aim, and '-

(iv) the particularly punitive quality assurance structure of the Project Agreement and the manner Iin which it is being deployed by the Province in this Project including, without limitation, thesignificantly delayed Project start date, the imposition of out of scope work relating to pier stability,the change order relating to Sterling Lloyd Waterproofing, all of which have negatively impactedProject delivery through no fault of the Contractor; and I

c. our agreement to postpone discussions on certain matters identified above in Paragraph 3(b)(iv),resulting in our complete surprise at receiving DBNCNO211. )

As not~d in S. lk) below, on Octo~er. 3, 20~1, the. Contractor sent a further letter t~ the Province asking fo~ an Iextension of the date for submitting thIs Notice of Referral due to the particular demands of Project ~,

~completion. As noted In S. 11) below, in a verbal communication to the Contractor on the day of the original Isubmission deadline, the Province advised the Contractor that it would not consent to any extension. "'

This letter does not necessarily contain a complete statement of all of the facts and arguments available to us.We therefore reserve the right to follow up with an amended version hereof providing more complete facts,grounds and documents to ensure this process allows for a full hearing of the issues and provides an equitableplatform to the Contractor given the Province's purported need to extend the prescribed la-business daydeadline for responding to our Notices of Referral. The Province cannot refuse to grant us an extension whileunilaterally imposing an extension on us in its own favour. This shall also confirm that the Province hasindicated, verbally, to the Contractor, its agreement with this reservation of rights and that it would awaitreceipt of our more developed documentation before providing their response.

4. This complex matter necessitates written and oral presentations to the Dispute Resolution Board (ORB). Wewould ask that the Contractor be allowed to offer a written rebuttal to the Response of the Province no laterthan 10 Business Days after it is received. We anticipate that the DRB will require three separate (4)-hourhearings to allow the parties to properly present the many issues within this dispute and address any questionsthe panel members may have prior to delivering their decision.

c;cxiOJ I. FACTS:00,;OJI.:

!3

§(/) Page 2 de/of 15

:cc",.,~~"C;;" i"'~,"; '." !'i'~~ ~C~""-:C ".

."-' _.~-~.,=,._, '"

,- ~

, ~

-'\

),"..., a) During an audit conducted on 6 September 2011, the PMB Auditor determined that the Contractor had not

achieved Full Traffic Availability by the Full Traffic Condition date of 5 September 2011.

b) On September 13, 2011 the Province delivered DBNCN0211 to the Contractor.

~~. c) On September 20,2011 the Contractor notified the Province that it declined to accept DBNCN0211.,,""Ce'"'"

. d) On September 21, 2011 the Province confirmed that DBNCN0211 had been placed in dispute and requested

. a Dispute Resolution Meeting be scheduled within 10 business days...;c".,'"" e) On September 22, 2011 the Project Manager and Provincial Project Manager met, but were unable to- resolve the dispute relating to DBNCN0211.'" ':~'

-~ f) On September 27, 2011 the Contractor sent the Province a letter ("Contractor's Further Response").. .:, ~;;.;;:;":~ providing further information as to our grounds for disputing the Non-Conformance Notice and requesting,

.. in the event of the Province's persistence, agreement to place the dispute resolution on hold until such

.'",;:.; time as all matters relating to project delays were discussed.:", ,,"~,"', g) On September 30, 2011 the Province sent a letter that did not respond directly to the Contractor's request

for an extension of the deadline for submitting the present Notice of Referral, but reiterated that thePrincess Margaret Bridge did not achieve Full Traffic Availability by the Required Full Traffic Condition Date,in justification of the NCN.

) h) On October 3, 2011, the Contractor sent a further letter to the Province asking for an extension of the datefor submitting this Notice of Referral due to the particular demands of Project completion.

i) On October 6, 2011, the Province rejected this request.- Based on the above, the Contractor hereby refers this dispute for resolution by the Dispute Resolution Board~"; ;. pursuant to Article 25.5 PA

c""'.'r II. DISPUTE IN BRIEF:." ' a) Province Findings as to Facts as Stated in the NCN: The Province contends that the Contractor did not.

, "co, achieve Full Traffic Availability by the Required Full Traffic Condition Date. '",..~:~~ii;l;q b) Province Findings as to Applicable Contractual Provisions as Stated in the NCN: The Province alleges that Ithe failure to achieve Full Traffic Availability by the Required Full Traffic Condition Date contravenes section I

~';";.::~:" 14.1 PA which states: '.

- "The Contractor covenants to ensure that (a) the Full Traffic Condition Date occurs on or before theRequired Full Traffic Condition Date and (b) the Total completion Date occurs on or before theRequired Total Completion Date and acknowledges and agrees that the failure by it to achieve such

0 covenants will, without limiting any other remedy available to the Province hereunder or at law or in~ equity, result in Contractor Non-Conformance Payments becoming due and payable by the Contractor

~ ~ to the Province."

" 130

., g~ ' rn Page 3 de/of 15

~

.

~'~ ~ ""._""'""""""--,~, ., -).

