Construction: Some Surprising Things About Contracts

As a leader in the area of Construction Law, Tim is a regular contributor to Alberta Construction Magazine. In this article Tim discusses how contracts can go bad and things to consider before signing.

Tim Mavko has authored this article for the Fall 2014 issue of Alberta Construction Magazine.

We depend on contracts. Really, it’s impos­sible to imagine a successful construc­tion project without them.

Sometimes they are simple—a hand­shake between a contractor and a sub­contractor or a one-page purchase order scribbled on the hood of a truck. Other times they are complex—tomes as thick as phonebooks, drafted by lawyers and containing tortuous terms and Byzantine conditions. But in every case, the parties have settled on essential terms, prom­ised to exchange something of value and intended to be legally bound. In other words, they have made a contract.

Despite the essential and near-universal role that contracts play, it’s surprising how often some basic features of contracts are misunderstood.

One common misconception is that the internal beliefs or subjective intentions of the parties somehow matter. For example, imagine a contract says that the work is to be done to a “first-class national industry standard.” Both sides happily agree to these words when they sign.

Yet, when a dispute later erupts over the quality of the work, it turns out each side was thinking something very different. The owner thought “first-class” meant defect-free work, measured according to the rigorous standards of an international organization. The contractor, on the other hand, only works locally and intended to match the quality of other regional contractors. Neither side was thinking about national standards, which were somewhere in the middle.

Clearly, the parties had different inten­tions. And yet, that does not matter one whit. The contract said national standards, and that’s what it will mean to a judge (if the dispute goes that far).

As Alberta’s Court of Appeal recently said, “Counsel and writers sometimes beguilingly suggest that the court’s duty is in essence to discover the intent of the parties. Does this mean bypassing the words of a formal signed contract in favour of the parties’ compet­ing assertions years later, all encased and cooked in a pastry shell of the trial judge’s inferences and deductions? If so, it is wrong. The court is to interpret the words of the signed contract. Subjective intent is espe­cially irrelevant and doubly so if the written words are clear.”

Another misunderstanding is the idea that the parties have a duty to negotiate a contract in good faith. They don’t. (This is not to suggest that the parties can lie, cheat or steal when they make a contract—they can’t.) But sometimes one side fights harder and smarter, or is more stubborn and ornery, and thereby gets the better of the other.

When this happens, either the negotia­tions fail because the parties can’t reach a deal or the resulting bargain is lopsided. The loser then complains that the winner failed to be mindful of the other side’s interests and acted unfairly. The winner, it’s suggested, didn’t bargain in good faith.

Our courts have dearly and firmly rejected this idea. As the Supreme Court of Canada says, “No duty of care arises in conducting negotiations.”

Simply put, one side does not have to pro­tect the other, even from itself. Rather, hard bargaining is expected and even encouraged. After all, the whole purpose of bargaining is for each side to carve out the best deal it can—for itself. The contract then locks it in.

This leads to a further misconception: that contracts have to be fair. Sometimes a party to a contract discovers, after the fact, that it’s made a bad bargain. Maybe the deal was lousy to begin with. Or maybe the losing side miscalculated and has now just learned that it’s going to lose its shirt. Or maybe it all started out good but circum­stances have changed—prices went up, sup­plies went down, labour disappeared—and the deal has now turned sour.

When this happens, the aggrieved party sometimes complains that the contract isn’t fair and tries to escape. Or refuses to per­form, arguing that somehow the contract is now unfair, unconscionable and therefore unenforceable. The deal, the argument goes, is not the deal that was expected or intended.

Such arguments rarely succeed. Bad con­tracts are still contracts that bind the par­ties. The fact that one side gets more and the other side gets less does not weaken the contract. To quote the Provincial Court of Alberta: “People have a right to enter into bad contracts—it’s a free country.”

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