Construction: Some Contracts Hide in Plain Sight

Tim Mavko has authored this article for the Spring 2016 issue of Alberta Construction Magazine.

We write down construction contracts to ensure cer­tainty. That way we lock down the terms so there is no doubt about the deal. When and if a dispute arises, whether over performance, payment or whatever, we can pull out the written document and point to the words that create our rights and define our obligations.

And yet, sometimes the words that bind us and that will resolve our disputes are not even in the thing we signed. Rather, the key deciding terms might be part of another contract—one made at a different time between different parties that we have not negotiated, signed or perhaps even seen.

This happens when one contract refers to another and incorporates its terms. Like a poor man’s hyperlink, one contract points to another, and we have to chase that link to see the whole picture.

This isn’t surprising. It happens with subcontracts all the time. Take, for example, a flooring subcontract that doesn’t specify the work itself, but instead says the subcontractor is to supply and install the flooring accord­ing to the plans and specifications in the prime contract. To know what to do, the flooring company needs to get hold of that prime contract—or at least the parts that matter. Not a problem.

But sometimes the reference from one contract to another is broader and goes deeper. Consider a subcontract that doesn’t just point to plans and specifications, but also says that the subcontractor will be bound by various other pro­visions in the prime contract, such as the warranty, change procedures, payment terms, insurance requirements, safety programs, notice periods, dispute resolution or even termi­nation rights. Now the subcontractor needs to pay a whole lot more attention to the deal between the contractor and the owner—and how that deal is managed.

Some subcontracts go all in not by limiting themselves to bits and pieces, but instead by swallowing the prime contract whole. Here the subcontractor might agree that he owes to the contractor all the duties that the contractor owes to the owner for the designated work. Or he might surrender everything, agreeing to be bound by all the terms of the prime contract, period.

What began as a tidy little subcontract might mushroom into a tangled mess of definitions, acknowledgements, covenants, representations, indemnities, obligations, limitations, exclusions and who knows what else.

Worse yet, tucked away in the murky layers of the two documents might be terms that overlap and contra­dict each other. The subcontract says one thing, but the distant prime contract says something very different.

This was one of many issues in the recent case of Park Avenue Flooring Inc. v EllisDon Construction Services Inc., 2015 ABQB 478. In that case, an unhappy general contractor fired a subcontractor. The subcontractor sued, and at trial it argued that it had been wrongly terminated.

In defending itself, the general contractor pointed to the subcontract, which allowed the contractor to ter­minate if the subcontractor failed to perform and then failed to make good within two days of notice. On those terms, the contractor was within its rights.

The subcontractor, however, clung to the terms of the prime contract, which were incorporated by reference and made part of the subcontract “to the extent that they may be applicable”—and which created a very different test. Under the prime contract the subcontractor had five working days to correct a “substantial” non-compliance as identified in a written statement from the architect, failing which the contractor could terminate. Under this test, the subcontractor was not in default and the con­tractor was wrong.

So, the contract and subcontract said very different things. To solve this puzzle, the court looked at other terms of the subcontract. To their credit, both parties had anticipated the possibility of this sort of overlap and had included a term for resolving it—in the event of a conflict, the prime contract trumped. The subcontractor won (on this point anyway).

Along the way, the judge said something worth remem­bering: each case must be considered separately, on its own merits, after looking at the circumstances and the language of the particular contracts—both contracts, even the one you didn’t see.

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