Does Delay by Contractor Justify Termination by Owner? - Specifier: October 2015

By: Bill Preston, Q.C.

A recent Ontario case, Urbacon Building v. City of Guelph, tackled this question and concluded that: it may be possible, but damned unlikely. This case arose out of the following language of GC 7.1.2 of the current standard CCDC contract documents:

7.1.2 Contractor neglects to prosecute Work properly to a substantial degree and if the Consultant has given a written statement that sufficient cause exists to justify such action, Owner may give the Contractor Notice in Writing and instruct the Contractor to correct the defaults in the 5 Working Days immediately following, or provide a satisfactory schedule.

Briefly, the facts were as follows:

• City wishes to, in 2 phases, build a Civic Admin and Provincial Admin complex which will incorporate an old Fire Hall as a heritage site.
• The initial Contract Budget was approximately $40M in 2006.
• The City had engaged Moriyama and Tishina to provide a detailed prescriptive design.
• In July/06 Urbacon signed a CCDC2 – 1994 contract to achieve Substantial Performance by May/08.
• Soon after promptly starting, Urbacon and its trades discovered that the design documents were terrible while the Owner was insistent on continually making Changes.
• Thus, by December/07 the parties had signed an Extension Agreement –
• Extend Substantial Performance schedule to August 15, 2008 though Urbacon sought to September 30, 2008.
• City pay an additional $534.6K.
• Consultant respond to Request for Change Order (RCO) and Request for Information (RFI) in 5 days.
• Landscaping Work was removed from Substantial Performance requirements.
• Nonetheless, relations between the parties continued tense and by the summer of 2008:
• The Consultant would not distribute its copies of Site meeting minutes until the eve of the next meeting.
• Site meetings frequently focused on scheduling and the language used “would not be heard at a church social”.
• Consultant was way behind on the 5 day response requirement concerning Change Orders (CO), Change Directives (CD), RFIs and RCOs.
• Urbacon was issuing Written Notices of Delay and Claims for dollars together with schedule extensions.
• So, on September 4 and 5, 2008 the City’s Property Manager, who had some prior experience with terminating contractors, demanded that the Consultant issue a written statement of “Sufficient Cause” to terminate Urbacon.
• At this point, Urbacon’s initial base Scope of Work was 98% complete while it’s performance of issued COs and CDs was 78% performed and there were still some COs and CDs which the Consultant had not yet issued.
• Further, the City later during the trial admitted that at the time of its request for the Consultant’s written statement of Sufficient Cause:
• Urbacon would likely obtain Substantial Performance by early November.
• The Mayor was publically acknowledging that the Project delays were “inconsequential”.
• And, the City had no evidence that a delayed Substantial Performance to November would cost it any additional expenses.
• Further, the trial Judge concluded that the City then ought to have known that it could not find an alternate contractor to come in an obtain Substantial Performance sooner than Urbacon.
• Yet, on September the 5th the Consultant issued its letter of “Sufficient Cause”using much of the Property Manager’s proposed wording and a very sparse description of Urbacon’s defaults.
• And, on September 19, 2008 the City, rejected Urbacon’s responsive schedule to obtain Substantial Performance, and sent out the City Police to refuse Urbacon and its trades access to the site!

I trust now you see my conclusion: the facts in this case make neither the Consultant nor the Owner look very sympathetic. And, the Judge so concluded by ordering that the City’s termination was unlawful and that it must thus pay Urbacon damages usually measured by its lost economic opportunity because it was denied an opportunity to complete the Project and have the City pay the full adjusted Contract Price including reasonable value for unissued COs and CDs.

Conclusion

What makes this case worth discussing is the Judge’s answers to the below three central issues arising out of the language used by CCDC in GC 7.1.2.

How serious must the Contractor’s Default be to be “a Substantial Degree”?

1. The answer involves a circumstantial balance: is it better to leave the Owner to collect delay damages from the unpaid Contract Price it is still withholding, or better to permit the Owner to find another contractor to complete sooner than what it appears the Contractor will complete?
2. Thus, where the construction services market will take time for another contractor to come up to speed, likely the balance will favor the conclusion that there is no default to a Substantial Degree.
3. While, if there are serious defects or deficiencies which are being covered up, the Consultant’s written statement of “Sufficient Cause” should detail these so that the contractor is not blindsided.
4. Finally, given CCDC has adopted the words “a Substantial Degree” which originate from ancient cases, the Court should adopt the following words from these ancient cases:
   
   “So serious and fundamental a default as to undermine the thing the Owner bargained for.”
   
   What level of detail must the Consultant provide in its Written Statement?
5. This document is critical to the validity of the Owner’s termination process and thus Judge’s will quickly second guess the Consultant’s judgment.
6. Thus, the Consultant must clearly detail each act or omission it relies upon so that the Contractor has a fair opportunity to provide a responsive schedule contemplating rectification of each defect/deficiency.
   
   When the Consultant is considering issuing a written statement of Sufficient Cause, what ought to be its Attitude?
7. Keep in mind that the CCDC documents prescribe “the Consultant will not show partiality”.
8. Judges, particularly since a recent Supreme Court of Canada decision, will thoroughly second guess the Consultant’s attitude to assure that it is not favoring the party who pays its fees and/or may soon be proffering another design project.
9. Clearly, the Consultant should never let the Owner draft its written statement.

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