Unpredictable pricing and rising project complexity are driving disputes in infrastructure construction and pushing parties to seek speedy results and alternative processes, say lawyers.
As of the time of writing, the Bank of Canada held its target for the overght rate at five percent. With Canada’s year-over-year inflation rate within three percent for February and March, some economists expect a rate cut by June. Amid the COVID pandemic, inflation began rising in 2021 and peaked at 8.1 percent in 2022.
The high cost of financing and the unpredictable pricing of goods and services have weighed on infrastructure construction for the last few years. Lawyers say this instability has led to disputes and compounded existing ones.
It takes a long time to build an infrastructure project. Long-term contracts have always had cost escalation built in, and it has historically been a risk the contracting party accepts, says Maureen Littlejohn, partner at Davies Ward Phillips & Vineberg LLP. But projects are increasing in complexity and project timelines are lengthening. That means more time for costs to escalate, says Littlejohn, which is happening more than is historically typical.
“That becomes a risk for larger and more complex projects and one that construction contractors aren't necessarily willing to take.”
She says the challenge is addressing that risk contractually and in a way that will lead to predictable results.
“As parties try to grapple with methods of dealing with cost escalations in a longer-term construction project – and that happens imperfectly – it creates cost pressure on the project, which often leads to more disputes.”
Littlejohn says that disputes also often arise from the sheer complexity of modern infrastructure projects. Where there are more technical aspects to the project and its delivery, the contracts also become more complex, widening the space for differing interpretations.
Mark St. Cyr has seen a “big shift” in the market recently, with contractors pushing to accelerate alternative dispute resolution (ADR) processes. The partner in the construction and infrastructure groups at Cassels Brock & Blackwell LLP says that the focus is more on getting a quick answer than necessarily getting the right one. He says this tendency lends itself to different forms of dispute resolution than what are typical in prior agreements.
Historically, agreements have involved negotiation, followed by mediation, and then arbitration or litigation, which can take months.
“Having been involved in several transactions in the past year, we’re seeing a big push from contractors – both our clients and people we’re acting against when we're acting for owners. They want to speed up that process,” says St. Cyr. “They’re not happy with the current dispute resolution process.”
Delays in the court system across Canada are also pushing litigants toward ADR, where they can afford it, says Littlejohn. Fortunately, she says, infrastructure construction has access to a deep roster of experienced and skilled ADR practitioners, but this intensifies their demand and squeezes their availability for disputes that are contractually required to proceed by ADR.
St. Cyr says the trend toward faster dispute resolution is pushing parties toward statutory adjudication. These adjudication systems are part of the prompt payment laws that have been enacted across the country in recent years. The laws require timely payment of contractors in construction projects and use adjudication to efficiently resolve disputes. In December, the Federal Prompt Payment for Construction Work Act and its regulations came into force. Prompt payment laws are in force in Ontario, Saskatchewan, and Alberta and are forthcoming in Manitoba, Nova Scotia, British Columbia, New Brunswick, and Quebec.
“That’s being looked at as a mechanism,” says St. Cyr. “And any attempts by owners to try to blunt that avenue are being resisted by contractors.”
Lawyers say project participants are also increasingly using dispute resolution boards. These are independent experts organized before construction begins and attached to the project to resolve disputes as they arise. They can hear the issue and quickly render a decision. Their resolution can be interim, like adjudication, but the parties can also agree to make it binding and determine appeal rights.
St. Cyr says that dispute boards will often have a “project monitoring function” where they meet once a month with each party to the contract, discuss, and receive a general report on the project’s status.
“The big downside of the dispute boards is that they’re a cost to the project,” he says. “The project has to be of such a size that it can warrant that type of body.”
Littlejohn says it is crucial to appoint dispute board members at the beginning of the project before any significant controversies erupt.
“If you’re in a position where you’re picking the person to resolve your dispute when it has already arisen, that can give rise to its own problems because somebody in the picture is happy for the process to move more slowly, and somebody in the picture wants the process to move more quickly.”
She says a dispute board that is trusted by the parties, involved in the project, and kept apprised of the details as they unfold expedites dispute resolution because the board will not need to learn everything about a project when a fight develops, unlike an external arbitrator.
“Having a [dispute] board involved in a project over the longer-term disciplines better behaviour by the parties,” says Littlejohn. “If you don’t conduct yourself reasonably and fairly with your dispute board, you are going to be dealing with them for some time, and you’re going to continue to wear that conduct over the life of the contract.”
Mark Crane, a partner in Gowling WLG’s advocacy department and member of the firm’s commercial litigation and construction and infrastructure groups, says disputes in infrastructure construction also continue to be driven by the public-private partnership (P3) design-build project model.
In the P3 design-build model, the owner – typically, a government entity such as Infrastructure Ontario – will go through a request-for-proposal (RFP) process to find contractors to build the project. With these large projects, says Crane, the bidders tend to be contracting joint ventures. One of the frailties with the model, he says, is that parties responding to the RFP are bidding to construct the project at a time when the project is only designed to roughly 30 percent.
Unlike apartment buildings or other construction projects with a standard design that has been executed many times before, large infrastructure projects tend to be unique “one-offs,” says Crane, which makes the design and construction costs difficult to forecast. Bidders are also incentivized to submit the lowest compliant bid possible while remaining profitable because it is a competitive RFP process, he says.
“The ability to forecast and estimate what a complex project is going to cost to build would be, in many cases, a Herculean task to do at any point, even if it was at 100 percent design.”
With the design-build model, Crane says the owner has shifted the overage risk to the contracting joint venture. This inevitably leads to disputes between the contracting joint venture and its prime design consultants, among others. The joint venture will argue that by relying on the allegedly negligent preliminary design to estimate their bid, they incurred additional costs. However, the joint venture may have carried an inadequate contingency at the time of the bid.
In response to the drawbacks of the P3 design-build model, owners are evolving toward a progressive design-build model, he says. In that model, the contracting joint venture’s fee to execute the project’s construction will not be locked in until the design has progressed to a more advanced stage. This fee approach can help reduce some of the risk and uncertainty associated with these large infrastructure projects, says Crane.
In a progressive design-build, says St. Cyr, the project has two phases. In the first phase, the parties develop the project, determine performance specifications, and allocate risks before coming up with a fixed fee for the contractors. Arguably, a collaborative process where everyone is aware of the risks will lead to fewer disputes, he says.
Inflation
2.8%: Rise in February, on a year-over-year basis
2.9%: Rise in January, on a year-over-year basis
3.9%: Annual average in 2023
6.8%: Annual average in 2022
Source: Statistics Canada
Interest rates (key rate/target for overnight rate)
.50%: March 2022
1%: April 2022
2.50%: July 2022
3.75%: October 2022
4.75%: June 2023
5%: April 2024
Source: Bank of Canada