March 2, 2020
Factors to consider in drafting contracts
BY ROBERT KENNALEY
In Canada over the years, construction contracts have become longer and longer, as clauses have been developed to address new and different issues. The standard form CCDC2 stipulated price contract, for example, runs to 30 pages, while the commonly used standard form CCA1 subcontract contains 29 pages. The relatively recent CCDC5B Construction Management Contract runs to an incredible 59 pages. These, of course, do not include pages for supplementary conditions or other contract documents, including the drawings and specifications, all of which detail the work and allocate risk between parties.
Yet for many a contractor working in the residential or small commercial contexts (where they are expected to present their own form of contracts to their owner/clients for signature), it is simply not commercially feasible to drop a 30-, 40- or 50-page document on the table and expect clients to sign off. These types of contractors are also wary of using legalese, for obvious reasons. Accordingly, contractors have to make some tough decisions about clauses to include and how they are drafted. In this article, we won’t offer any advice about specific clauses. We will, however, offer some thoughts on a few factors and issues which should be considered as part of the drafting process. (Our list is not at all exhaustive).
Consumer protection legislation
Most provinces in Canada have some form of Consumer’s Protection legislation, such as the Consumer Protection Act in Ontario. If a contractor is retained by what is generally considered a ‘residential’ client, chances are very high the client will be entitled to protection under the legislation, and the onus will fall to the contractor to ensure the contract meets certain legislative requirements. If the contract does not do so, the consumer client will be entitled to various forms of relief and compensation under the legislation, which can include termination rights and the right to the return of funds in many circumstances. Individuals responsible for the process can be liable, even if the contractor is a corporation. Contractors who work with residential clients should accordingly ensure their contracts conform with such legislation.
Prompt payment and adjudication
Ontario’s Construction Act has been amended to introduce prompt payment and adjudication provisions and processes. The changes are significant. They impose payment terms which override the payment provisions of virtually all construction contracts in the province. In that regard, payers on a contract or subcontract must pay amounts included in a contractor’s proper invoice within specific, tight, timeframes, unless they give notice of their intention not to pay in a specific way, using a specific form, in a specific period of time. In addition, the adjudication provisions allow for construction disputes to be resolved in as quickly as 46 days or less. The federal government and many other Canadian provinces are following suit with their own forms of similar legislation. In short, if you are relying on your own form of contract or subcontract and you are caught by the new legislation, now is the time to re-do those contract documents. Your payment provisions will now most likely be void and there are many changes you can, and should, make to better manage the risks associated with prompt payment and adjudication.
If you are drafting your own form of contract or subcontract, you should be aware of contra proferentem. Under this principle of contractual interpretation, where the contract or subcontract has more than one reasonable interpretation, the party that did not draft the contract is entitled to its own reasonable interpretation. Thus, if you draft the contract and it is capable of more than one reasonable interpretation, your client will be entitled to read the contract as he or she interpreted it. This means care must be taken to ensure the contract is as clear as possible. It should be understood, however, that our Courts will not create an ambiguity where none exists. They will only apply the rule to resolve an actual ambiguity in the contract or subcontract.
Terms and conditions can and will be implied into a contract or subcontract in certain circumstances. The overriding concern of the Courts in deciding whether or not to do so is based on the desire to determine the intention of the parties. However, any evidence as to their intent or understanding is inadmissible if that evidence goes contrary to the expressed, clear, terms of the contract. This is what is known as “the parol evidence rule,” which provides that where a written contract is clear and unambiguous, no extrinsic evidence may be admitted to add, vary, or contradict the words of the contract. In addition, towards deciding whether or not terms need to be implied, the Courts will generally apply the following principles:
- A contract must be read as a whole, giving words their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time the contract was formed;
- Interpretations that would give rise to unrealistic or absurd results are to be avoided, as these would not have been intended by the parties; and
- A term will only be implied where it is necessary to meet the true intentions of the parties.
Custom of the trade
It should not be assumed that the custom of the contactor or subcontractor’s trade will necessarily be implied into the terms of the contract or subcontract. This is because, while custom of the trade can be implied, our Courts have made it clear this will only generally occur where the custom is so “notorious” (which is the word the Courts have used) that the custom will essentially be known to both parties. This, of course, can make reliance on custom of the trade difficult in many circumstances.
Those who feel compelled to avoid the use of 30- or 40-page standard form contacts with their clients are in a difficult position. They must pick and choose between clauses those who created the standard forms believe are necessary to properly clarify who is responsible for what. They must beware of applicable legislation and of contra proferentum. While they can rely on implied terms, doing so can be difficult and uncertain, and relying on custom of the trade will not be possible in most circumstances. In addition, where new legislation introduces prompt payment and adjudication, payment terms will need to be reworked and many issues can and should be addressed with new contract language. Care needs to be taken to specify work and allocate risk in different ways (perhaps, for example, with notes on the drawings). In the end, for those who rely on their own contract forms, now is probably the time to revisit the language to ensure the terms and conditions allocate risk and protect the company so far as is reasonably possible in the circumstances.
Rob Kennaley practices construction law in Toronto and Simcoe, Ont. He speaks and writes on construction law issues and can be reached for comment at 416-700-4142 or at email@example.com. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.