When the Delay Really Isn’t the Contractor’s Fault: Someone has to pay and a “time is of the essence

Earthworks projects, while they may sound simple (“moving dirt”), often have many hidden land mines that threaten to throw both contracting parties into a tense and uncertain state on the project. The relatively recent case, Kon Construction Ltd. v. Terranova Developments Ltd., 2014 ABQB 256; aff’d Kon Construction Ltd. v. Terranova Developments Ltd., 2015 ABCA 249 (“Kon”) illustrates one such instance. Kon involved a very familiar set of facts and contractual clauses:

• Contract for earthworks is executed between Kon and Terranova, with an engineer consultant (Scheffer Andrew Ltd.) acting as a project manager;

• Both Kon and Terranova had high turnover in their personnel at the project manager and senior manager levels;

• The work went through a bid stage and Kon was the lowest bidder;

• The contract had fixed unit prices for the work, fixed completion date and a “time is of the essence clause” and an estimate of earth moved quantities with no firm quantity;

• The contract also had a clause requiring notice by Kon to Terranova for any event, act or decision that could cause a delay to the schedule within 14 days after commencement of the delay;

• There was a contractually prescribed method for terminating Kon, including the requirement to give notice of default before termination;

• Kon required a change order or addendum for additional payment if it was going to perform additional work;

• Kon had to give immediate notice if an instruction/decision from the engineer would cause extra work or additional cost;

• The work scope was not clearly described, particularly as to what phase the completion date referred;

• Development approvals (a Terranova obligation) were late and were received with conditions;

• The late permits and attached conditions altered Kon’s originally expected work site space and, until received, prevented Kon from being able to use certain areas as borrow pits; and,

• Terranova was required to source the borrow material (clay and dirt) for Kon.

With that as the backdrop, Kon started working and mobilized equipment on site, however heavy rain and the limited site work space made it so Kon, practically, often could perform no work on the site. When Kon was able to perform the work, it was prevented from using efficient machinery due to the limited working space and a higher-than-expected requirement for clay (backhoes were required to dig deeper and in a smaller space). Sounds familiar: the project was not going perfectly; the owner’s requirement to provide materials was proving more difficult than it expected and the contractor was not able to use the equipment and space for an optimized construction plan. What happened next is also not a surprise. Terranova told Kon that it did not have enough equipment on the site and Kon actually demobilized from the site because of the impossible working conditions caused by the rain and lack of space. Terranova subsequently sent a letter to Kon terminating the contract and obtained a second earthworks contractor. The second earthworks contractor was paid substantially more to do the same work and complete it in a timely fashion. The second earthworks contractor also ran into the same issues as Kon. In reading the above, a cynical person might want to take bets on who is going to win…On these facts, the earthworks contractor wins. Kon received judgment (and note that the engineer was not liable for a separate claim against it for negligently administering the project). Of key importance was the fact that significantly higher fees were paid to the second earthworks contractor to perform the same work on a timely basis, the termination clause in the contract was not followed and that, until the final development approval was received, Kon did not know where it could source its borrow material; because Terranova had the obligation to provide borrow material from the site and to obtain the final development permit, Terranova could not blame Kon for a delay and then terminate the contract because Terranova itself had been the author of its own misfortune. So, what does it all mean? Some points to take away from Kon are:

1. If there is a termination clause in the contract that requires notice of default first, use it. If, as an owner, you don’t expect to follow the termination clause or there is a time sensitive nature to the work that does not lend itself to cure periods, take out a notice of default and draft a clear immediate termination right in certain instances;

2. The description of the scope of work and to what completion dates apply must be clear. Remember that the other party, another lawyer, a judge or another third party doesn’t know what you intended when you drafted the contract. If its ambiguous, expect it to cause problems between the parties; and,

3. One party cannot blame another party for missing a deadline or not doing something when that deadline is contingent on the first party being ready; before blaming the other party, ask yourself, “what role have I played in this situation”. And then be honest. Rarely is a dispute as clear as each side believes.

A consideration of the project in context when thinking about defining the scope, terminating a contract or getting into a dispute is essential. Construction is complicated and involves many different steps that all need to line up. Both parties are responsible for those steps and if one party misses a step, it will probably have repercussions down the line. The parties can draft longer and more complex contracts to address this truth, which in some complicated projects is necessary. They can also “fly by the seat of their pants” or go in on a handshake deal and, maybe, in the right relationship on the right project that will also turn out well. Sandquist Law & Construction Project Consulting can assist in discussing these issues and developing an appropriate approach, given the project context.