Legal Blog

Delay

You are a sub, or a general, and you have been delayed in your work by the actions of another. Delay almost invariably means a loss of money. Do you have any rights against the wrongdoer for compensation? We touched on this issue in our discussion of Foundation Company of Canada v. United Grain Growers (see our July, 96 newsletter).

Monetary Loss 

Most general contracts stipulate that a sub will be liable for delaying the project. The magnitude of the possible loss is enormous if the completion of the project is delayed by, for example, two months. Delay to a project can be subdivided into three main components: direct costs, lost profit and overhead, and lost interest on holdback.

1.   Direct Costs – these are the out-of-pocket costs that are incurred by the general in keeping the project going. These costs would include supervision, hydro, gas, telephone, insurance and trailers. These costs rapidly mount as time progresses.

2.   Lost profit and overhead – these are the costs incurred by the general in tying up men and resources for two months when they should have been released for use on other projects, projects that could have been used to earn profit and overhead for the general. The liability for this head of damages is dependent of the general proving that other projects were available so that the men and resources would otherwise have been earning money towards profit and overhead.  The formula for this head of damages was set out in Ellis-Don Limited v. Parking Authority of Toronto, a 1978 Supreme Court of Ontario decision:

Profit and overhead as a percentage of gross revenue

x

Contract amount

x

Delay in time Contract period

 

To give some indication of what this means in monetary terms, assume profit and overhead as a percentage of gross revenue are 5%. Assume a contract price of $5 million. Assume that the general was delayed by the offending sub for 2 months and by other factors for 3 months, extending the anticipated contract time for 12 months to 17 months. The lost profit and overhead would be:

      5% x {2 months ¸ (12 + 3 months)} x $5mil = $33,333.33

3.   Lost interest on holdback – the general was to receive its 10% holdback two months earlier than it did and has lost the interest it could have received from that holdback. This claim had much more significance when the interest rates were at 15%. The offending sub will note that most of the holdback received by the general is earmarked for other subs. However, the general can easily argue that its relationship with its other subs is not relevant to the offending sub. The general either has to pay this lost interest to its subs or it does not. In neither case should the offending sub be affected.

The exact categories of loss depend on whether the loss is suffered by a general or sub and the exact nature of the operation of the party suffering the loss. Realize that when a sub, general or owner causes a loss, the results can be staggering with possible damages exceeding the contract price. Be careful.

TENDER SAGA REVISITED 

Lawsuits involving tender have become a growth industry for lawyers. We are reproducing an article by Jonathan Speigel to be published in the Construction Law Letter. It relates to two cases; the first of which, the Bradsil case, was discussed by us in our May, 1997 newsletter.

 “I have learned that there are two truisms in anticipating the result of a court battle:

(i)  Where the facts are such that a rancid odour emanates from one side, that side will almost invariably lose. The trial judge will push, bend, fold and extend the law to fit the facts.

(ii)    If the trial judge’s findings of fact are strong enough, there is some evidence to support those facts, and the odour still lingers, the appellate courts will be loathe to overturn the decision of the trial judge.

Twin City 

In Twin City v. Bradsil the trial judge was outraged by the conduct of Bradsil, the general contractor. He was even more outraged by Her Majesty the Queen in right of Ontario, the owner. The owner knew about Bradsil’s poor conduct. Instead of interceding to force Bradsil to deal fairly with the plaintiff subcontractor, the owner allowed Bradsil to run roughshod over the subcontractor and, even worse, attempted to protect its own backside with an indemnity from Bradsil.

The trial judge felt that he could not hold the owner liable in contract, because he could not conceive that there could be a contract between the owner and the subcontractor (actual conception was left to the trial judge in Ken Toby). However, he decided that he could hold the owner liable in tort. He concluded that there was a duty of care owed by the owner to the subcontractor to ensure that the general contractor abided by the terms of the bid depository and by the terms of ultimate general contract, Contract B.

Ken Toby

In Ken Toby Ltd. v. British Columbia Building Corporation, the trial judge was outraged that the owner set the ground rules and then, when it appeared that it would be required to pay more money under those rules, breached them. He held, like the trial judge in Twin City, that the owner was liable in tort. In addition, he held that the owner was also liable in contract.

A contract was not readily available, so the trial judge invented one – just as Mr. Justice Estey did in Ron Engineering. The trial judge analysed the facts as follows:

a)   When the owner published an invitation to bid and stipulated the use of the Bids Depository, the owner agreed to be bound by the Depository Rules and agreed to act in good faith.

b)   When the subcontractor submitted its bid, it agreed to be bound by the Depository Rules.

c)   As soon as the subcontractor submitted its bid, there was a contract between the owner and the subcontractor whereby they each agreed to be bound by the Depository Rules and the owner agreed to act in good faith.

The fact that the owner would have been astonished to learn that it was entering into any such contract was a mere annoyance that could be disregarded.

Future Trends 

These cases apply to a bid depository system. They can be easily extended to a non-bid depository situation – as long as the smell factor is present.

Are the principles outlined in these cases sound law? It almost does not matter. With the advent of Ron Engineering and the use of what I refer to as the “weasel clause” (i.e. the owner need not accept the low or any tender), the pendulum had swung full scale to the owner. In any tender situation, the general contractor was bound to perfection, the subcontractor was bound to perfection, and the owner was bound to nothing. The pendulum is now swinging back and an owner, who acts in a particularly greedy manner, swings with it.”