.,

"

The Province also cites Schedule 7(11)(A) which sets forth the amount of the Non-Conformance paymentswhich are payable in the event the requirement of Section 14.1 PA is not met. -

Finally, the Province cites the definitions of "Full Traffic Availability" and IIRequired Full Traffic ConditionDate" in support of its submission.

c) Contractor's Further Response, dated 27 September 2011: In We acknowledged that the Bridge was not inFull Traffic Condition on the Full Traffic Condition Date but stated as follows:

"However, as previously indicated and discussed during our coordination meetings, certain ScopeChanges over the course of the Project and other circumstances beyond the control of theContractor have resulted in an express or implied consent or contractual term extending the FullTraffic Condition Date past (misspelled as "passed") the original date of September 5, 2011 (and infact, as you know, the Province and the Contractor are still negotiating the schedule impact of thesechanges). Consequently, we decline to accept the occurrence of an incidence of Contractor Non-Conformance as the cause of the delay does not fall within the definition of a Contractor Non-Conformance. In light of the foregoing, the NCN should be withdrawn."

~'j- d) Province's Response, Dated September 30,2011, to the Contractor's Further Response

~;;i;,'~, The Province first reiterated the fact that the Bridge did not achieve Full traffic Availability by the RequiredL Full Traffic Condition Date.,,'!,.,...'

Next the Province, in rejecting that "an express or implied consent or contractual term extending the Full ~

111111"~~""5;""f;:;:': Traffic Condition Date passed (sic) the original date of September 5, 201111, responded that they did notunderstand how we came to such a conclusion and stated that "there is no such consent on the Part of the. "-c "'--o~~ Province.

-'~ The Province in further assertion of its position cited Section 27.8 of the Project Agreement, which provides:~ that no amendment to the Project Agreement shall be valid unless it is made in writing and signed by or onL behalf of each of the Parties.. III. CONTRACTOR'S RESPONSE:':".7:-. As stated, we do not contest the fact that the Princess Margaret Bridge did not achieve Full traffic Availability by the

C_;':":' Required Full Traffic Condition Date of September 5, 2011. Rather, it is the allegedly non-conforming nature of this"" lateness which is contested..'?:'" c~

I The Province's statement (letter of September 30, 2011) that there was no consent to extend the project term is. selective and self-serving and neglects important facts which go to the heart of this Notice of Referral. The

Contractor was compelled to undertake certain work to upgrade the stability of pier work which is outside theContractor's Scope of Work, thereby constituting a Scope Change, with an increase in the Contractor's costs anddelays in the completion of the scheduled obligations under the Project Agreement resulting. The Province disputedthis characterization but offered to defer the negotiation of this Issue until a later time in order to enable the work

;; to proceed without delay given the already serious time constraints on the Project. In a spirit of cooperation andm despite the risk of moving forward without an upfront guarantee of the required compensation and schedule relief,

~ the Contractor agreed."IX:'"OD

[5 r2 Page 4 de/of 15 .

-

, ~~~

. ,~

." '"

)Similarly, when the Province issued a Change Order amending the Project Agreement to add the requirement forSterling Lloyd Eliminator bridge deck waterproofing of the bridge deck, the Parties were unable to come to an

agreement regarding the cost and schedule impact of this change. However, notwithstanding this disagreement,the Contractor agreed' to implement the system into the design, with the understanding that the issues ofscheduling and cost impacts would be negotiated at a later date.

Finally, the Province has adopted an excessively punitive approach to quality assurance and design review on this IProject which has had an adverse impact on scheduling and justifies an extension of time. As at the date hereof,the Province has delivered to SNC-Lavalin 232 Non-Conformance Notices (collectively, the "NCN's"). Some were Iacknowledged and accepted pursuant to S. 12.2.1 (a) while others were disputed in accordance with s. 12.2.1(b). .'

The remainder were subjected to the Province's final determination pursuant to the last paragraph of s. 12.2.5.Notices of Referral to the DRB have been filed with respect to certain NCN's and Notices of Referral have beenprepared with respect to certain NCN's but set aside by mutual agreement of the parties for later discussion. By cmutual agreement, the prescribed Contractor Non-Conformance Payments in respect of the NCN's have not yet Ibeen paid or deducted as it has been agreed that the totality of such payments shall be subject to discussions to ;take place at a later date. I

~Thus, the Parties agreed to suspend the discussions of scheduling and other Impacts until a later date and it was the I

Contractor's intention that some accommodation regarding project schedule would be reached. Since the I_,

contractual terms relating to schedule were not yet finalized, this NCN is premature at best. While it was and -remains our firm contention that the factors to be discussed justify an extension of time, among other relief whichshould accrue to the Contractor on this Project, we consented to suspend discussions of these issues in order to

, move the work forward effectively. Our consent was obviously premised on the Province's good faith in return, and) the Province knew or should have known this, so should not be permitted to raise an absence of an express

.c' contractual term against the Contractor. We re-assert our claim that the Province permitted the Contractor to rely

on an implied agreement to subsequently negotiate in good faith, creating an implied consent or term of contractin favour of the Contractor to this effect.

Alternatively, the performance delay was contractually justified given that the Contractor was not at fault or able tocontrol the factors giving rise to the delay. In fact most, if not all, of these factors were within the control or due tothe fault of the Province, including the cumulative impact of the aforementioned scope changes, the particularcircumstances of the Project and the Province's unfairly punitive approach to project management on productivity,as demonstrated below.

