Construction Liens FAQ


CHANGED WORKING CONDITIONS - RAMIFICATIONS OF THE PETER KIEWIT CASE

Fred J. Matthews of Christie Saccucci Matthews is a certified specialist in construction law. He can provide you with the information and advice you need regarding changed working conditions and the Peter Kiewit case.

The 'Kiewit' Precedent

One does not have to spend much time in the construction business before having to face the surprise of being called upon to undertake unspecified additional work, or costly changed work.

This circumstance is always significant, sometimes financially overwhelming. It is inherently difficult to deal with for all parties. A 1960 decision of the Supreme Court of Canada makes it particularly problematic for the contractor or subcontractor charged with the responsibility to deal with the change. The decision is Peter Kiewit v. Eakins Construction (1960) S.C.R. 361.


A Summary of the Facts and Reasons in Kiewit

A subcontractor [Eakins] committed itself to carry out specified work. The specifications required driving piles to a bearing capacity of 20 tonnes. After signing the subcontract, and before commencing work, the subcontractor was provided with a further copy of the general contract, which changed the pile driving specification to one requiring the piles to be driven to a certain elevation regardless of bearing capacity.

The Court acknowledged that the subcontractor was called upon ('under threat of compulsion') to do work well in excess of what was specified when its subcontract was committed to it.

The subcontractor immediately and continuously protested. It completed the additional work reserving the right to claim. The reasons of the majority of the Supreme Court show the subcontractor was completely unsuccessful.

The Court stated the following:

'One party says that it is being told to do more than the contract calls for. The engineer insists that the work is according to contract and no more, and that is what is asserted to be extra work is not extra work and will not be paid for. The main contractor tells the subcontractor that it will have to follow the orders of the engineer and makes no promise of additional remuneration. In these circumstances, the subcontractor continues with the work............. The engineer expressly refused to order as an extra what has been referred to throughout this case as "overdriving". The work was not done as an extra and there can be no recovery for it on that basis. When this position became, and it became clear before any work was done, the remedy of the Eakin's company was to refuse further performance except on its own interpretation of the contract and if this performance was rejected, to elect to treat the contract as repudiated and to sue for damages'.

The lone dissenting Judge (Cartwright J.) summarized the dilemma with the following statement:

'It is said that the respondent (who held what turns out to be the right view as to the meaning of the subcontract) should have had the courage of its convictions and refuse to perform any work beyond that which was required by the subcontract, and when this resulted in its being put off the job, should have sued the appellant for damages. It must however be remembered, that the subcontract was so difficult to construe that there has been a difference of judicial opinion as to its true meaning. The Appellant (who held what turns out to be a mistake in view as to the meaning of the subcontract) threatened the respondent with what might well amount to financial ruin unless it did the additional work, which the subcontract did not obligate it to do. To say that because in such circumstances, the respondent was not prepared to stop work and so risk the ruinous loss which would have fallen on it if its view of the meaning of the contract turned out to be erroneous, the appellant may retain the benefit of all the additional work done by the respondent without paying for it would be to countenance an unjust enrichment of a shocking character which, in my opinion, can and should be prevented by imposing upon the appellant the obligation to pay...'


Does Kiewit Still Represent the Law?

It has been referred to many times since; sometimes found not to apply because of distinguishing facts, sometimes ignored, but never rejected.

British Columbia is an exception. Motivated perhaps by the criticism of Judge Cartwright, British Columbia enacted special legislation. S. 62 of the Law and Equity Act, B.C. sets out a procedure whereby a party called upon to perform disputed work may do so under protest and preserve an entitlement to sue for compensation later. Subject to that section and for the rest of Canada, Kiewit remains the law unless an exception can be found.

Examples of exceptions are:

  • The parties may agree that the protested extra work be undertaken and the issue of compensation or, any part of it, be reserved for later determination. The contractor can carry out the work and sue for it later (Halton Region v. Toronto Underground [1985] 12 CLR 139 (O.C.A)
  • A contractor was induced to work on an expressed or implied representation that proper compensation would be addressed later. In that circumstance, the right to sue for the extra work after performance was allowed (Diesel Contracting v. Salomon Holdings [1997] O.J. no. 440)
  • The failure of an owner to fulfil a positive contractual duty to prepare the site was found to be an exception to Kiewit. (Penvetic Contracting Co. v. International Nickel Co. [1976] S.C.R. 267

A trial judge applied Kiewit and denied compensation to the contractor on Kiewit like facts. The court of Appeal reversed the trial judge with no mention of Kiewit.

'Given that the contractor went ahead and performed the more expensive alternate method in the face of a statement from the owner refusing to accept responsibility for any extra cost, this decision may be difficult to explain except for an unstated aversion to the Kiewit result'. Warden Construction v. Grimsby [1983] O.J. 108 (O.C.A.)

Some cases have upheld Kiewit but noted that the contractor did not give timely notice of its intention to claim for additional impact or delay costs. Impliedly, if the customer had been confronted at the earliest possible time and given full notice of the contractor's intentions to claim, the strict rule of Kiewit might not have been applied. (Doyle Construction v. Carling O'Keefe Breweries (1988) 27 B.C.L.R. (2nd) 89)


What Options Are Available?

