To Sue, Or Be Sued: A Legal Primer For New Litigants To The Construction Industry

Introduction

Litigation can be intimidating at the best of times, but especially for emerging construction entities who are unfamiliar with the complexities of the court process. This article outlines fundamental considerations for construction entities in their early stages, covering aspects before, during, and after litigation. Extra diligence in the early stages of a relationship is often capable of curtailing the need to litigate; however, sometimes the opposing party can be unreasonable or diametrically opposed to compromising. In these circumstances, understanding the basics of litigation is essential to successfully and optimally resolving a dispute. Only by knowing the process and costs of litigation can you properly understand when to walk away from the bargaining table.

Pre-litigation Best Practices

1) Due diligence

The first step a party can take to mitigate litigation risk is to know the party with whom they are entering a relationship with. Reaching out to other entities and getting a preliminary picture of how it is to work with a prospective entity is essential. If you receive any indications of difficulties working with this prospective entity, especially difficulties getting paid, these are immediate red flags indicating this entity may not be trustworthy and if you enter a relationship with them there could be increased litigation risk. Simply meeting with the other party is unlikely to be enough.

Judges, lawyers, individuals in the construction industry, and people generally all have a common flaw: they are absurdly bad at judging the character of another through a handful of face-to-face interactions.¹ Paradoxically, people also often believe they are better at determining the character of a person than they in fact are. Rather, individuals should look to objective indicators, such as other construction entities historical experiences with a prospective contractual partner. If there is a recurring pattern of litigation or non-payment of bills, it may be wiser to forego the opportunity rather than become contractually entangled with a bad actor.

Legal and regulatory compliance can impede construction projects from getting off the runway and can immediately lead to conflict and litigation. It is necessary to ensure a construction project follows all relevant laws, regulations, and permits at both the provincial and federal levels. Construction entities must ensure they have the proper licenses, zoning ordinances, and environmental regulations in place, or risk immediately breaching a prospective contract.

2) Paper everything: an oral contract isn't worth the paper it is written on!

Although some proponents of construction companies still subscribe to the old way of doing things (based on "honour" or a handshake deal) doing so comes with a tremendous amount of legal risk. Verbal contracts often lack clarity, where essential terms are understood by different parties in different ways.

The enforceability of a verbal contract is also an imminent concern. Without a paper trail or a written contract, the very existence of a contract may be disputed. Further, our memories are not perfect; with the passage of time, there is sure to be some erosion of remembrance regarding what exactly was agreed upon, which can lead to a different recollection between parties.

Without clear, unambiguous written terms, parties are at an increased risk of uncertainty regarding deliverables as well as expectations, which can lead to delays, dips in quality, and dissatisfaction of parties. This dissatisfaction and room for inconsistent interpretations all have the capacity to perversely affect business relationships and, most importantly, damage the trust that exists between two parties. Ultimately, this can lead to costly and protracted litigation.

3) Clear, unambiguous communication and detailed contracts

When drafting the terms of a written contract, it is essential to direct one's mind to any alternative interpretations that may exist. Often, what seems clear to the initial drafter is not clear to most readers. Contractual ambiguity is one of the main reasons parties enter litigation. A concerted effort must be made to resolve contractual ambiguity prior to the contract being signed.

If you are the drafter, you will always have contra proferentum acting against you. Contra proferentum is the Latin term that translates to "against the offeror" or "against the one who brings forth." In contract law, the doctrine dictates that any ambiguity or uncertainty in the language of a contract will be interpreted against the party who drafted the contract. If you are the drafter of the contract, extra diligence must be given to resolving ambiguity prior to entering a contract.

Detailed contracts can preliminarily resolve potential disputes and provide clarity as to the scope and obligations of each party. This in turn leads to a lower likelihood of a dispute, an improved relationship with the other party, and a reduction in litigation risk. The more detail and clarity in a contract, the lower the chance you will have to litigate your matter in the first place.

Litigating Construction Disputes

1) Can you lien?

Typically, if a contractor has provided supplies, materials, or labor to a project within the specified timeframe and has not received payment, they have the right to place a lien on the property. It's crucial to recognize that the timelines and repercussions for missing these deadlines vary across Canada's provinces.²

Liening a property requires far less effort and cost than going through the court process. With that said, payment from liening a property is often slow, and liening may be insufficient for the circumstances. The more complex the construction or contract dispute, the less likely liening is going to fully resolve the issue.

Liens are most appropriate when there is little ambiguity as to whether work was done, and the matter is simply that the bill has not been paid. In these circumstances, it is often most appropriate to start with liening the property. As the matter increases in complexity and there are issues beyond repayment for work or supplies provided, it will likely be necessary to settle your matter out of court or to proceed to litigate your matter in court.

2) Taking your matter to court

The court process allows plaintiffs to seek a wide range of legal remedies that are unavailable in lien enforcements, such as monetary damages, specific performance, equitable relief, injunctions, and court ordered judgments, to name a few.

