At least one well-known American construction attorney, John Ahlers, thinks that the fund is a good idea, providing of course that it is properly managed.

It seems like a sensible idea to me too for financing similar types of large-scale infrastructure projects.

I immediately wondered how something like that would work in Canada. Although our constitutional structure would change the character of a project like that to some extent, would a similar institution in fact encourage interprovincial collaboration on, say, a high speed rail link or improved energy infrastructure? What’s the closest thing we have to a Canadian analogue at the moment? Are there any reasons why this wouldn’t work or else would not yield any significant benefits?

The post points out a few things, including the unequivocal shift away from English common law: “Canadian law has become itself, and is free-standing as a body of law; less and less is there a Commonwealth or even a global common law“; “English law has consistently declined and really stopped being a dominant source at the time of the Laskin Court”. Slaw provides a few very handy charts which help digest the annual SCC citation data by the numbers and show the clear trends.

The trend away from English law arguably has varying causes and significances (e.g. in the context of national identity and sovereignty), but a tangential issue I’m not sure anyone has addressed is the impact of diverging streams of common law on international trade.

Of course, in a market climate which at a glance is more globalized than at any point in history it may seem silly to be concerned about barriers to trade. And regardless of conflict of laws if there are market opportunities people will tend to find a way. But have diverging streams of common law contributed at all to inefficiencies? Increased chances of litigation of international arrangements? Prevented investment, enterprises or projects that otherwise would have occurred? Affected relationships with trading partners? Choice of trading partners?

Or, have Commonwealth divergences in the common law been more pronounced in areas of the law less likely to impact trade than others (e.g. criminal law as opposed to the law of contracts)?

While an increasingly made-in-Canada body of law has clearly positive significance for issues like sovereignty, it’s hard to see how increasingly idiosyncratic bodies of domestic jurisprudence diverging from a more uniform base can do anything but introduce inefficiencies – whether or not those inefficiencies have been compensated for by increased efficiencies elsewhere. Admittedly, it would be hard to introduce any meaningful valuations into this analysis (what is the economic value of national sovereignty?) and I am not an economist.

The question I am asking is utilitarian I suppose: What is the net social benefit of jurisprudential idiosyncrasy?

Thoughts?

1. It’s cheaper than litigation,
2. Mediated outcomes can be far more flexible than those possible at trial, and
3. The parties retain ultimate decision-making control, instead of giving it up to the court.

I agree with him completely, and I have a few things to add.

What is mediation?

First, though, a quick rundown on the nature of mediation. While experienced construction-industry professionals may have as good a handle on their basic legal options as their legal advisors do, owners and managers of small- or mid-sized firms may not always be as aware of those options (indeed, if they have never had a need to know, why should they?).

Parties to construction contracts sometimes find themselves engaged in legitimate disputes as a result of common problems such as changes in site conditions, changes in the nature or scope of work, or disagreements in the interpretation of contractual terms. If parties to construction contracts cannot resolve these disputes on their own there are three basic types of dispute resolution available: (1) Litigation, which is the traditional method of appealing to the courts, and (2) Arbitration and (3) Mediation which are both forms of extra-judicial “Alternative Dispute Resolution”.

Mediation is the least formal of the three options (Arbitration, also referred to as “Binding Arbitration”, lies between the other two in terms of the formality of the process and the amount of procedural control ceded by the parties). The essential difference between mediation and the parties simply hashing things out between themselves is the inclusion of a neutral third party – a mediator – to facilitate meaningful negotiations with the end goal of a voluntary settlement. Further:

• Mediation is confidential, and any representations made in mediation are typically made without prejudice and are not admissable in court.
• The mediator does not make a ‘ruling’ for the parties, although he or she may sometimes draft formal recommendations to the parties for settlement based on their knowledge of the dispute.
• Parties can still (and probably should) seek the advice of an independant lawyer.
• When and if the parties agree to a settlement they can agree to be bound by it, but if they do not reach an agreement, they can proceed to arbitration or litigation.

Courts themselves generally like parties to attempt mediation before appealing to a judge and some jurisdictions are actually moving to require it in some cases (see Rule 37A of the Rules of the Supreme Court, 1986, SNL 1986 c42: “Court Ordered Mediation“).

Contracting for mandatory mediation

It is actually possible to build mediation right into a contract at the negotiation stage (of course this is not an option with public tenders). That is, it is possible to include a provision mandating the parties to seek settlement via mediation (or arbitration) in the event of a dispute rather than marching straight to court. Doing so is a simple measure that seeks to reduce potential costs by heading off litigation in the event that an unforeseen dispute occurs.

There are legal and strategic arguments both for and against mandatory mediation provisions. Timothy Hughes has recently posted on the merits of mandatory mediation clauses in construction contracts, in part as a response to ENR writer Don Short’s series of posts emphatically recommending against mediation and skipping straight to arbitration.