It is important to note that we are not claiming the Province has reneged on its promise to suspend the foregoingissues for later discussion. It is possible that the Province chose to issue DBNCNO211 in order to preserve its rightsin the event the parties do not reach agreement during their discussions on project delays. However, the Provincehas not stated that this is the case, so we are just extending it the benefit of the doubt. Whatever the case may be,we are compelled to reject this non-conformance given our contention that the contract should have been andmust be amended to reflect the project delay impacts of extra work performed by Contractor on the Project,whether or not the full impact reached negotiation. As such, the Contractor is not in a situation of non-conformance justifying the NCN.

A. DETAilED DISCUSSION OF FACTORS JUSTIFYING EXTENSION

0-~ i) Late Signing of Contract00,-

, ~ Facts surrounding the execution of the PA

} gPage 5 de/of 15

-'

~ ,~

. ~

)

. On March 19, 2009 the Province issued a Request for Qualifications (RFQ) in which Respondents wereasked to submit thei~qualifications for the performance of design and construction work to rehabilitate thePrincess Margaret Bridge in Fredericton, New Brunswick (the "Project"). SNC-Lavalin's bid was ranked insecond place but was selected by the Province following the failure of the original Preferred Proponent toI timely execute and deliver the PA under RFP. As a result, the PA was executed and delivered by SNC-Lavalin

..;; on 17 February 2011, being almost two months following the original Project start date. This meant, among"C";~ other things, the loss of two crucial months of engineering time. ,

~ Despite the significantly delayed Project start date (through no fault of SNC-Lavalin), the deadline for full Traffic I

,,"', remained unchanged, resulting in significantly shortened time frames for certain of the Work. I

Attempts by SNC-Lavalin to negotiate changes to the PA - including with respect to deadline extensions to reflect I'these altered time frames - were unsuccessful, with the Province showing no openness to amend the PA. ,

However, SNC-Lavalin's impression was that the Province would show flexibility where possible to enable SNC-Lavalin to meet the challenges presented by the vastly compressed schedule. For example, the compressedtimelines made it virtually impossible for SNC-Lavalin to deliver the 100% Design Report no later than 30 days priorto commencement of construction of the Works as required under the PA and it was our impression fromdiscussions with the Province that, while unwilling to formally amend the PA, they were aware of this impossibilityand intended to allow for a feasible alternate solution involving the phased delivery of design packages: However,this turned out not to be the case as, when the deadline for delivery of the 100% Design Report passed, theProvince immediately delivered a Non~Conformance Notice ("NCN") to SNC-Lavalin. .)

Delaved Start as Scope Chang~: Paragraph (viii) of S. 1.1 of the Project Agreement provides that a failure by the '.,~Province to make the Bridge Lands Work Areas available to the Contractor on or before November 30, 2009 "'g

constitutes a Scope Change. This clause applies whether or not the delayed access to the Bridge Lands Work Areas '

is accompanied by an equivalent extension of the project completion date. As such, the contemplated relief relatesQQ1h to mobilization costs incurred by the Contractor as a result of mobilized resources not used during the delayEru;!. to the cost and schedule impact on the Contractor of the reduction in time arising from the delayed ProjectCommencement. This in and of itself entitles the Contractor to relief as to time and cost resulting from the latestart of the Project. However, even if one were to argue that the stated date of November 30, 2009 (paragraph .I

(viii) of S. 1.1) was the initial start date for the Project and that such date is deemed to have been amended and ,:.

replaced by the actual start date of February 17, 2010, the existence of this Scope Change illustrates that,according to the spirit and the letter of the Project Agreement, the Contractor is intended to be relieved from thecost and schedule impact of a shortened contract term where such reduction in time arises from an act of theProvince.

ii) Province Project Management/Un/air Practices ~.

General Comments Regarding Conduct of the NCN Regime:

0~ 1 Our phasing proposal suggested the design for particular work be submitted 10 prior to commencement of that work rather

~ than submitting the entire design for the project 30 days prior to Work commencement. This proposed solution was not only

~ feasible but perfectly in keeping with the Design-Bid mode of procurement, one of whose advantages Is to allow faster delivery

§ by enabling design to be conducted In phases. ;(/) Page 6 de/of 15

-

.. ..~

~

')~a. Design-Build Contracts! Acceptable Risk: The Contractor bid on this Project on the basis that the

IIDesign-Build" method of procurement was going to be being used. One of the key advantages of

IIDesign-Build" (as compared to traditional Design-Bid-Build or Design-Award-Build modes of, procurement) is that design can be performed concurrently with construction activities, allowing

the work to be phased and performed efficiently, as long as it is compliant with applicable codes,

"",.',~" standards and the Project Agreement. Such phased design and construction work, aptly referred to~"M as fast-tracking, is not used on all projects. Sometimes the Design-Builder (IIDB") creates the entire

design prior to commencement of construction. However, such fast-tracking is particularly useful inorder to achieve accelerated delivery of projects and therefore, such an approach would have been

particularly appropriate given the abnormally accelerated schedule resulting from the late startdate described in a) above.

