The days of certainty through fixed price contracts may be over.
In the post-COVID world, escalating prices cannot be expected to hold steady over the course of a multi-year project. This puts pressure on owners, builders and suppliers to find mutually agreeable grounds on which to move forward.
“Escalation cannot simply be managed by passing the financial risk onto contractors and suppliers with tighter contract terms,” writes Christopher Hirst of Alexander Holburn Beaudin + Lang LLP. “It also cannot simply be passed on to the owner – the owner has usually not planned for it and may have no capacity to absorb it.”
Hirst suggests “organizing the project around reasonable expectations.”
In particular, it is important that contractors and suppliers be transparent in their dealings.
“You are likely in the best position to understand the risk. Assess your risk proactively and share that assessment with your customers.”
When it comes to the contracts themselves, Hirst advises paying attention to the language.
“Your customer will have little sympathy for you if you sign a fixed price contract and then simply expect to be relieved of its requirements.”
Contract language is vitally important, agrees Rob Kennaley of Kennaley Law. Without specific provisions dealing with price escalations, parties will be leaving the matter of responsibility to the courts.
“In virtually every circumstance, the expressed or implied terms of the contract will govern.”
Despite terms such as “surrounding conditions,” “force majeure” and “frustration,” Kennaley says, “establishing a claim for additional time or money for cost escalations or supply chain problems in the absence of an expressed contractual right can be difficult.”
Kennaley cites several case examples that demonstrate how the courts view the applicability of such terms.
In one, he notes the Supreme Court emphasizes how common sense should dictate the outcome, or in its words, “A reading of the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.”
“The role of ‘surrounding circumstances’ will vary from case to case and cannot be used to change or overrule the plain meaning of the contract,” Kennaley writes.
However, the term is generally accepted to mean, “what was, or reasonably ought to have been, within the knowledge of both parties at the time of contracting, including what ‘would have been understood by a reasonable man.’”
He also notes how the terms can be implied for the purpose of “business efficacy,” meaning something that so obvious it didn’t need to be written down.
Force majeure and contract frustration have gained more traction and understanding over the past few years as well and occupy more prominence in contracts today.
“Force majeure has no set or specialized meaning,” writes Kennaley. “It does not exist outside the contract. Whether or not a force majeure event has occurred, and what relief might flow from the event, will depend in each case on the wording and application of the clause in question.”
He also points out force majeure does have limitations.
“In the construction context, most force majeure clauses in Canada only provide a schedule extension if a force majeure event occurs. They don’t provide for additional compensation.”
Contract frustration is even more difficult to establish, Kennaley writes.
“The doctrine will only apply when the performance of the contract is virtually impossible.”
This means performance of a contract is more than just difficult and the disruption cited is permanent.
“The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties.”
“Owners rely completely on the price certainty that contractors and suppliers are usually able to deliver,” says Hirst. “Without that certainty, the entire construction process breaks down.”
Owners, contractors and suppliers must therefore gain appreciation for what each is facing for the sake of maintaining their ongoing relationship throughout the project.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.
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