I have little to add to what they’ve already said. But I did want to make mention of the option of drafting mediation into an agreement from the start because I still think that on balance a properly-worded mediation or arbitration clause has more potential upside than down, and including a provision like that is definitely worth discussing with a professional legal advisor. This is because I am generally in favour of mediation as a path to settlement.

Mediation is good business

Along with the three non-trivial benefits of mediation mentioned by Mr. Hill – cost-effectiveness, flexibility, and control – there are other significant advantages:

• There is more room to discuss issues that are relevant to the decisions of the parties but that are potentially ‘non-legal’.
• Mediation is faster. This is part of what makes it cheaper: It cuts down on legal expenses for costly preparation for litigation and it can get parties back to work with less fooling around.
• Public relations: While having your contract dispute covered in the local media might be free exposure, it’s probably not valuable exposure. Trials happen in the public eye; mediation is far more confidential.
• Mediation helps to conserve any social or good-will capital that a firm has acquired among its peers. I believe that collegiality is generally better for business than animosity, and mediation helps to foster that between parties in a semi-competitive/semi-cooperative industry like construction.

All said, more often than not seeking mediation of contract disputes is simply good business. Lawyers should make sure that their clients understand the availablity of mediation as an option. And a party to a contract dispute, if not otherwise advised on mediation, would be wise to ask their lawyer questions about it.

Nota Bene: Mediation and Economics

For those interested in economics, there is also a social cost-benefit argument to be made in favour of mediation, although more empirical work is apparently required. See Richard A. Posner, Economic Analysis of Law, 7th ed., (New York: Aspen, 2007), pp. 604-606: “Mediation as an Aid to Settlement.”

Unfortunately, when an accident happens the company runs into it like a sunker everybody knew was there, but that nobody was keeping an eye on.

Slackness might cost you

In my pre-law life I spent a lot of time around heavy equipment. And every time I got out of a machine I took the pressure off the hydraulics – leaving a boom or a bucket needlessly hanging in the air always just seemed sloppy and unnecessarily hard on the gear.

Personal preferences notwithstanding, lowering hydraulic booms on parked machinery is also considered safe practice. A recent case from the BC Supreme Court – Slocan Forest Products Ltd. v. Trapper Enterprises Ltd., 2009 BCSC 1175 – is a great example of how much carelessness can cost. (Gary Oakes also commented on this case in the September 18, 2009 issue of The Lawyers Weekly).

In abbreviation, the relevant facts here are:

• Slocan was a forestry company and owned logging camps
• Trapper had a service contract with Slocan for general maintenance and operations of one of their camps
• Slocan hired a second company to do some renovations on the camp while the camp was vacant during the spring
• Trapper helped that company by, among other things, carrying away debris
• On the day in question a Trapper employee was using a front-end loader to collect debris by moving close to a building being worked on and positioning the bucket so the other company’s workers could toss debris into the bucket
• Near the end of the day the Trapper employee knocked off around 5:00 but left the loader parked with the bucket elevated for the other workers to continue working.
• Those workers never stayed long either and also quit earlier than they often did (possibly to catch a hockey game – I don’t make this up it’s in the decision)
• The loader bucket was left suspended over a “Christmas tree” (a splitter assembly for the camp’s propane system)
• The propane was supplied by a nearby tank farm with 9000 US gallon capacity
• At about 2:20 am the camp was flattened by a massive explosion
• After causation analysis it was found as fact that the critical event was the probable loss of hydraulic pressure in the loader’s rams, which caused the bucket to lower onto the Christmas tree, damaging it and creating a gas leak
• Slocan’s damages were assessed against Trapper at $1,750,000 plus another $483,850 that was agreed between the parties

So, to recap, because the employee left his machine parked with the bucket elevated the employer was on the hook for over two million dollars. There’s nothing really ground-breaking about the law applied in this case; the analysis is straightforward negligence and employer vicarious liability. Again, what the case illustrates very well is how a little sloppiness can result in a big bill.

A little might go a long way

So, while business owners and managers are often pressed with the business of core tasks, it makes a lot of sense to take meaningful steps to eliminate sloppy workplace practices (so, doing more than just filling out ‘toolbox meeting’ paperwork to satisfy the government safety inspectors). By doing so they can reduce the possibility of exposure to potentially onerous liabilities. Unless, of course, they’ve got a few million to burn.

Nota Bene

A final thought: one way to reduce possible liability as a result of workplace accidents is to encourage safe work habits in existing personnel. But, the adage about teaching old dogs new tricks is one to bear in mind. An employee who is characteristically careless might be a liability – period – no matter how many safety meetings he or she attends. An alternative to attempting to ‘teach’ safety is to keep it in mind at the hiring stage, and make it a consideration before making a hiring decision. That is, just hire people who, as a far as ascertainable by way of past behaviour and personal judgment, are on the ball and not prone to sloppy or careless habits.