For example, (as mentioned in a) above) the compressed timelines made it virtually impossible for

SNC-Lavalin to deliver the 100% Design Report no later than 30 days prior to commencement ofconstruction of the Works as required under the PA and it was our impression from discussionswith the Province that, while unwilling to formally amend the PAl they were aware of thisimpossibility and intended to allow for a feasible alternate solution involving the phased delivery ofdesign packages.2 As an alternative, we suggested the use of design packages. However, ourexpectation of flexibility from the Province was shown to be in error, when the deadline fordelivery of the 100% Design Report passed, the Province immediately delivered a Non-Conformance Notice (IINCN")3 to SNC-Lavalin.

The suggested use of design packages was being perfectly in keeping with the "Design-Build" mode) of procurement used on this project and particularly appropriate given the abnormally accelerated

... schedule and the expectation of the Province's accommodation was reasonable. The issuance of

NCN 004 was not.

NCN 004 is not the only example of an unproductive, uncooperative and, unreasonable departure bythe Province from the innovative scope allocation principles of Design-Build. In fact, from an earlystage in the Project the Province began to adopt an increasingly detail-oriented approach tooversight of the Work, with their Independent Engineer frequently requiring us to "go back to thedrawing board" with respect to various designs, causing a significant drain on our financial andhuman resources and aggravating the already tight time constraints of the project. By driving the

~ design process in a manner more befitting a traditional bid, the Province has placed SNC-Lavalin inthe untenable situation of assuming all the risks and burdens to Design-Build delivery while at the

~c~ same depriving it of the independence and margin for manoeuvre which generally accompany the"",,-j'" assumption of those risks,.

~;,?:!:c,,; This overzealous approach to reviewing design has resulted in interference with the Contractor's

ability to manage the design and construction process. This has a negative impact on theContractor's cost and schedule and this off-loading to the Contractor of unacceptable risk was not

. foreseeable and therefore could not have been (and was not) priced or planned for.

~ 2 Our phasing proposal suggested the design for particular work be submitted 10 prior to commencement of thatOJ work rather than submitting the entire design for the project 30 days prior to Work commencement. This proposed

~ solution was not only feasible but perfectly in keeping with the Design Bid mode of procurement, one of whose(( advantages is to allows faster delivery by enabling design to be conducted in phases.

.. ~ 3 NCN 004.j 0

CI) Page 7 de/of 15

., ,""C""bC"'C"Co""~~""~"""'~"""=~~'"C~"-""'C

1-,3,

'"

'i~ ,~

b. Interference in the Design Process: In contrast to the nature of a Design-Build contract where theContractor controls design, the Province is unduly interfering with the design process. DesignReview by an Owner's role in a Design-Build project should be limited to compliance with Projectrequirements, not to design validity nor technical adequacy of the design; this is particularly so inthis case where the Province wishes the Contractor to retain responsibility for the design4. Inaddition, excessive involvement in the design process by the Province has had a negative impactthe Contractor's schedule and cost. The design approval process under the Project Agreement adds Iconsiderable delays to the schedules causing a significant multiplier effect in time lost from ':

excessive interference In the process by the Province. Inappropriate intrusion in the design processhas created additional and unnecessary approval cycles causing significant loss of time.Furthermore, NCNs have issued for differences of opinion relating to design choices which theContractor is contractually entitled and obligated to control. Even if the Province (or anothercontractor) would do things differently, this is not tantamount to anon-conformity provided ourdesign is reasonable and is complaint with the bridge code, the state of the art, and the Project IAgreement, in which case It must be accepted. NCNs are not the appropriate vehicle for debatingthese issues as there is no defect or non-conformity, no damage and no objective non-conformingbehaviour to sanction and the use of the NCNs in these cases contributes to unnecessary delays.

c. Punitive Nature: The Province has adopted an excessively punitive approach to QA and design I

rev~ew on thi~ Project. To date, the p~ovince h~s delivered.to SNC-L~valin over. 200 NCNs, many of .~which we believe were unnecessary, Inappropriate or unfair and which have diverted resources of ~the Contractor from more productive work.

d. Implied covenant of good faith and fair dealing: The Province must deal with the Contractorhonestly, fairly, and in good faith, so as to not destroy the Contractor's right to receive the benefitsof the contract. This obligation occurs each time the Province exercises discretion in performanceand thereby controls the other party's anticipated benefit. Such good faith dealing is even morenecessary In the case of the inflexible and arguably inappropriate (as discussed elsewhere) NCN Iregime under the PA, particularly in the context of what Is for all intents and purposes a contract of .adhesion. It is argued that the Province has not conducted itself in accordance with this principle inits application of the NCN regime and that this problem underlies many of the other comments set I"forth in this memo.

e. Quality Assurance is typically not an NCN-Matter: QA is not typically sanctioned by NCNs in theIcontext of construction contracts whose object is to deliver a constructed Project. This goes against

contract principles as well as equity, custom and practise.