While not a guarantee of success, it appears, one should always protest and declare a position at the earliest opportunity and repeatedly. Subject to that rule, strategic choices include:

  • Submit. Do the work under protest and hope that the legal system will overrule Kiewit. This choice may be only for the eternal optimist. Any dispute would start at least three or more levels down from the Supreme Court of Canada. The courts below are obliged to follow precedent. However well founded, there is a significant risk of a time-consuming and expensive legal process with multiple levels of appeal.
  • Negotiate for the right to perform the disputed work and reserve arguments as to liability and compensation to a later time. This compromise may not be available simply because the general contractor, owner or consultants may demand performance and deny any entitlement to compensation.

Conversely, the risk of performing now, financing that performance, and being left with the time, expense, and uncertainty of a legal claim may be unacceptable.

  • Try to establish factual distinctions that fit with some of the exceptions that have been recognized by the legal system such as facts constituting an inducement to work with implied promise of payment or establishing a positive failure of the owner to perform part of its duty.
  • Refuse to perform until or unless the issue is resolved on clear and satisfactory terms. In effect, turn the Kiewit decision into a weapon and adopt the language that suggests that this is the specific option outlined by the Court as the alternative to submission without compensation. Contracts often contain language that suggests that work should continue regardless of any dispute. Arguably, Kiewit sanctions relief from this result where compensation for the extra work is at issue.

The risk of the position is that it may result in stalemate with very significant delay and completion cost damages. A legal proceeding may determine that you were wrong in refusing to work and, therefore, are liable for the damages.


FACTORS AFFECTING THE CHOICE OF OPTION

The ultimate choice of option depends on a multitude of factors, some legal, some political and some practical. They may be addressed by raising questions in the following areas:

1. The Contract

The form of the contract can be very determinative of the allocation of risk of material change.

The designed intent of the formal documentation contemplates a prescribed form and logical hierarchy where all parties are bound from the top down. It is expected that the subsubcontractor will be bound by all the applicable terms and specifications of the general contract. This may not be the result. Despite designed intent, the process has often strayed during the practical process of bidding, hiring and getting on with the work.

Often the sub has submitted a bid on its own form and terms, is engaged on that basis, and ordered to start work. The standard contract documentation is to follow. This documentation often shows up with differences particularly in the allocation of risk or definition of extra work, for example, the cost of dealing with hidden obstructions.

The owner or general will invariably say that the terms of the pro-forma documentation apply. This may not in fact be the bargain that was made.

The owner/general may still be negotiating the head-contract while subs may have started work based on the terms of their accepted bid. The problem sections of the head-contract or specs may have shown up only later. The sub may not be bound by these (i.e. Kiewit).

Analyze the documentation to determine precisely what the relevant terms of the bargain were when made.

2. Cost and Your Financial Resources

What is the cost of the change in proportion to the total contract? Perhaps more importantly, how significant is the total cost in proportion to your overall resources? How substantial are the assets inside the operating contracting company? It may be that no matter how recalcitrant the customer, the simple and effective response may be that what is demanded is beyond the resources of the contracting company and that therefore an alternate, fairer solution is required.

Was a performance bond was posted? What indemnities or guarantees support that performance bond? These factors greatly affect risk and bargaining position.

3. The Financial Position of the Adversary

Is the general contractor caught in the middle between you and a rigid owner? Does that contractor have an equal or larger risk if the matter is not resolved? General contractors usually strain to function as intermediaries, maintaining no greater obligation to their customer than the sub's obligation to them. The contract analysis may support the conclusion that the general contractor may have accepted risks that the sub did not, or the general contractor may have an exposure that is greater than any recoverable exposure from the sub. Perhaps the general has committed to a performance bond and the sub has not. These factors may warrant an accommodation from the general to share extra cost that may not be passed on to the owner.

4. The State of the Project

How close to completion are you? Whether or not you have been paid for work done to date, if very little additional work is required to complete the project, discretion may be the better part of valour. The better choice may to simply declare and protest the position clearly, try to set up possible factual exceptions, gamble, while controlling the completion costs.

How necessary are you at this stage in the project? Are you sufficiently integrated into the project that it would extremely impractical for anyone to find an alternate subcontractor to take on the job? This situation, perceived or real, very greatly affects bargaining position. It is also a circumstance that may vary over the course of the work. This raises picking the right moment to stand firm having protested the circumstances.

Summary

Selecting the right option depends on an assessment of these and perhaps other factors. Ironically, some of the toughest situations may be the easiest to deal with. Some of the marginal situations may present some of the toughest choices. If confronted by an owner, consultant, or general contractor who says, 'Complete the work and finance it yourself or I will sue your company for everything it has got,' there may be something comforting in being able to respond, 'I think your position is wrong and unreasonable, but in any event, compliance with your demand would cost more than everything the company has and, therefore, we are left with little choice.'

Ultimately, the best practical resolution of all of these matters, for all concerned, arises from each being able to address a balanced and proportionate accommodation. The considerations set out above are factors that, hopefully, assist in reaching that accommodation while protecting against the consequence if it is not reached.