Try looking at their boots – are they laced up? Because if they don’t have the energy for that they might not have the energy to park that machine properly either.

So-called bid bombs are bids that come in substantially lower than other competing bids. In these situations the other competing bids might be hovering more closely around a particular price range for the project. For example, out of four bidders on a public tender, three come in around $20M while the low tender steals the project for $14 or $15M. I’ve seen this happen, and for the second bidder this can be annoying and frustrating (although bidders are typically annoyed at losing a job anyway).

What the project price ’should’ be

The ENR article makes two central assertions:

1. That that there is a “correct” price for a given tender call.
2. That unusually low bids are caused by “bad business managers” or “poor bidders.”

The article throws around the word “correct” a lot (engineers love the word): “correct materials specified”, “correct labor (sic) productivity”, determining contract requirements “correctly”, etc. Now, given that all players are working with the same set of variable costs, in a highly competitive market project costs and thus bids will gravitate to a fairly narrow range if everyone is working with similar resources, the same suppliers, and similar knowledge. Specifically, the article finds that on large projects the likelihood of a competitive advantage resulting in a price advantage of more than a few percent is practically non-existent, leaving the only real variable in the final price to be the profit margin. That is, whichever bidder decides to take the tightest margin above the proper cost should get the project.

The “poor bidders” who throw the bid bombs are those who i) make significant mistakes in their estimates, or ii) purposely take a project below cost. The article identifies the latter as bad management.

Altogether, the author calls bid bombing a problem because “qualified bidders” lose business and the low bids “ruin markets”.

What should the project price be?

While I agree that wild-card low bids very often are the result of uninformed or inexperienced estimators, or of intentional under-bidding, I take issue with both of the article’s main points.

First, while bids often will hover around a certain price range, I think that it is possible for a bidder to occasionally gain some competitive advantage, or series of advantages, which allows them to score the job. I’d actually argue that some of the more successful “qualified bidders” became successful not by consistently squeezing their margins but by working to gain advantages and thus making their work more profitable. Further, it is possible that profit margins in some local markets might have become temporarily inflated, so an unexpected low bid might actually be closer to the so-called “correct” price.

Second, while making a serious mistake in a bid is never good, I don’t think I’d be so quick to condemn intentional underbidding. Which is not to say I think it is typically an effective strategy – if anything, I’ve seen it fail as a strategy when used in an attempt to starve smaller competition out of a market. But that doesn’t mean that underbidding is not a legitimate strategy. The bidder takes the risks with the possible rewards, if any.

In the long run, the strongest contracting companies will survive, while others stagnate or fail. If a bid bomber takes a project and fails to complete, then there are remedies for that situation that the owners can pursue – often those remedies involve calling in other builders anyway. If a bid bomber takes a job and completes it within spec, then the owners (which are often the taxpayers) are happy.

All said, I’m not convinced that it’s so easy for the bombers to ruin the construction market.

As a final note, bid bombing situations in Canada could potentially attract the operation of privilege clauses. In fact, the proper good faith exercise of privilege clauses in situations where a low bidder has obviously made a mistake – so that the owner awards to the second bidder, presumably at a substantially higher price – might actually save headaches, time and money in certain circumstances.

Why contractors and subcontractors should put agreements in writing

There are lots of reasons why it’s important to be clear about the details of an agreement, especially if it’s with a person or company that you don’t regularly deal with. And Infinity Steel Inc. v. B & C Steel Erectors Inc., 2009 BCSC 1053 is a great example of one of those reasons.

The Facts:

1. Infinity was a one-man structural steel company who obtained a contract for the construction of a steel building.
2. Infinity only wanted to supply the steel and negotiated with subcontractors for the actual erection of the building.
3. In June, it entered “an agreement” with B&C for erection of the structural steel.
4. B&C began putting up the steel in September. The job was to be completed in five weeks.
5. Almost six weeks into the project, B&C was not finished, but invoiced Infinity for materials and labour costs to that point.
6. Infinity refused payment, asserting that the work was being done on a lump sum basis
7. B&C continued working for several more weeks before walking away from the unfinished project.
8. Infinity sued B&C for breach claiming damages for “back charges for delay, increased costs to complete B&C’s work, and costs of administration and equipment charges.” It maintained that it had a lump sum contract with B&C.
9. B&C defended by denying breach, and claimed that the contract with Infinity was a cost plus arrangement.
10. At trial, neither party was able to produce convincing evidence of all the payment terms of the agreement.