Typically, NCN deductions or payments are imposed in construction contracts in the event ofdelayed completion ("Delay Liquidated Damages" or "Delay LD's") or in the event the facilityelements do not meet, or perform in accordance with, contractual specifications. Likewise, O&M orfacility management contracts typically contain non-performance deduction regimes which providefor the deduction of amounts to reflect deficiencies in the quality or the quantity of services

5 rendered. These deficiencies include the failure to make a facility or parts thereof available asgi required or the failure to meet specific quality or service standards They serve, in such00;;~ 4 Section 5.1 of the PA clearly allocates responsibility for the Design Work to the Contractor.~ 5 See for example, the 10 business day waiting periods set forth in S. 5.4.2 of the Project Agreement.0(I) Page 8 de/of 15

I

~ '.c I

-~"'\"'C

'-:rcc: ,;, "'c'

,. '~ 11:::m. ..

..

I\ !

) I circumstances, to indemnify the client for the damages it suffers because of such late delivery or I

because the thing delivered did not meet the standards bargained for, a tool for avoiding onerous i

litigation and complicated issues of proof by agreeing to a contractually defined pre-estimate ofdamages' Penalty or deduction points are often assessed with each crystallized non-conformance so Ias to track their occurrence and to trigger contractual defaults and termination where the level of ~

non-conformance rises to contractually-established critical (and high) thresholds. In contrast, in this I

Project many of the NCNs are imposed in the context of a QA program, the purpose of which I'., typically is to ensure ~on-conformances are caught early and rectified so that bre.aches gi~ing rise to

