Uncertain Times For Claims in Construction Law

by Anna Esposito (Construction Canada - November 2009)

It took 14 years, but the Canadian Construction Documents Committee (CCDC) has released an updated version of its widely used Stipulated Price Contract last year. However, does ‘newer’ necessarily mean better?

The CCDC2-2008, like its 1994 predecessor, is not a contract that applies in all circumstances to all construction projects. Further, it is not a contract that should be used without serious thought being given to adding Supplementary Conditions to modify the General Conditions. Certain provisions have been dramatically modified from the 1994 version – this article focuses particularly on GC 12.1 – Indemnification and GC 12.2 – Waiver of Claims.

Indemnification

‘Indemnification’ means a party undertakes to be financially responsible for specified claims or losses that the other party may incur. GC 12.1 is a contractual risk-allocation mechanism. In the 1994 version of CCDC 2, indemnification was unilateral; the Owner had no obligation to indemnify the contractor except for specific claims related to title matters. Indemnification by the contractor was in respect to only negligence and restricted to third-party claims for bodily injury or property damage.

Under the 2008 version, however, indemnification is much broader. The obligations extend to both ‘third-party’ and ‘first-party’ claims. In addition to indemnifying each other in respect of third-party claims, owners and contractors must now indemnify each other concerning their own negligence or breach of contract. Additionally, the consultant is not longer expressly indemnified.

The types of claims that can be the subject o indemnification are no longer limited. A claim can be made for both direct losses (e.g. bodily injury or destruction of property) and indirect losses (e.g. consequential damages or loss of future earning capacity). The 2008 version has also introduced limits of liability for claims (other than those related to bodily injury and property damage). Further, different monetary caps now apply to different types of indemnification claims.

Owner-contractor indemnity claims respecting matters for which insurance is provided under the contract are limited to the general liability insurance maximum for one occurrence. Owner-contractor claims for matters for which no insurance is required under the contract are limited to the greater of the contract price or $2 million, but cannot exceed $20 million.

With respect to third-party direct losses (for bodily injury or property damage), the obligation to indemnify is unlimited. However, indirect losses of third parties are subject to the same monetary caps as owner-contractor claims. The monetary caps include legal costs and interest.

Since GC 12.1 specifically provides that the parties waive the right to indemnity for claims other than those in the contract, owners and contractors need to be aware of the added significance of the contractual risk-allocation imposed by the new indemnity provisions. If the provisions are modified by Supplementary Conditions, owners and contractors should ensure this does not result in uninsured risks or an unintended waiver of the right to indemnity.

Waiver of Claims

In the 1994 version of CCDC 2, the owner waived all claims against the contractor as of the date of the final Certificate for Payment except for those:

made in writing before the date of the final Certificate for Payment;
arising out of the indemnification and warranty provisions of the contract;
arising from the toxic and hazardous materials provisions; and
in relation to substantial defects and deficiencies made in writing within six years from substantial performance of the work. (In Ontario, the shorter period of two years from discovery of the claim is prescribed by limitations legislation.)

The CCDC 2-2008 brings major changes to the old waiver provisions. The waiver date is no longer tied to the date of the final Certificate for Payment, and Notice in Writing (a newly defined term) of the claim is required to be given within prescribed time frames. The 1994 version did not prescribe a particular form of notice and no time limits applied.

Unless the owner and the contractor give Notice in Writing no later than the sixth calendar day before expiry of the lien period, then as of the fifth day before the expiry of the lien period, both parties waive and release each other from all claims based on acts or omissions occurring prior to or on the date of substantial performance:

of which they have (or reasonably ought to have) knowledge;
that could be advanced by one against the other; and
arising from their involvement in the work, including claims arising from negligence or breach of contract.

This waiver does not apply to:

indemnification from claims made against the owner or contractor by third parties;
claims for which a right of indemnity could be asserted by the contractor or owner pursuant to the GC 12.1.4 (i.e. toxic and hazardous substances);
claims for which a right of indemnity could be possibly asserted by the contractor pursuant to GC 12.1.5 (i.e. patent fees and defect in title);
claims of the owner arising from GC 12.3 – Warranty;
damages arising from the contractor’s actions that result in substantial defects or deficiencies in the work (i.e. those affecting the work in such a manner a significant part is unfit for the purpose intended); and
claims resulting from acts or omissions of either party occurring after the date of substantial performance.

If the owner or contractor receives a Notice in Writing of a claim under GC 12.2 on the sixth or seventh day before the expiry of the lien period then, the period within which the other party must give Notice in Writing of a claim is extended to two calendar days before the lien period’s expiry. This provision was clearly intended to eliminate the situation where one party lies in the weeds to make a claim at the latest possible time.

For the purposes of GC 12.2, the Notice in Writing of a claim must include:

a clear, unequivocal statement of intention to make a claim;
the nature of the claim and the grounds for which it is based; and
the estimated quantum.

Then, the person who gave Notice in Writing of the claim must submit a detailed account “within a reasonable time.”

Mutual waiver and release provisions also apply to claims resulting from acts or omissions that occur after the date of substantial performance. The exceptions are:

claims for which there are third-party indemnification obligations (i.e. GC 12.2.1.2 and GC 12.2.3.2);
claims in relation to toxic and hazardous materials (i.e. GC 12.2.1.3 and GC 12.2.3.3);
contractor’s claims in relation to patent fees and defects in title (i.e. GC 12.2.1.3);
owner’s claims in relation to warranty obligations (i.e. GC 12.3); and
claims for which a Notice in Writing of claim has been received within 395 calendar days following the date of substantial performance.

