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Contract Law

Contract Law. 2014 NCHCA Education Series- January 23, 2014 Presented by Geoffrey Cantello, City of Ottawa and Ron Price, Rasmussen Starr Ruddy LLP. 1. Specific Contractual Terms. Incentive/Disincentive provisions Background in the Context of City of Ottawa Contracts

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Contract Law

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  1. Contract Law 2014 NCHCA Education Series- January 23, 2014 Presented by Geoffrey Cantello, City of Ottawa and Ron Price, Rasmussen Starr Ruddy LLP

  2. 1. Specific Contractual Terms • Incentive/Disincentive provisions • Background in the Context of City of Ottawa Contracts • Why does the City have incentive/disincentive provisions

  3. 2. History of Incentive/Disincentive Claims • City of Ottawa is not a profit generating corporation • City projects do not generate profit when they are ready for use

  4. 3. Interim Completion Dates • Coordinating infrastructure projects is becoming more and more complicated in the City of Ottawa Examples: Light Rail, Baseball Stadium/ Pedestrian Bridge • City of Ottawa uses incentive/disincentive clauses as means to achieve interim completion dates

  5. 4. Dealing with the Construction Industry • City of Ottawa has a very difficult time offering pure bonuses for completion of specific portions of contracts • As a public corporation, the City is generally restricted from granting bonuses to commercial enterprises (Section 106 of Municipal Act)

  6. 5. Local Construction Industry • After discussions with the local construction industry, it was determined that incentive/disincentive clauses would be the best means of achieving interim completion dates • Industry generally agrees that an incentive balanced by a corresponding disincentive is fair to both parties

  7. 6. Mechanics of Incentive/Disincentive Provisions • In cases of multi-stage transportation projects, the City of Ottawa often requires stage one to be complete by a certain date • In order to get the work done by that date, the City includes a provision that calls for an additional payment if the stage is ready for use by the specified date and an equivalent deduction if the stage is late

  8. SPECIAL PROVISION – GENERALNo. D-019INCENTIVE / DISINCENTIVE Scope of Work The Contractor is advised that for the portion of work outlined below the Incentive/Disincentive Special Provision will apply. This provision does not modify any completion date or working day provisions as stated elsewhere in the Contract Documents. Note to designer – provide full description of the works that are to be completed by the stated deadline Incentive for early completion If all of the above work is completed to the satisfaction of the Contract Administrator on or before the _________ 200_, the Contractor will be paid an incentive of $xx,000. Also, for each calendar day prior to the above date that the above work is completed, to the satisfaction of the Contract Administrator, the Contractor will be paid an additional $x,000 per calendar day, up to a maximum of $xx,000. Disincentive for late completion If all of the above work is not completed on or before __________200_ the Owner will deduct a single lump sum of $xx,000. In addition, the Owner will deduct a further $x,000 a day for each additional calendar day until the above work is completed, up to a maximum of$xx,000. Note to designer – maximum incentive must equal maximum disincentive Compensation for the Contractor to schedule the operations in accordance with these requirements, including, if required, utilizing extra crews, shall be deemed to be included in the contract bid price for the various tender items and no additional payment shall be made except for the payments outlined above. Basis of Payment This Special Provision - General will be paid under the Contract Item “Incentive/Disincentive” following successful completion of the above work to the satisfaction of the Contract Administrator, or deducted from monies due the Contractor at such time as the above work has been completed. For the purpose of establishing a Contract Start Date, it is assumed that the Commence Work Order will be issued 3 working days after the Contract Award is complete. Note to designer – the amount to appear against the Contract Item “Incentive/Disincentive” shall be the maximum that the Contractor could receive for early completion Warrant: On Division Manager approval.

  9. 7. Issues • In the context of a multi-million dollar project, is an incentive/disincentive of $50,000 or $100,000.00 sufficient to achieve the required result? • In many cases, a missed interim completion date results in a delay claim for the lost incentive and the assessed disincentive

  10. 8. Evolution of the Incentive/Disincentive Special Provision • Current version provides for a lump sum payment or deduction for either achieving or missing a specified interim completion date plus daily additional amounts • This approach moves away from a single date approach and allows for greater payments for earlier completion of a portion of the contract work and a corresponding greater deduction for each day beyond the interim date

  11. 9. Other Issues • If issues arise that delay a project and the issues are outside the control of either party, interim completion dates should be moved, if possible

  12. 10. Liquidated Damages • Legal Principles that govern liquidated damages • City of Ottawa approach to Liquidated damages

  13. 11. Legal Principles • Court will not enforce penalty clauses • Liquidated damages can be negotiated by parties to a contract • Liquidated damages are required to be a genuine pre-estimate of the damages flowing from a breach of contract

  14. 12. Pre-Estimate of Damages • In a situation where two parties negotiate the final terms of a contract, they can agree to liquidated damages and these damages will be very difficult to challenge • In the case of contracts awarded through a public tender system, negotiation of liquidated damages is not possible

  15. 13. City’s Pre-Estimate • City reviews the damages that are likely to flow from late completion of a contract when considering liquidated damages • The largest portion of liquidated damages is usually additional consultant costs • City considers all other costs flowing from late completion

  16. 14. Acceptance by Bidders • City views the submission of a bid on a contract as acceptance of the liquidated damages stated in the Tender documents • City assesses the stipulated liquidated damages by deducting the appropriate amounts from monies otherwise payable under the contract

  17. 15. Issues • Contractors frequently challenge the amount of liquidated damages • The liquidated damages do not have to exactly reflect the actual damages flowing from late completion • Delays that may affect completion dates

  18. 16. Purpose of Liquidated Damages • City and contractors will know, in advance, the monetary impact of late performance • City should be able to recover its additional costs without going through the process of proving those costs in Court

  19. Thank you

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