NCNs under normal circumstances and contracts never occur. QA relates to conditions which for themost part are in the process of being rectified or can and will be rectified, at Contractor's cost andwithout causing any damage to the Province (and not, as in the case of typical performance LD's, forlateness or defects in the delivered infrastructure). These are picked up either by the ContractorsQA procedure or via Province audit, both part of a QA system which assumes non-conformities willoccur and seeks to identify and record them and ensure their timely rectification. In both cases, theContractor rectifies the deficiency at its own cost as part of its contractual obligations. Yet, in ourcase, because of the overly punitive nature of the contractual NCN-regime and the Province'sparticularly abusive use of it, non-conformities in QA which are expected and which cause nodamage to the Province, are now causing the Contractor onerous financial consequences without

~~~;-,,=,~ the benefit of a rectification period to correct the non-conformance or a concept of repetitive Ibreach to assess deductions only where the nature or quantity of the deficiencies surpasses a ~i~reasonably agreed threshold.

f. Contravention of General Contract Principles: The issuance by the Province of the NCN-regime) should be confined, and is so confined in typical construction (including Design-Build contracts) to

the limited circumstances where objective technical criteria are breached, rather than to the widerpatterns as is occurring in this case. A contractor should not have to suffer automatic and .significant penalties for vague alleged breaches or being deprived of benefit of such protections as

~~! burden of proof, materiality thresholds right to cure and to mitigate as this violates many principlesof contract law, creates unfairness in this contractual framework (especially since the Provincecontrols the purse-strings under PA and excessive NCNs reduce the Payments to the Contractor),create a situation of unjust enrichment favouring the Province. In short, NCNs are being used by the IProvince as a tool to inappropriately sanction more minor deviations from the agreement, which is 'I"

inconsistent with the typical aims of NCN regimes. More on these principles below.

go Inappropriate Timing; Imposition of NCNs with respect to Ongoing Work: This includes: I. NCNs for deficiencies which have been identified by the Contractor's QA system or by

Provincial Audit which are in the process of being rectified;

,.0.r~ . where a requirement has not yet been met but where in the opinion of the Contractor,, , there was no obligation to meet such requirement at the time the NCN was assessed.

This phenomenon, sometimes referred to as the problem of "temporary disconformities/', has anegative impact on the timing of ongoing work and inappropriately and unfairly penalizes the :',~:"~ 0: Contractor for disconformities which will not form part of the delivered structure.

P;'; h. Requesting more information than Contractor feels is necessary to comply; this, despite, ~ disagreement, results in a non-conformance which, prior to its removal from the bucket and, 0

(/) Page 9 delof 15

i& .r" . ,:.,~~,.".cc'" -

::;£~Y=~-:;,t."i'

,~

~

I regardless of whether Contractor is ultimately vindicated, can serve as the threshold NCN triggering

$10,OOO/day. This is fundamentally unfair (given the NCN payment impact) but also goes againstone of the major tenets of Design Build: streamlining. At all times, the public owner should do itsbest to allow the contractor to produce the minimum documentation required to demonstratecompliance with the Owner's requirements, construct the project and facilitate the Owners finalacceptance. Disagreements between the parties should be dealt with in the appropriate discussionor dispute forums, not via the issuance of punitive NCNs.

i. Non-Removal from NCN Register: Due to the Province's interpretation of S. 12.2.3, the PA, NCN'sremain in the Register until the incidence of Contractor Non-Conformance is corrected or rectifiedto the reasonable satisfaction of the Province. This has the potential to prolong the accrual of10,OOO/day Non-Conformance Payments due to circumstances completely beyond the control ofthe Contractor. Only the good faith exercise of the Province's discretion in this regard can guardagainst the unfair application of the PA in this regard. NCN 94 is but one example of this.

j. Existence of Non-Punitive Alternatives: The Province is inappropriately imposing onerous NCN'swhere non-punitive alternatives exist: An example is the issuance of NCNs where the Province'sreal intent was to trigger ciarification of a matter by SNC-Lavalin. We acknowledge and appreciatethe occasional use of Observation Notices by the Province but lament their underuse.

k. Unjust Enrichment: The NCN penalties are beyond compensatory in the circumstances as would bethe case if they were truly liquidated damages - they constitute unjustifiable penalties that unjustlyenrich the Province to the detriment of the Contractor. In addition, the delayed removal of the NCNsfrom the Register leads to an improper financial burden for the Contractor without any correlationto damages suffered by the Province or ability to mitigate by the Contractor.

I. Cure and Mitigation: Under general contract principles, and usual contract terms, a contractingparty is given a fair opportunity to correct (or cure) defaults as well as to mitigate its damages.Typically, NCN regimes also provide the same. However, the current NCN regime as applied by theProvince deprives the Contractor of its ability to both cure and mitigate. NCNs are removed withgreat difficulty which poses additional burdens on the Contractor.

In summary, it is SNC-Lavalin's contention that a great many of these NCNs were unnecessary and unfair insubstance. Furthermore, their related Payments are also excessive, unfair and oppressive, many of which couldhave been avoided, reduced or removed quickly from the register. As It is within the Province's discretion to assessor not assess NCNs, their sheer number, frequency and size of Payments show a pattern of bad faith. The NCI\Jregime set forth in the Project Agreement is being inappropriately used as part of the QA program in this context,being in a construction contract. Where it would be appropriate, such as in O&M contract (where the deductionscompensate owners for services or standards paid for but not met), they are accompanied by balancingmechanisms, such as rectification periods making the NCN regimes fair and equitable, rather than punitive, which istotally not the case here. For this reason, Provincial discretion must be exercised to the highest standard of goodfaith and fairness to mitigate the most punitive and onerous effects of this kind of regime.

1;gi ;ii) Stability Work Outside of Contract8>'~'"

80(/)- Page 10 de/of 15

"1~?'.i,':~'-;>"""ii,:c

I}

,

,

)As mentioned above, it was the Contractor's reasonable expectation that the issues surrounding the nature andscope of the Contractor's obligations as they pertain to the substructure of the Bridge would be mutuallynegotiated at a later date, as agreed with the Province. However, the issuance of DBNCN0211 makes it necessary toaddress the issue of the impact of out-of-scope work on our schedule now.

. Disagreement with respect to contractual scope and deferred negotiations