It is important to note GC 12.2.2 and GC 12.2.5 give the owner and contractor a period of only 395 days following the date of substantial performance to make a claim relating to acts or omissions occurring after the date of substantial performance.

Supplementary conditions

General Conditions 12.2 is lengthy, can be difficult to understand, and contains concepts foreign to the 1994 version. Four critical issues arise with respect to this provision that should be addressed by Supplementary Conditions.

Firstly, although the new waiver and release provisions were intended to be mutual, it has been suggested waiver and release of claims by a contractor may not necessarily be enforceable in Ontario when those claims are correctly included within a properly preserved Claim for Lien.

The opening words, “Subject to any lien legislations applicable to the Place of Work,” of GC 12.2.1 could be interpreted to mean the parties are purporting to contract out of the Ontario Construction Lien Act – something expressly prohibited by that act’s Section 4. Since the claims of owners are not regulated by lien legislation, the waiver and release of claims by owners may remain unaffected.

Secondly, as previously noted, the critical date for the Notice in Writing is tied to the expiry of the lien period rather than the date of the final Certificate for Payment. Undoubtedly, issues of proper notice will arise in those cases where the expiry of the lien period is uncertain. Where a Certificate of Substantial Performance is published, calculation of the contractor’s lien expiry date is relatively easy. Where it is not, determination of lien rights may rest on the difficult factual determination of when a contract was actually completed or abandoned.

Thirdly, the parties are only releasing claims of which they “have or reasonably ought to have knowledge” – the phrase reminiscent of language in legislation defining discoverability of claims for limitations purposes. The ‘discoverability’ principle has given rise to much litigation. Similarly, the courts will have to define what claims an owner or contractor “ought to have knowledge of” for CCDC 2-2008 waiver purposes on a case-by-case basis. Such a concept was not found in the 1994 version.

Fourthly, a Notice in Writing (in addition to being delivered by hand, registered mail, or regular mail) may now also be delivered by courier, fax, or other form of electronic communication (including e-mail) provided that a ‘failure of receipt’ is not communicated to the sender.

Sending a Notice in Writing by e-mail may be convenient, but gives rise to concerns about receipt. Undelivered e-mails do not always bounce back. E-mails may be received but not opened, or they may be automatically diverted to Junk Mail by spam filters. Access could be restricted within the office of the recipient to that particular individual. There may not be a fail-safe system for managing e-mail flow where that individual is absent. If properly establishing receipt of a Notice in Writing has the potential to pose risks, Supplementary Conditions will be necessary.

What does this mean for construction contracts?

Perhaps the most critical issue arising out of the new indemnification and waiver provisions for owners and contractors alike is the tying together or waiver of claims to expiry of the lien period.

The industry practice has often been to release the holdback on the understanding that – even in the absence of a formal claim – legitimate claims would be dealt with after the holdback release. To take this approach under the new CCDC 2 presents considerable risks, however. Parties failing to provide proper Notice in Writing six days before the expiry of lien rights may find their claim is now barred.

Since the period to avoid waiver of claims is tight, parties must implement a detailed system for monitoring and making potential claims. Further, commencing a potential claim at the time required by the new CCDC 2 could inject unnecessary acrimony into the owner/contractor relationship.

The tight timeframes for giving proper notice of claims under the new CCDC must always be viewed in conjunction with limitations legislation. For example, the new GC 12.2.4 has the potential to cause particular difficulties with respect to latent defects. The Limitations Act 2002 requires a claim be commenced within two years of its discovery. It also provides for an ultimate 15-year period from the date on which the act or omission giving rise to the claim took place. GC 12.2.4, however, states the owner waives and releases the contractor from all claims for damages arising from substantial defects and deficiencies in the work (except claims for which the contractor has received Notice in Writing from the owner within six years fro substantial performance).

In practical terms, this may mean claims for latent defects that would normally be subject to the 15-year statutory period could be restricted to a much shorter period of six years. Although the Limitations Act 2002 permits statutory limitation periods to be shortened by a commercial agreement, it is uncertain whether the language of GC 12.2.4 sufficiently and clearly demonstrates an intention to reduce the 15-year ultimate limitation period to six years.

The language of GC 12 suggests the drafters envisaged a more objective claims process. Claims will now have to be asserted and quantified in a clearer fashion. For example, in a delay claim, arguing the entire course of dealings between the parties constitutes sufficient compliance with the contractual notice requirements might no longer be possible.

Courts may no longer overlook a party’s failure to give formal notice and it is unclear whether a party could waive compliance with the notice requirements by their conduct in the face of these explicit contractual notice requirements.

Conclusion

Although it was far from perfect, the industry was comfortable with the CCDC 2-1994. However, seals can no longer be purchased for its use. For better or worse, CCDC 2-2008 has arrived.

In some instances, a party will be bound by the new contract without the ability to negotiate Supplementary Conditions, but it is still important for both parties to understand their rights and obligations, especially as they pertain to indemnification and waiver of claims. These provisions should be given serious consideration when negotiating a contract. A contract failing to permit the assertion of valid claims cannot be remedied after the fact.