The Ruling:

Since there was no reliable evidence as to the price and method of payment agreed on, the judge found as a fact that the agreement lack the “essential and critical term of price”, which is always a fundamental term of any contract, that there was “no meeting of the minds”, and, thus, that there was no contract. B&C was awarded its reasonable incurred costs for the work performed on a quantum meruit basis, plus 15%.

Lesson Learned:

• Be clear on the details of any agreement meant to have contractual force – especially terms of payment
• Even if formal contract documents are not drawn up, be able to produce reliable evidence of the agreement

Latin Maxim of the Day

Vox emissa volat; litera scripta manet – The spoken word flies; the written letter remains.

Nota Bene:

“Reasonable Costs” as determined by the court for a quantum meruit award may or may not reflect what a contractor might actually have billed or contracted for.

That’s what happened in Dalcon, except the contract was not actually awarded prior to the submission of an application to court. Again, see my post if you’re interested.

Can They Do That?

The question always asked when an owner passes over a low bidder by relying on a provision purporting to give them the power to do so is: Can they do that? The answer is: Maybe.

These clauses are called “privilege clauses.” Some pratitioners are of the opinion that privilege clauses are as enforceable as any other contract term. And while they are generally enforceable, I personally would be a little more cautious before relying on one.

In M.J.B. Enterprises v. Defence Construction (1951), [1999] 1 S.C.R. 619 (“M.J.B.“), which is a leading case in Canadian law on privilege clauses, the tender documents at issue stated: “The lowest or any tender shall not necessarily be accepted.” This type of wording is fairly standard, although privilege clauses have gotten a little more sophisticated in response to developing case law.

But the catch is that the case law, arguably, is not entirely consistent. For example, Iacobucci J’s discussion in M.J.B. indicates that in deciding which bidder to award a contract to, an owner should not make the decision based on “undisclosed” criteria. But some subsequent decisions of lower courts have upheld owners’ decisions made rejecting low bidders based on such critertia.

What is generally agreed on is that inclusion of a privilege clause does not eliminate owners’ duty to deal with all bidders fairly and in good faith. For example, see Martel Building Ltd. v. Canada, 2000 SCC 60.

In any event, privilege clauses are not an overly complex subject, but an in-depth discussion is probably better saved for a subsequent post. What I did want to correct was any impression I might have left that the owner township in Dalcon would be absolutely immune from any liability should they choose to exercise their “discretion” not to accept a bid. In Dalcon, the owner township’s tender documents contained what were essentially privilege clauses. And they did have the right to exercise their discretion under those clauses without seeking a court order stating so. What they couldn’t do was exercise that discretion improperly, for example, in bad faith. That is, a privilege clause may not be available for use if there are no circumstances which could justify its fair use.

Nota Bene

Public Tenders in Newfoundland and Labrador are governed by the Public Tender Act, R.S.N.L. 1990, c. P-45, section 8(1) of which is effectively a statutory privilege clause.
See also the Public Tender Regulations, N.L.Reg. 103/98.

Not to say that this was exactly the case with the Township of Russell, ON. But, this past spring, the Township issued an invitation to tender for an expansion to its Lagoon. The tender closed on May, 21, 2009, and of six bids received the two lowest were by Dalcon and Robert. An engineering consultant hired by the Township reviewed the bids and recommended that Dalcon’s be rejected because of some issues with the bid documents, and that the contract be awarded to Robert. In early June, both low bidders having gotten wind of the potential to gain or lose the project, Dalcon and Robert each threatned to sue the Township for damages if they were not found to be the successful bidder.

Rather than make the call and deal with one or the other threatened actions, the Township decided to head both actions off at the pass and brought an application to court to seeking a judicial order confirming the Township’s contractual ability to select a bidder without incurring liability to the unsucessful bidders.

But, the tender documents themselves provided at three points for the owner to exercise discretion in the final selection of a successful bidder. Justice Ray dismissed the application, saying that where the Township’s own contract documents gave it discretionary power, there was no room for the court to “make the decision for Russell Township.” That is, make your decision, and if there’s a legal dispute subsequently, that’s when you come to court.

See Russell (Township) v. Dalcon Enterprises Inc., [2009] O.J. No. 2560 (Ont. S.C.J.).

This is an interesting little case, although it doesn’t really set out any ground-breaking ratio. The moral of the story is that it doesn’t matter who’s threatening what in the way of a legal action, or how bad and mad they are, a contractual right pursuant to an agreed-to provision – assuming that the provision is enforceable – is what it is: a contractual right.

So, for smaller public owners everwhere, the general rules of engagement for tender contracts equally apply, including: (i) Make sure your tender contract documents are well-drafted, (ii) make sure you know what you can and can’t do under the contract, and (iii) if you can do it, and you need to do it, don’t be afraid put a provision into action.