The issue mutually set aside for later negotiation concerns whether or not the Contractor scope of Workwas intended to encompass the investigation, analysis or assessment of the stability of the Bridge piers andabutments and the rehabilitation of piers and abutments not meeting required load and stability ratings.The Contractor's firm position is that it does not, as our scope of Work in respect of substructure elementsis limited to: (i) concrete removal from and encapsulation of pier and abutments; and (ii) concrete infill ofland-based piers, as clearly set forth in Section 1.4 (Project Description) of Schedule 1 to the ProjectAgreement. This position, which constitutes one of the assumptions upon which the Contractor based itsdecision to bid on the Project at the tendered price, was reflected in our initial structural evaluation reportsubmitted to the Province. In response to the report, the Province, during the first coordination meetingbetween the Contactor and the Province on 31 March 2011, indicated its position that the Contractor wasresponsible for performance of stability studies on the bridge piers as well as any work required to bringthe stability ratings of the piers up to current standards, if necessary. The Contractor's Design Manager,Adel Zaki, disagreed, stating that the pier work required by the Project Agreement was limited to "repair ofsubstructure elements." While the Province continued to dispute this characterization of the ProjectAgreement, it was clearly agreed during the 13 May 2011 Coordination Meeting #4 that the issue of

') contractual scope, specifically its application to upgrading the piers to meet the current bridge code, wouldbe settled at a later date.

. Contractual Basis for Contractor's position with respect to contractual scope

The substructure work involving pier stability is outside of the Contractor's scope of Work based on the

following:

Section 3.1 PA provides that the Contractor is engaged to perform the Work. "Work", in turn, is defined atS. 1.1(ju) as:

(i) The Design Work(ii) The Construction Work(iii) The Contractor Repairs(iv) The Warranty Work(v) All required investigation, analysis or assessment required in connection with any of the foregoing:(vi) All other work to be performed by or on behalf of the Contractor as described in the Contract

Documents; and(vii) The performance and observance of all the covenants, agreements and obligations of the

Contractor under this Agreement. [...].

co "Design Work" is defined in relevant part at S. 1.1(bq) to mean "the design of all elements of the Construction Work'"'" [...]. Therefore, the operative definition for our purposes is "Construction Work"0

q

'\ ! "Construction Work" is defined at S. 1.1(am) as:.. \ 0

,(J 0 cn Page 11 defof 15

{,,~.- -

I

(i) The dismantling, removal and disposal of all existing elements or components of the Bridge that are

required to be dismantled, removed and/or replaced, the refurbishment, repair or replacement of

all existing elements or components of the Bridge that are required to be refurbished, repaired or

replaced, and the supply, installation and construction of all new elements or components of the

Bridge which are required to be supplied, installed or constructed, in each case as specified in

accordance with, the Contract Documents (including Part 1.0 of Schedule 1) and

(ii) Any Contractor Determined Work [...J

The operative provision in Part 1 of Schedule 1 (referred to specifically in the definition of Construction Work) is S.

1.4 (Project Description) which describes the Work to be completed as follows:

"The Work to be completed by the Contractor includes, without limitation:

. surface preparation painting, upgrading, and general refurbishment of structural steel work;

. compete removal and replacement of existing concrete deck slabs, supporting floor beams and asphalt

wearing surface;

. replacement of existing traffic barriers and installation of new traffic barriers;

. replacement of expansion joint assemblies, drainage troughs and downspouts; ".J

r

. replacement of all bearing assemblies not replaced as part of the Phase 1 contract;

. concrete removal from and encapsulation of all piers and abutments;

. concrete infill of land-based piers; and

. all other Work specified herein.

The Work shall also include such additional Design Work and Construction Work as is required to ensure that the

Bridge achieves the required (i) capacity; and (ii) service life objectives set out in the Contract Documents (the'Contractor Determined Work')."

Thus, the general definition of "Construction Work" requires the refurbishment, repair or replacement of allexisting elements or components of the Bridge that are required to be refurbished. recaired or reclaced. and S. 1.4provides a detailed list of those elements or components requiring repair, refurbishment and replacement. For themost part, the Work described in section 1.4 relates to superstructure elements and the only requirements relatingto the substructure apply to concrete removal from and encapsulation of all piers and abutments and concrete infillof land-based piers. None of the foregoing requires substructure work below the waterline, which is what would

have been required if it were within the Contractor's scope to ensure stability of the bridge through the

~ performance of Work on its Substructure Elements (other than those which are land based).<»

~ Schedule 1 provides further detailed information about the nature of the Work. Section 5 provides the0:

13 specifications for Durability. It commences with the requirement that all materials, processes and methods of§VI Page 12 de/of 15

"., ~i4~~r. ':

, ~ '.,

")-

rehabttitation used by the Contractor be "the best available state of the art industry standards" (sic) to provide afifty (50) year service life for a bridge structure exposed to heavy usage of salt and other de-icing materials. This is ,stated in the first paragraph of s. 5 and it is not a subparagraph and so it can be said that it is meant as an .overriding clause to apply to the rest of section 5, which, in subsequent subparagraphs 5.1 to 5.2 refers to Concrete -Corrosion Protection and Painting Structural Steelwork, respectively. In each case reference is made tosuperstructure elements only, with the exception of the third paragraph of s. 5.1, which states that the Designrequirements, materials and methods of construction used for encapsulation and refurbishment of existing piers Iand abutments must conform to Item 302 of the Construction Specifications as well as Section 8 of Schedule 1 i:

(Repair of Substructure Elements). Item 302 of the Construction Specs relates to Concrete in Structures and theonly instance in which Item 302 relates to substructure elements is in the case of encapsulation. Section 8 ofSchedule 1 clearly provides that repair of substructure elements shall be accomplished by encapsulation and thatrefurbishment of land based piers E-5 to E-8, and E-ll to E-15 shall be through construction of a new concrete intillwall and concrete base cup. Once again, in no case is substructure work mentioned other than the specific casesmentioned above. Finally, section 8.2 reiterates that repair of substructure elements shall be by encapsulation and Iproceeds to set forth how encapsulation shall be carried out.

Section 6 relates to the Deck Replacement System. Section 7 relates to the upgrading of Structural Steelwork.Under subsection 7.1, the Contractor is required to design all strengthening required for deficient superstructuremembers and to perform its own inspection and assessment of the Bridge in order to evaluate the structural ~

capacity of all existing superstructure Bridge Members. Under s. 7.2 ("Strengthening and Repair work") thecontractor is required to provide adequate structural capacity for all Bridge superstructure members: s. 7, part 1.

