Contractors & The Law: Delays and Cancellations
By Joseph CampbellConstruction Law
Best practices and insights in turbulent market conditions.
The Canadian construction industry has been facing a perfect storm of higher interest rates, increased costs for materials, labour shortages, supply chain issues and the potential of a post COVID-19 recession. To navigate these turbulent market conditions, parties to construction contracts must be well-versed in the legal framework governing project delays and cancellations.
Delays and cost overruns on Canadian construction projects have unfortunately become the status quo. In project delay situations, a party must manage potential additional costs for site and office overhead, equipment rentals, idle labour, financing and insurance, and other potential liabilities, such as loss of revenue and profit.
A careful review and thorough understanding of the change management and dispute resolution provisions in the underlying contract is a crucial first step. Close attention must be paid to contractual notice provisions, including timelines, substantive requirements and how the notice must be served.
Canadian courts typically require strict compliance with notice provisions where the underlying provision is clear and unambiguous, and particularly where a government entity is involved. In Tower Restoration v Attorney General of Canada, the Ontario Divisional Court ruled that the contractor was barred from bringing its claim against the Government of Canada because it failed to deliver a notice to dispute a decision within the contractual timeframe.
This case followed the seminal Supreme Court of Canada decision on notice requirements in Corpex (1977) Inc. v. Canada, which stated that the primary policy reason for strict compliance with binding notice provisions in construction contracts is to provide the responding party with the appropriate information and opportunity to take corrective action before a claim is pursued.
Another best practice is for project personnel to document the delay event or circumstance through correspondence, meeting minutes, photographs or any other record to capture the relevant facts. Notice is not enough. Project claim submissions must also contain adequate particulars and contemporaneous supporting documentation, with detailed breakdowns and evidence of specific costs consequences to allow the project arbiter to render a considered decision having regard to all material facts and circumstances.
In its 2023 contractor survey, the Ontario Construction Secretariat reported that 36 per cent of contractors had projects cancelled during the past year. The main reasons for cancellations typically include escalating project costs, difficulty obtaining materials, inability to secure permits, labour issues, and failure to obtain satisfactory financing or higher interest rates.
Project cancellations often leave contractors in a bind and scrambling to find alternative work fronts to deploy personnel and equipment. This, in turn, often leads to higher costs, overstaffing and idle equipment with the unfortunate corollary being lost profit for contractors and the potential for employee layoffs.
A review of the underlying contract will determine whether a party (most often the owner) may be entitled to cancel the project, and on what terms. To this end, most contracts will contain cancellation or early termination provisions which set out the circumstances in which a party may be entitled to walk away, including the inability to proceed for a reason beyond one’s control. It is also worth noting that, absent a specific contractual right, mere economic hardship is typically not a basis for terminating a contract on the common law principle of frustration.
A party seeking to cancel a project must closely examine the applicable contractual provisions to ensure compliance with the cancellation procedure and avoid any breach or claim scenario. While the vast majority of project cancellations have a valid reason, the parties should also be reminded that the common law since the SCC’s landmark 2014 decision in Bhasin v Hrynew requires any such cancellation rights to be exercised honestly and in good faith.
More recently, the SCC stated in C.M. Callow Inc. v. Zollinger that the duty of honest performance requires that parties must not lie or otherwise knowingly mislead each other regarding issues directly linked to the execution of the contract.
The upshot of these court decisions is that a party seeking to exercise a contractual right of cancellation must do so in good faith for valid reasons. In any case, parties must keep meticulous records of all correspondence and meetings regarding the reasons invoked for cancelling the project.
While the overall outlook for Canada’s construction industry remains bullish, factors such as labour shortages and the increased costs of financing and materials create potential for project delays and cancellations. In these circumstances, parties must be aware of their contractual and legal rights and responsibilities and should seek knowledgeable legal counsel to help navigate these turbulent market conditions.
Joseph Campbell is counsel in the construction group at Borden Ladner Gervais LLP. He acknowledges the assistance of articling student Divi Dev in preparing this article. This column provides a general overview and is not intended to be exhaustive of the subject matter. Though care has been taken to ensure accuracy, this article should not be relied upon as legal advice.