Reading between the lines: Implied terms in construction contracts
By Krista Johanson and Dagmara PawaLaw
A construction contract may not explicitly address every situation that may arise on a project. Canadian courts use implied terms in two ways: (1) to address circumstances that, if contemplated by the parties, would likely have been addressed in a particular way; or (2) to give meaning that is so well understood in the industry context that it is considered unnecessary to include in the written agreement.
Given the possibility that a disagreement may be determined according to an implied term, it is important that parties consider what remains unwritten in their contracts.
In the construction industry, certain terms will be implied into most contracts, unless the contract states otherwise.
Statutory and governmental approvals for work: Construction contracts that do not address the division of responsibilities between owner and contractor with respect to governmental and statutory approvals, such as planning or zoning, usually contain an implied term that the owner is responsible for these approvals. However, the existence and scope of this implied term varies according to local laws and an owner’s other explicit obligations.
Tax: If the contract does not explicitly state which party will pay GST or HST, then the contract price is implied to exclude tax and taxes are chargeable on top of the stated contract price.
Timely payment: Unless otherwise stated, an owner is obligated to make payments within a reasonable time. If the owner fails to make timely payments, the contractor is entitled to cease its work and terminate the contract after providing reasonable notice to the owner. If the project involves federal property, then the parties must refer to the Federal Prompt Payment for Construction Work Act for their payment obligations.
Site availability: The owner must provide access to the site and sufficient space for the contractor to complete its work, and must avoid interference with the work in a way that may cause undue or unreasonable delays and costs for the contractor.
Good and workmanlike manner: It is implied that a contractor must perform its work in a good and workmanlike manner. Courts have interpreted this to mean that individuals who perform the work must possess and employ the ordinary skill of their trade. Materials must be of good quality and reasonably fit for their purpose. The degree of skill implied depends on the degree of competence represented by the contractor to the owner.
Warranty of fitness for purpose intended: Where an owner relies on its contractor’s skill and judgment in the work (for example in contracts in which the contractor has design-assist duties), then the contract will imply a warranty of fitness for purpose. This implied term is particularly important for contractors to consider during contract negotiation because it may extend the contractor’s liability beyond its own work. The scope of such an implied term can be a real grey area. For that reason, parties would be wise to avoid disputes by reducing whatever design obligations the contractor may or may not have to writing to the widest extent possible.
OBLIGATIONS APPLICABLE TO BOTH PARTIES
Reasonable notice: Where a contract provides for termination for default, but does not specify a notice period, the terminating party must provide reasonable notice. Reasonable notice is determined with regard to all circumstances around the project.
Timely performance: Where no time is specified for an obligation, it must be done within a reasonable time. Thus, an owner must sign the contract within a reasonable time after award, and provide the contractor with all necessary plans or drawings.
Honest performance: It is sometimes said that there is an implied term of “good faith and honest performance.” This is not strictly true in Canada. However, our courts have found that an organizing principle of good faith does require parties to be honest with each other in relation to the performance of their obligations. Because this is a legal principle and not an implied term, parties cannot exclude the obligation.
Be aware of standard implied terms when negotiating a contract to ensure that you get what you bargained for. When carrying out a contract, remember that some of your obligations may be unwritten.
This article provides a cursory overview of some common implied terms in construction contracts. The list is not exhaustive. Although care has been taken to ensure accuracy, this article should not be relied upon as legal advice.
Krista Johanson is a partner and Dagmara Pawa is an associate in the Construction Group at Borden Ladner Gervais LLP.