Non-Compliance Clauses in Construction Contracts: When Do They Apply?

When it comes to major construction projects, many construction contracts stipulate that the general contractor responsible for the work is liable to pay substantial penalties should they fail to meet the agreed deadlines.

In fact, managing and meeting deadlines is a key obligation under the contract between the contractor and the client. However, fulfilling this obligation is subject to several uncertainties, including:

• the accuracy of the information provided by the client;
• unforeseen circumstances during the project;
• the proper fulfillment by other parties involved in the project of their own obligations.

Failure to meet deadlines can have a significant impact on the client. As such, many choose to include a contractual clause facilitating compensation should deadlines not be met.

Although failure to meet deadlines can be the subject of a claim by the client without being explicitly stipulated in the contract, penal clauses for delays are not uncommon in construction contracts. Such clauses also anticipate the assessment of damages that may be claimed should the contractor fail to meet the deadline. The law specifically provides for such clauses known as “penal clauses.”

A penal clause provides contractual means of determining ahead of time the financial compensation to which a party will be entitled to, should the other party fail to meet their obligations (e.g. failure to meet the deadlines). Although not immune to legal challenges, and subject to judicial moderation, the penal clause for failure to meet deadlines can make it easier for the client to claim such damages, notably by contractually fixing the value of such damages in advance between the parties.

On this point, however, the Court of Appeal of Québec highlights that the existence of a penal clause does not always allow the claim of the damages provided for therein. The Court may require a prima facie proof of prejudice to the party invoking the penal clause[1], and refuse to apply it, if failure to perform by the defaulting co-contractor does not cause prejudice to the party invoking the application of such clause.

Recent Examples of Limits to the Penal Clause for Failure to Meet Deadlines

In December 2022, the Court of Appeal of Québec ruled that the City of Québec was not entitled to claim compensation under a penal clause for failure to meet deadlines from the general contractor responsible for the construction of a waterworks project requiring the installation of a freestanding footbridge[2].

According to the Court, the City of Québec contributed significantly to the late delivery of the work by failing to fulfill its obligation to provide information, specifically by failing to sufficiently describe the planned work in its tender documents, thereby misleading those involved in the project as to its actual complexity and costs.

In fact, when the call for tenders was issued, the project design had not yet been finalized, and the bidders had to deal with the design and construction of an unpredictable project. Insofar as the City of Québec had enlisted the help of experts to design the preliminary as well as final plans and specifications for such a project, the Court of Appeal found that the bidders could rely on the City’s assessment of the project’s feasibility and on the information obtained.

Accordingly, the Court found that the various parties involved were deprived of key information in the preparation of their bids, and that the City of Québec could not, therefore, blame them for the failure to meet the deadline and the increase in costs. Given the City’s primary role in the failure to meet deadlines, they could not complain about the delays and seek the application of the penal clause and related penalties.

This ruling also illustrates how the lack of prejudice would have prevented the application of the penal clause. The Court of Appeal emphasized that, had it not been for the City of Québec’s failure to meet their obligation to provide information, the penal clause would still not have applied, as the City had failed to show that they had suffered damages as a result of such delay. In the Court’s view, it was not enough for the City of Québec to invoke without qualification their contractual right to be compensated for the delay in the execution of the work. Moreover, should a party seeking to enforce a penal clause be able to prove that no prejudice was suffered by their client despite the failure to meet deadlines, it will generally be impossible to enforce the clause.

Continuing on the subject of penal clauses, last November, the Court of Appeal upheld a Superior Court judgment highlighting another limitation to the application of a failure to meet deadlines clause[3]. This time around, the Court of Appeal ruled that the City of Montréal was not entitled to invoke the penalty for delay against a construction company responsible for expanding and upgrading an arena, since the latter had previously indicated they would not avail themselves of the clause.

It is worth noting that the penal clause in this case did not appear to apply automatically, leaving the City of Montréal free to decide how to use it. Evidence thus revealed that the City of Montréal had implied, through their director (during the project and even after the legal proceedings had been initiated), that they had no intention of applying the delay penalties if the contractor showed goodwill during the project. For reasons of consistency and good faith, therefore, the City could not seek the application of the clause.

In conclusion, penal clauses included in construction contracts that provide for the assessment of penalties applicable in case of delay in the execution of work are common and can give rise to legal challenges. Caution should be exercised before automatically concluding that such penalties apply. The above-mentioned decisions clearly illustrate that it is sometimes possible for a contractor who is subject to such a clause to challenge its application, depending on the specific circumstances of the work in progress.

Do not hesitate to contact our construction litigation team, who will be pleased to provide you with advice and support.

 

[1] See Robitaille v. Gestion L. Jalbert Inc. 2007 QCCA 1052, par. 44 and  seq. and Gestess Plus (9088-0964 Québec Inc.) v. Harvey 2008 QCCA 314, par. 17 and  seq. and [2] Québec City v. Constructions BSL Inc, 2022 QCCA 1682 ("BSL" Decision). and [3] City of Montréal v. Construction Company Édilbec Inc. 2022 QCCA 1521 ("Édilbec" Decision).