, Finally, section 9 of schedule 1 goes into significant detail regarding miscellaneous bridge components such as) traffic barriers, expansion joints, single box seals, large movement joints, deck drainage, and bearing assemblies,

none of which relate to substructure stability work. ITherefore, the Project Agreement imposes detailed requirements relating to superstructure along with a limitednumber of specifications relating to the substructure, supporting the Contractors contention that the contractualscope excludes work involving the investigation or remediation of the load bearing capacity of the substructureelements.

This conclusion is further reinforced by the Province's commitments relating to Environmental Impact Assessmentsin respect of the Project. Correspondence between NBDOT and Fisheries and Oceans Canada and between NBDOTand the Assessment and Approvals Branch of the Department of Environment of New Brunswick make it clear that

~ substructure work to be performed under the Project Agreement is restricted to encapsulation of the piers and.-' abutments, with no underwater work being contemplated. It was on this basis that relevant governmental

itA authorities confirmed that the Project would not be subject to registration under the Environmental Impact-~"': Assessment Regulation and other relevant environmental authorization requirements. In fact, section 1.1 (iv) ..- provides that there shall be a Scope Change in the event an EtA Environmental Condition is imposed or otherwise ~

becomes applicable to the Work. Therefore, the position relating to EIAs supports the Contractor's contention thatsubstructure work was never contemplated under the Project Agreement.

. Work performed and scheduling impact

;;si Despite the Contractor's firm position that Bridge stability work was outside of its agreed scope and relying on the

~ parties' "agreement to disagree" on this issue until a later date, the Contractor consented to perform certain. ~ engineering work to assess the extent of any stability problems with the piers. These studies disclosed a number of

: §, I/) Page 13 de/of 15

iilllllll- - :c.. )..:;'~4'~1'!"

...

piers were unstable. Through various techniques the number of piers with such stability problems was reduceddown to 8.

During a coordination meeting held on June 7, 2010, the Province instructed the Contractor to submit a StructuralEvaluation and Live Load Rating Report containing solutions to the stability problems relating to the 8 piers prior toclosure of the bridge. We were able to significantly reduce the number of piers which were deemed to be unstablebut could still not bring the number of unstable elements to zero. We submitted our Structural Evaluation and LiveLoad Rating Report containing this information and we were allowed to close the Bridge despite the Province'scontention that the Report was non-compliant.

During the 2010 Permitted Closure Period, our efforts were devoted to engineering work which had been delayedduring the spring due to the extra-contractual focus on issues related to structure and stability and no furtherprogress was made on those issues

In the autumn of 2010, the parties agreed to hold non-prejudicial meetings on a number of issues, including thestability issue. The group established to deal with stability issues resolved the remaining stability issues by amongother things: (i) driving a test pile on the land to provide further evidence of our existing assumptions regardingstability; (ii) digging out the space behind the west abutment and refilling it with light weight material; (iii) taking abearing installed at W2 and placing it in W3; (iv) driving 10 extra piles beneath El0; and (v) removing the landfillbehind the east abutment and tying the abutment back.

It is noteworthy that neither driving piles nor excavating the backside of abutments form part of the Contractor'sscope of work under the Project Agreement.

As a result of our engineering work relating to the stability issue, our design budget increased significantly and wesuffered delays as Work was deferred in order to focus on the issue of pier stability.

iv) Sterling Lloyd Waterproofing Change Order

The Province issued Change Order PMBPCO06 amending the Project Agreement to add the requirement for StirlingLloyd Eliminator bridge deck waterproofing to be added to the waterproof wearing surface system. The Provinceagreed that the Change Order constituted a Scope Change and the Contractor submitted costs for the work as wellas its assertion that the performance of the work would require a two week extension to the 2011 PermittedClosure Period. As the parties were unable to come to an agreement on the cost and schedule impacts of thechange, the Province issued, by a letter dated March 31, 2011, a determination in respect of the matter. On April14, 2011, the Contractor responded with a Notice of Dispute indicating that it would proceed as required with thework but would be disputing the Province's determination as permitted under article 13.5.4 of the ProjectAgreement. We also reiterating our concern relating to the potential adverse scheduling impact of rainy/dampweather on the performance of the Change Order and suggesting that ways of dealing with this issue be added tothe agenda of the dispute resolution scheduled in respect pursuant to Article 25.4(b) of the Project Agreement. Thisissue still awaits discussion and therefore, since the contractual terms relating to schedule were not yet finalized,DBNCN0211 is premature at best.

c; v) Conclusionm~ The late start to the Project (as discussed in Ai) above), which was already afflicted with what were arguablyCD~ unrealistic timeliness, would alone be sufficient to justify an extension. However, the persistent failure of the

§"' Page 14 delof 15

':""~;'~~:o~:;\f"'%:c';c,

,,~*

-c

'C"'C -: . ,"""~-=~~&"",,i7:i~

,-

.\

\

)Province to adapt procedures and practices to the abnormally accelerated project schedule and the inappropriategeneral approach of the Province (as described in ii) above) also significantly contributed to Project delays and,

'c'~';;:i' taken together with the additional work mentioned in iii) and iv) above had a devastatlngly negative cumulative. impact on productivity, cost and timing, all of which justify an extension of time on this Project. As the schedule. ~:..o.,; impact of certain work was submitted for later discussion with the Province, we do not consider the Full Traffic

;)it,,:i"~,,; Condition Date of September 5,2011 to be valid as a measure of timely achievement of Full Traffic Availability and8 " therefore, we consider DBNCN0211 to be invalid. We furthermore consider that the cumulative effect of the factors

%;5:"/..0. mentioned in the present Notice of Referral, all of which were beyond the control of the Contractor and were- caused by the Province, justify an extension of the timelines on this Project.:"- Reservation of Rights:

;'~"'~'

. In addition and without prejudice to the rights reserved in Section 3 above, we hereby reserve our rights and

.. recourses whether or not the Province invokes new or additional grounds apart from those stated in DBNCNO211.~ Furthermore we reserve our right to review or adduce further evidence and arguments in connection with any',,"-"

..~ negative response the Province deems fit to bring forward.

c"cc,,~c- Summary and Conclusion -"~

;;tZ:In light of all of the foregoing, we hereby request that the Dispute Resolution Board confirm that DBNCN0211 doesnot demonstrate that the Contractor is in non-conformance with Article 14.1 of the Project Agreement or any ~,1; related provision, and is thus invalid. c

). Respectfully submitted,

c.",

Enclosures

c;.;0)

8,:~

\ ~J 0

(II Page 15 de/of 15

.c

.'e

gc'~..o.",C

,';:' -c,c- c.""