November 1, 2012
Introducing a glossary of construction legaleseBY ROBERT KENNALEY
There are many legal or contractual concepts, terms, and conditions used in tender packages, contracts, insurance policies, legislation, and dispute resolution that readers might find confusing or incomprehensible. It can be difficult to impart the meaning and significance of many of these in our regular column. We have accordingly decided to intersperse, among our regular articles, a catalog of short and concise summaries of what a particular principle, term, or condition might mean, and how its operation might impact your business. Accordingly, without further ado and in no particular order, here is the first instalment of our glossary of construction law and contract legalese:
Contra proferentum and the parol evidence rule
Contra proferentum is a Latin term which stands for the proposition that where a contractual term or condition is vague or ambiguous such that it can have more than one meaning, the party who did not draft the contract is entitled to his or her reasonable interpretation in that regard. In other words, the contract will be interpreted against the party who drafted it, so long as the other party’s interpretation is not unreasonable. The principle will only apply if the contractual language in question is unclear. The principle can also be overridden by legislation: in Ontario, the Consumer Protection Act (for example) appears to provide that ambiguities in a consumer agreement will be interpreted in favour of the consumer, regardless of who drafted the contract.
The parol evidence rule is also a rule of contract interpretation. It provides that, in the event of a contractual dispute, a court will not ‘look behind’ the expressed words in the contract to understand what the contract means, if the contract is clear and certain in that regard, on its face. In determining whether or not the contract is clear on its face, the court will generally look at the entire contract. In other words, it will consider the language in question in the context of the rest of the contract, before determining whether or not the language is clear. Where uncertainty does exist, the court can then (and only then, according to the principle) look at extraneous or collateral factors. These can include pre-contractual negotiations and the conduct of the parties both before and after the contract was entered into.
Liquidated damages clauses are those contractual clauses that state that where a certain event occurs, one of the parties to the contract will automatically be entitled to specified compensation, as ‘damages’ arising from the event itself. Thus, for example, a construction contract might provide that the owner will be entitled to $1,000 per day, as damages for delay, for every day a project goes over schedule. The theory behind such a clause is as follows: the parties to the contract would rather determine in advance (to use our example) what a day’s-worth-of-delay is worth. In this way, in the event of delay, the parties need not have to fight over (and lead evidence of) what the damages actually turn out to be.
Liquidated damages clauses are enforceable, so long as it can be established that they were a genuine pre-estimate of what the damages would be. If the court determines there was no genuine pre-estimate of the damages but, rather, that one party is attempting to impose a penalty on the other for a failure to perform in certain circumstances, the court will generally strike the clause as being unconscionable and unenforceable. Thus, for example, if the owner says that one-day-of-delay is worth $5,000 under a $50,000 contract that was going to take six months to complete, the Court would most likely strike the clause as a penalty.
The person attempting to rely on the clause must accordingly be able to show, at first instance, that the clause was, in fact, a genuine pre-estimate of what the damages would be. Where the clause is a genuine pre-estimate but turns out to be less than the actual damages, the person entitled to recover the damages is most likely limited to what was agreed to under the contract. In relation to liquidated damages for delay, it is not true (as some believe) that the clause can only be enforced where there is a corresponding ‘bonus’ clause giving the contractor additional compensation for finishing the job early.
Subrogation is an insurance concept. Liability and property insurance policies allow insured parties to claim under the policy and recover in the event that certain events occur, so long as the insurer is not otherwise entitled to deny coverage under terms of the insurance contract. Third-party liability policies will also generally cover the insured for the cost of defending an action commenced against the insured.
Subrogation is a term in the insurance contract (between the insurer and the insured) that provides that, in the event the insurer pays out under the policy, the insurer will have the sole right to pursue the persons actually responsible for the loss in question. For example, where I am insured for damages to my property caused by fire, and my insurance company pays out under my policy, the subrogation clause in my insurance contract will allow my insurance company to pursue the persons actually responsible for the fire, to recover their costs of administering and paying out on my claim. Similarly, in the construction context, if my earthworks subcontractor fails to properly compact the base for my building, such that the building slips, and if I am then sued by my homeowner/client and my insurance company pays out under the policy, subrogation will allow my insurance company to pursue the subcontractor. Similarly, if the subcontractor’s insurer paid out on a claim, it may be entitled by way of subrogation to pursue the geotechnical consultant who prepared the report upon which the subcontractor relied, and so on.
Subrogation can be tricky, especially in construction. The scope of any such right will depend on the wording of the individual insurance contract. Also, where multiple insurers are in place and/or where umbrella or builder’s risk policies are in place for an overall project, the rights of subrogation as between the various insurers might be pre-determined by parties in the construction contracts. This is one of the reasons why contractors and subcontractors should confirm with their brokers that they can provide and agree to contractual insurance requirements, before the contracts are signed.
Robert Kennaley has a background in construction and now practices construction law in Toronto and Simcoe, Ont. He speaks and writes regularly on construction law issues and can be reached for comment at 416-368-2522 (Toronto) or 519-426-2577 (Simcoe) or at email@example.com. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.