As the court process is often foreign to emerging construction entities, this article will help shed some light on the process you may expect. The first legal step to initiate the court process is the demand letter.

1. i)Demand Letter

While not a strict requirement, the demand letter serves several purposes in the context of legal dispute resolution. First, the letter is a way of providing formal notice to the other party of a prospective legal claim or demand against them. This demand letter is often the final attempt to resolve a legal dispute prior to engaging the court process. The letter also often indicates an escalation of the dispute from initial talk to a real legal claim.

The demand letter often lays out clarification as to why the prospective claim will be made, the action or remedy the drafting party is seeking, a final opportunity to resolve the claim before the initiation of legal action, and the likely consequences of failing to respond to the demand letter. Often the demand letter is met with two responses, the first being no response, with the likelihood being that a claim will be drafted and filed with the pertinent court. Alternatively, the demand letter is responded to, and serious settlement negotiations are entered.

1. ii)Statement of Claim

Preliminarily, claims may only be valid if they are not barred by the pertinent limitation period. Provinces throughout Canada have different limitation periods. If you have any intention of bringing a legal claim, always ensure that you do so before the limitation period has passed. In Saskatchewan, this limitation period is generally 2 years from the pertinent precipitating event.³

The statement of claim is the commencement document in civil court proceedings. It outlines the plaintiff's legal claims against one or more defendants and provides the factual and legal basis for these claims. The statement of claim will also include the specific relief being sought by the plaintiff; for example, monetary damages, injunctive relief such as a court order, and specific performance such as an order to fulfill contractual obligations.

Claims must allege a cause of action. Causes of action in law are the legal bases or grounds forming the basis on which a claim is brought to the courts. Some common causes of action in the construction industry include:

1. a) Breach of contract: breaches of contract often involve allegations that a party has failed to perform work according to agreed specifications, failed to meet deadlines, or failed to make payments as required by contract. It is incumbent on the plaintiff to demonstrate that: i) a valid contract exists, ii) the defendant breached the terms of the contract, and iii) the breach caused the plaintiff to suffer damages.
2. b) Negligence: negligence claims arise when actions or omissions fall below the standard of care expected in the construction industry. Examples of negligence include failure to adhere to safety regulations or a failure to warn of known hazards. To establish negligence, the plaintiff must show: i) the defendant(s) owed a duty of care, ii) breached that duty, and iii) that the breach caused the plaintiff to suffer damages or injury.
3. c) Fraud or Misrepresentation: fraud or misrepresentation claims often arise from false promises about the quality of work, misrepresentations regarding timelines and costs, or concealing defects in the work done. To prove misrepresentation, the plaintiff must demonstrate that: i) the defendant made a false statement or representation of material fact without reasonable grounds to believe the statement was true, and ii) the plaintiff relied on this representation to their detriment (i.e. suffered damages).

In Canadian construction disputes, the claim will be brought either to the small claims court or the province's superior court, depending on the quantum of the claim and the relief the parties are seeking. For example, in Saskatchewan, the cap on small claims is currently $50,000. If your prospective claim exceeds this cap, it will then be necessary to file your claim with the pertinent superior court. In Saskatchewan and Alberta, this court is the Court of King's Bench. Note: If you have filed a builders' lien, then you must bring your claim to the Court of King's Bench as the Provincial Court has no jurisdiction to hear builders' lien actions.

Since most construction disputes are commenced in the Court of King's Bench, our discussion below will outline that court process.

iii) Statement of defence, counterclaims, and crossclaims

As noted above, the statement of claim kickstarts the court process. The defendants in the matter will have a prescribed amount of time to respond with their statement of defence. In Saskatchewan, defendants have 20 days to serve and file their statement of defence if they are in Saskatchewan, 30 days if they are elsewhere in Canada or the United States, or 40 days if they were served outside of Canada and the United States.

The purpose of the statement of defence is to respond to the claims contained in the statement of claim. The statement of defence typically admits or denies each allegation made by the plaintiff in their claim. This includes disputing facts and claims and asserting any specific defences that may be available.

Many common defences in construction disputes exist. Below is a list of some common defences in construction disputes:

1. a) Limitation Period: Claims brought after the pertinent limitation period will be barred. A limitation defence, where proven, is a complete defence to a claim.
2. b) No Breach: The defendant may simply argue there was no material breach of the contract. This defence involves challenging the plaintiff's initial allegations and presenting evidence to refute these arguments.
3. c) Force Majeure: Defendants may argue the delays, disruptions, or other issues involved in their construction dispute were caused by unforeseeable events beyond their control, such as natural disasters, terrorism, government actions, and pandemics. The events can excuse performance of a contract or provide the basis for extending timelines.
4. d) Estoppel: Defendants may argue the plaintiff is estopped from bringing a claim based on their prior conduct, actions, or representations. For example, if a contract says you cannot do A, but the other party tells you to do A, they cannot then sue you for breach of contract for having done A. Estoppel prevents a party from taking inconsistent positions to the detriment of another.

