Tolling Agreements in Construction Contracts – A Practical Solution
Key Takeaway
Parties should consider including tolling agreements directly in their construction contracts.
Introduction
The pressure of a statutory limitation period often drives the commencement of litigation or arbitration before either party wishes to do so, and often before the issue is properly ripe for final dispute resolution.
This is particularly so in construction, where project durations generally exceed the basic two-year limitation period and where it can be unclear as to when a claim is considered “discovered” and therefore when the limitation clock begins to run.
As a result, parties often seek to negotiate tolling agreements during a project in order to avoid having to commence proceedings prematurely, i.e. before they are ready to do so or before it is in the best interests of all parties and the project to do so.
This article explores a little-used but perhaps more efficient approach – including tolling agreements directly within one’s construction contract, obviating the need to commence an action prematurely to avoid losing their claim due to the Limitations Act.
Limitation Periods and Construction Projects
As with many legal issues, the question of when a limitation period begins to run and conclude is fact dependent.
The Limitations Act provides a basic limitation on a claimant’s right to pursue a claim more than two years following the day on which a claim is “discovered.” Section 5 provides that a claim is “discovered” on the earlier of:
(a) the day on which the person with the claim first knew,
(i) that the injury, loss or damage had occurred,
(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,
(iii) that the act or omission was that of the person against whom the claim is made, and
(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and
(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).
The Supreme Court of Canada in Grant Thornton LLP v. New Brunswick held that a claim is discovered when a plaintiff has knowledge, actual or constructive, of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn. A plaintiff does not need knowledge of all constituent elements of a claim to “discover” that claim.
Despite the legislature and court’s efforts to simplify the analysis, much debate in litigation remains over this question and in construction the answer is often more complicated.
For example, in 1838120 Ontario Inc. v. Township of East Zorra-Tavistock, the court noted:
“…the limitation period on an invoice, issued for having supplied goods and services in accordance with a contract, does not commence at the time the goods and services are supplied or at the time the invoice was issued and submitted to the payors. Instead, it commences after a ‘reasonable’ period of time has passed for the invoice to be issued and a ‘reasonable’ period of time has passed for the invoice to be paid. What is ‘reasonable’ is context- and circumstance-dependent and follows the parties’ contract and the parties’ past practices with respect to when invoices were issued and submitted and when payments were made.”
In Suncor Energy Products Inc. v. Howe-Baker Engineers, Ltd., the court found that “…it was not until Suncor made it clear to Howe-Baker that they were not going to pay the invoices that Howe-Baker ‘discovered’ that it had a cause of action.”
Although not a construction case, the Ontario Court of Appeal in Apotex Inc. v. Nordion (Canada) Inc. highlighted that the limitation period for breach of contract does not necessarily run from the date of the breach – the party with the claim must also know that the damage occurred.
Often in construction, a party is impacted, but the damage resulting from that impact does not materialize immediately. In law, “damage” and “damages” are distinct concepts: the former refers to the injury caused by the breach, while the latter refers to compensation payable for that injury. Only some damage must occur in order to start the limitation period. This principle is particularly important in construction claims, where the damage may be known but the quantification of damages evolves over time, may be mitigated, and frequently crystallizes only upon project completion.
Further, construction contracts often contain detailed processes and stepped dispute resolution clauses, which further muddy the water as to when a claim is “discovered” for the purposes of the Limitations Act. A legal proceeding is not always the initial and most appropriate means to remedy a dispute.
Impact of Stepped Dispute Resolution Clauses on Limitation Periods
Once a claim or dispute has materialized under a construction contract, there is often a stepped dispute resolution process which adds further complexity.
For example, if the contract requires negotiations, followed by mediation, and only thereafter permits litigation or arbitration – how does this affect the basic limitation period under the Limitations Act?
In PQ Licensing S.A. v. LPQ Central Canada Inc., the Ontario Court of Appeal affirmed that a condition precedent to arbitration can suspend the running of the limitation period until the condition is fulfilled or if a party refuses to engage with the process.
Similarly, in Maisonneuve v. Clark, the court held that the two-year limitation period did not begin to run until it was clear that no informal resolution was possible, because the contract required parties to attempt resolution before arbitration.
At least for contracts with mandatory stepped dispute resolution clauses, courts are moving towards a finding that a claim is “discovered” under the Limitations Act only after the mandatory steps are fulfilled.
But if you are a claimant, are you going to take the risk that a court or tribunal might find otherwise?
Consider also the risk that a court or tribunal may find that your client failed or refused to engage in the stepped process, triggering “discovery” under the Limitations Act.
You probably will not – and you will either (a) commence litigation or arbitration to preserve the claim or (b) seek to enter a tolling agreement.
Tolling Agreements
Section 22(3) of the Limitations Act allows parties to suspend or extend a limitation period by agreement – generally referred to as “tolling agreements.” These allow parties to pause limitation periods to avoid commencing litigation or arbitration prematurely.
Although typically entered into when a dispute is contemplated, there is no reason that parties cannot agree in advance, in their construction contracts, to toll limitation periods.
The Case for Including Tolling Agreements in the Contract
Tolling agreements are particularly useful in construction projects for several reasons:
- Formal disputes disrupt relationships among parties who must continue working together.
- Disputes often arise before damages are fully realized or crystallized, and while opportunities to mitigate may remain.
- Many construction disputes involve multiple parties, and disputes tend to snowball quickly, forcing claims and counterclaims that could otherwise be avoided.
With proposed changes to the Rules of Civil Procedure which contemplate fast-tracked litigation and front-loaded costs, there is even more reason for potential litigants to toll limitation periods until disputes are ripe for resolution and settlement opportunities are exhausted.
So why wait until a dispute arises to negotiate a tolling agreement? Instead, parties can include tolling agreements directly in their construction contracts and design agreements, specifying that limitation periods do not begin until completion of the contract, substantial performance of the project, or another agreed milestone.
In light of contractual dispute resolution processes aimed at resolving disputes before litigation or arbitration, the best way to ensure proper functioning is to remove the risk of claim expiration under the Limitations Act.
Therefore, at the drafting and negotiation stage of construction contracts, parties should strongly consider including a provision that tolls the basic limitation period, avoiding the need to commence actions or arbitrations prematurely.