November 30, 2009

Legal Perspective | J. Marc MacEwing

All construction industry players must educate themselves about legal issues

The construction industry is particularly affected by legal concerns. This is because the multi-level pyramid of participants in construction projects, the complex matrix of their rights against and responsibilities to each other, and the technical nature of the construction process give rise to complicated legal relationships.

Among other areas, these can involve the law of contract, negligence, insurance and bonding, builders lien, trusts and various statutory regimes such as workers compensation, income and goods and services tax and employment standards.

The close involvement of the construction industry with significant legal processes and the potential for the scale of construction operations to give rise to significant legal liabilities make it desirable that all construction players educate themselves concerning the legal issues which affect them and recommended legal practices which can minimize their risk. 

Unfortunately, not all construction industry participants see fit to make such an effort, with the result that similar types of construction law problems occur again and again.

The following is a “hit list” of the worst categories of legal-related errors most commonly committed in the construction industry:

• Poor contracting practices - These run the gamut from absence of written contracts to poor contract drafting, unfair allocation of risk, onerous provisions, which unreasonably alter what would otherwise be legal entitlement, failure to comply with contractual procedures and failure to tailor or adjust contractual provisions to practical reality.

• Failure to retain builders lien holdback - Except with respect to employment contracts with workers, material supply contracts or professional services agreements with architects or engineers, holdback is a mandatory requirement of the Builders Lien Act on any contract or subcontract under which a lien may arise. 

Under the act, retention of the holdback protects not only the retaining party from potentially having to pay more than 100 per cent of the contract price, but also the liening subtrades for whom the holdback offers at least partial security for payment. 

Builders lien disputes can be difficult enough to untangle without the added complication of having to fund duplicate holdback liability.

• Poor document control - Documents are the principal source of evidence in the resolution of construction disputes. They memorialize agreed contractual terms and record events and communications. 

Both their existence and their absence can have important legal significance.  They need to be generated in accordance with good business practice and retained for possible later use.

• Poor follow-up - This issue is closely related to document control.  For example, significant issues or developments need to be confirmed for the record, written change orders need to be obtained and notices of delays or of contractual default need to be given, all in a timely way.  In many cases, legal entitlement may be conditional on there having been proper compliance with prescribed contractual procedures.

• Inattention to legal rights - By definition, the construction industry is a “can-do” institution, and construction is above all a business. 

However, those realities mustn’t be allowed to lead to disregard or contempt for legal niceties in favor of getting on with the main event of the work. 

Legal issues should not be left to sort themselves out and, above all, the necessity of understanding and complying with critical contractual provisions must not be treated indifferently.

• Abuse of legal rights - The construction industry can be prone to legal bullying, most often arising from the inequality of bargaining power held by paying parties.  Ultimately, practices such as imposing unreasonable contractual provisions, unjustifiably withholding payment or making spurious or excessive claims can be self-defeating in both cost and reputation.

Avoiding construction law errors is ultimately an issue of the bottom line. It simply costs more to receive higher bids, which reflect the contingencies arising from onerous contractual terms, to have to make up duplicate holdback liability or to pay legal expense for litigation which might have been avoided. 

Staying away from construction law errors should not be too difficult, because good construction law practice is simply good business practice.

J. Marc MacEwing is associate counsel with Shapiro Hankinson & Knutson Law Corporation in Vancouver, whose practice focuses on all aspects of construction law. Direct questions or comments to editor@journalofcommerce.com

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