The statement of defence may also include counterclaims or crossclaims asserted by the defendant. Counterclaims are claims asserted by the defendant against the plaintiff, while crossclaims are claims asserted by one defendant against another defendant. Resolving these counterclaims and crossclaims in tandem with the original claim helps reduce the multiplicity of proceedings and aids in efficiently resolving legal disputes. A defendant might also bring a third-party claim against a party not already part of the action to allege the claim should actually be asserted against that third-party.

1. iv) Mandatory Mediation

Throughout Canada, most jurisdictions require the parties to participate in mandatory mediation after the claim and defence are filed. During mediation, the parties and their lawyers will meet with a mediator. There is an element in mediation requiring the parties to participate "in good faith". The mediator is not there to provide an opinion on a legal strength of either party's position. Rather the mediator is there as a neutral party who is there to help facilitate discussion between the parties to work through their dispute and achieve a settlement agreement. If a resolution can be reached, this ends the legal action.

1. v) Examination for Discovery

Should mediation fail, each party must prepare an Affidavit of Documents. This document discloses all documents the parties have relating to the lawsuit. It is the responsibility of each party to disclose and produce all documents related to the matters raised in the action. As such, parties should ensure they have proper mechanisms in place to preserve documents (this includes, emails, texts, phone messages, recordings, notes, agreements, all versions of drawings and schematics, etc.) as soon as the prospect of litigation becomes apparent.

The Affidavit of Documents also provides an indication if either party seeks to object to producing any documents in their possession. These objections can be based on several legal grounds, for example, whether the information is confidential or privileged. Once the documents are produced, the parties then have an opportunity to question each other under oath regarding the lawsuit.

1. vi) Pre-Trial:

Before a trial begins, the parties will convene with a Judge for a pre-trial conference. The pre-trial Judge operates as a mediator. However, unlike the mediators discussed above, the Judge will provide their legal perspective on the case and how it might be perceived by the trial Judge, with the aim of facilitating settlement between the parties. The pre-trial Judge may be called upon to issue orders or provide guidance to streamline the proceedings, always with the aim of ensuring a fair, efficient, and cost-effective resolution. Pre-trials may lead to final resolution or settlement between the parties, partial settlement that resolves some of the issues before trial, or, in some circumstances, no issues are resolved at pre-trial.

vii) Trial

Rarely does a matter progress to an actual trial; settlement is frequently the path a matter takes. Should your matter reach a trial, these are the steps the trial would likely entail:

1. a) Preliminary motions: Before a trial begins, the court will address any preliminary matters which might address readiness to proceed, any preliminary motions, and any other housekeeping relating to the trial at hand.
2. b) Opening statements: Both parties have the option to provide opening statements, which will outline their arguments and the evidence they plan to present to the court. In some cases, a defendant may seek to reserve their opening statement until after the plaintiff has presented their case.
3. c) Plaintiff's case: The plaintiff presents their case by calling evidence and using exhibits to support their claim.
4. d) Defendant's case: The defendant presents their case by calling evidence and using exhibits to refute the plaintiff's case and bolster their defences.
5. e) Closing Statements: Both parties have an opportunity to provide closing statements, summarizing the evidence presented and arguing why the judge should rule in their favor.
6. f) Court decision or jury verdict: In a judge only trial, the judge can either provide their verdict at the end of proceedings, or, much more likely, render their decision through their written decision. In the rare instance of a trial by jury, the decision will be given through a jury verdict to the parties (NOTE: jury trials are extremely rare but available. However, in the civil dispute context it is the responsibility of the party requesting the jury to pay all the costs related to the jury).

These steps help illustrate the typical framework for progression through a trial in Canada, but specific procedures and rules may differ depending on the specific jurisdiction and province.

viii) Appeal

Where a party feels the trial judge erred, they have the opportunity to appeal the decision to the province's Court of Appeal. If a party fails to find success at the Court of Appeal, they may try to appeal to the Supreme Court of Canada.

Conclusion

In conclusion, navigating litigation within the construction industry can be daunting, particularly for emerging entities unfamiliar with the complexities of the legal process. This article has provided essential insights into various stages of litigation, from pre-litigation practices to the trial itself. Pre-litigation best practices emphasize thorough due diligence, meticulous documentation, and clear communication to mitigate risks and establish solid foundations for contractual relationships. Understanding the basics of litigating construction disputes, including the importance of written contracts and detailed communication, is crucial to minimizing legal exposure and fostering trust between parties.

Footnotes

1 For example, see this article on the limited value and overconfidence of people concerning demeanor evidence:https://digitalcommons.unl.edu/cgi/viewcontent.cgi?article=1659&context=nlr.

2 For more information on lien deadlines in Canada, please reference the following article by Troy Baril and Fatima Ahmed:https://procido.com/2023/07/31/deadline-for-registering-builders-liens/.

3 For more information on limitation periods in Canada, please reference the following articles by Troy Baril, Kevin Mehi and Taylor Moroz:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.