Stop the clock: Preserving rights and relationships through tolling agreements

(Photo: © Gajus / Adobe Stock)

Once a party to a construction contract determines it has a potential legal claim, they need to evaluate the appropriate time to assert that claim. This timing may not be ideal, however, but there may be a legal way to extend the window with some contracts.

Managing construction projects while avoiding claims or disputes is no easy feat. Coordinating subcontractors and suppliers, amending schedules to accommodate for delays, encountering labour or material shortages, and a multitude of other potential complications make it almost inevitable that something goes awry.

When disputes arise between parties to a construction contract while the project is ongoing, important resources can be diverted away from the project and instead be directed toward addressing the dispute. This often creates a distraction that impacts the parties’ collective ability to meet deadlines and complete the work. It can also lead to the straining of relationships, making the dispute even larger and harder to resolve.

Identifying and quantifying impacts and losses during an ongoing construction project can be tricky, if not impossible, particularly as they relate to ongoing deficiencies and delays.

Certain losses or impacts that initially appear minimal may evolve as they are compounded by other related issues or schedule changes. Some losses may have latent impacts which are difficult to define or evaluate until after the project is complete. Other losses may seem substantial at the outset but are later remedied at minimal cost or mitigated as the work continues.

Identifying the date on which a claim arises is important from a legal perspective; the date that the claim arises starts the timer on what is called a “limitation period.” A limitation period can be statutory or contractual, but in either case, it operates to limit the time a party has to commence a legal claim.

In Ontario, the Limitations Act requires a party to bring a claim within two years from the date that the claim is discovered. A limitation period imposed under a contract can often be even less than two years and can include stringent notice requirements.

In the construction context, a two-year (or less) period is often shorter than the length of the project itself and can impose significant pressure to start a claim while the work is ongoing. This would normally require the party with the claim to start a lawsuit (or arbitration) prior to the project being completed in order to preserve its rights.

There are, however, competing interests at play when considering whether to commence a claim. If a claim is started prior to the project being completed, it can disrupt business relationships among contracting parties and can negatively impact the project. Litigation can be a time consuming and costly undertaking and can be difficult to manage financially (and logistically) alongside an ongoing construction project.

In contrast, failing to commence a claim within the prescribed period can cause a party to lose out on a potential remedy and may result in even more significant losses. If a claim is commenced outside of the two-year limitation period, in most cases the party being sued can rely on this simple fact as a complete defence to the claim, regardless of whether they are at fault.

A tolling agreement offers a practical interim solution.

In simple terms, a tolling agreement is a contract in which the parties agree to “stop the clock” on any applicable limitation period, and to “toll” the limitation period. A properly drafted tolling agreement eliminates the risk or penalty associated with commencing a claim outside of the applicable limitation period. This enables a dispute to be put off to another day and allows the parties to keep their focus on completing the project.

A tolling agreement can also help to preserve the relationship between the parties while it remains in place. In some instances, a tolling agreement can allow parties to avoid the litigation process altogether – when there is no real pressure to commence a claim, parties can spend their time and resources on resolving their dispute outside of court, and at their own convenience, through negotiation or mediation. Pressing pause on the litigation can often help to facilitate a more productive business discussion between the parties.

Parties should be aware that there are important formal requirements for an agreement to qualify as a tolling agreement. In Ontario, section 22 of the Limitations Act recognizes that a limitation period can be suspended by a mutual agreement between parties (i.e., a tolling agreement). The Ontario Court of Appeal has ruled that a tolling agreement must be more than a mere “promise to forbear” the right to pursue a claim – it requires a clear, bilateral agreement where both parties consent to a tolling of the applicable limitation period.

It is also important to recognize that while a tolling agreement is a valuable tool in the construction context, not every dispute can be postponed to a later date. Sometimes there is simply no way around it and the issue needs to be dealt with immediately.

For example, a tolling agreement may not be desirable if the relationship between the parties has already soured to a point that it has become irreconcilable, and the project is suffering as a result. Litigation is sometimes the best option in these circumstances.

Whether or not a tolling agreement is an appropriate interim solution is ultimately a business decision to be made in consultation with a lawyer who is familiar with the typical litigation process.

Ultimately, just remember that when a dispute arises, you do not always have to rush to court – consider the practical, cost-conscious solution of implementing a tolling agreement and deferring your dispute to another day.

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Andrew Parley is partner and head of the construction and infrastructure practice group at Lenczner Slaght. Focusing on commercial litigation, he represents individuals and businesses of all sizes before all levels of courts in Ontario, including the Supreme Court of Canada. Drew Black is a lawyer at Lenczner Slaght. His developing practice focuses on complex commercial litigation, construction, and professional liability cases. Prior to joining the firm, Drew completed his JD at the Dalhousie Schulich School of Law.