By David Little and Charlene Hiller

We were there

The last few years have been tumultuous for the infrastructure industry. What was previously a market characterized by low interest rates, high risk transfer contracts and a steady supply of bidders, gave way after several largescale, global disruptions like the COVID-19 pandemic, the Ukraine War and natural disasters that may have been caused or contributed to by climate change. These events changed risk tolerance to a much more restrictive and competitive environment plagued by:

  1. A scarcity of bidders, as a limited number of companies had the capital and capabilities to deal with long-term infrastructure projects, including the availability of labour to execute large projects, especially remotely located ones.
  2. A reduced capacity in the bonding and insurance markets.
  3. Cost escalation that hit the industry earlier and harder than economy-wide inflation.
  4. High-risk transfer contracts turning out poorly as risks such as schedule delays and quality issues materialized.

Despite these problems, the demand for infrastructure has not decreased. Pre-existing infrastructure deficits are magnified as Canada’s population is growing at a record-setting pace and now exceeds 40 million. In 2022, the number of Canadians rose by over 1 million—the first time this has ever happened in a single year.

This surging growth in the Canadian population means that infrastructure is needed in Canada now more than ever, and governments are making these projects a priority, despite the state of a challenged infrastructure market. Millions of new Canadians will need new, renovated or expanded hospitals, schools, universities, roads, transit systems, municipal support infrastructure, mental health facilities, long-term care facilities and other infrastructure. The focus on new housing will also continue to add additional pressures.

We are here

Despite the previously mentioned issues affecting our current infrastructure market, the increasing demand means that there is no choice for project owners, and they must adapt their procurement processes to get projects done.

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Meanwhile, several legal trends have emerged, including, a rise in new procurement and contract models, with a focus on collaboration; an emphasis on good faith in negotiations; and a shift to and focus on arbitration rather than litigation.

New procurement models and collaboration

The state of the market has resulted in a continued movement towards procurement models that are more attractive to bidders, such as those that reduce bid pursuit costs, lead to earlier engagement, and contain more shared or owner retained risks. We see these changes within our contracts including progressive design builds, alliances, integrated project delivery and contract models with staged work-in phases. In addition to the newer models, we see a distinct return to construction management contracts as compared with previous contract models focusing on high-risk transfer.

We have also seen a shift towards collaborative project delivery models for Canadian infrastructure in recent years. This shift is being driven by contractor and developer concerns about assuming risk in a market characterized by rising and unpredictable costs. The last few years have seen market uncertainties pile up in Canada, from labour shortages and supply chain issues to volatile commodities prices and climate change issues like floods and fires. As a result, contractors and developers are seeking project delivery models where they can raise these concerns and address them collaboratively with owners.

This is not to say that every single contract model is being replaced. Design-Build and public private partnership (P3) contracts can still be found. However, the way that parties ultimately arrive at a Design-Build or P3 contract may not be as simple as a straightforward bidding process any longer. For example, it is not uncommon to see alternative arrangements such as a development phase agreement or a design early works agreement (DEWA) used to concurrently develop design while proceeding with contract negotiation, and these include off-ramps and rights to protect against the risks that would materialize if the final contract cannot ultimately be negotiated.

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Good faith

A 2014 Supreme Court of Canada decision (Bhasin v Hrynew) introduced the concept of good faith conduct to commercial relationships. Since this decision, good faith has become firmly entrenched in common law and is an evolving topic for infrastructure construction disputes.

Previously, parties were generally able to assume that if the contract included items like discretion clauses or renewal rights, that clearly gave one party sole discretion, they may have been able to act in a discretionary, self-interested way.

Now, duties of good faith mean that behaviour matters. Contracting parties need to think about their conduct. They cannot simply read the contract on its own. The behaviour must match the contract. Sometimes, it means disclosing a position or view in a contract that could otherwise be misleading. Sometimes, purposely leaving out relevant information can be construed as bad faith. Circumstance matters.

When it comes to disputes, the duty of good faith may require more work and analysis. It is not entirely clear how far these duties are headed, but the trend towards alleging breach of good faith in contractual behaviour and disputes continues to gain momentum.

Arbitration

Disputes are unfortunately common in infrastructure development projects. Using litigation to solve them, however, is becoming increasingly rare for many reasons, including an inability to get timely resolution in court, high costs on all sides, lack of subject matter expert decision-makers and the public nature of court proceedings. More and more, disputes are being resolved by alternative means such as arbitration. The biggest differences between litigation and arbitration are that arbitration costs are lower, and the resolutions are not made public. It is unclear what this trend means for the development of construction and infrastructure law in Canada when we do not have courts making public decisions and precedent-setting caselaw, but this is certainly an important trend to watch.

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Where are we going?

It is hard to predict where the infrastructure market will go next but based on a continuing high demand for reduced risk and greater cost certainly, it looks like lower risk transfer contracts and innovative contracting models and solutions will remain the industry focus and will continue to be further developed and utilized.

If it turns out the infrastructure market continues to trend in the current direction, then governments and companies may need to be even more open to new solutions. For example, there may be a renewed interest in encouraging and evaluating unsolicited proposals, where private entities propose innovative, unique, or proprietary solutions to public infrastructure needs they have identified.

We should, however, also prepare for the market to learn and adapt to risks such as supply chain disruptions, force majeure, interest rate fluctuations, pricing demands and labour shortages, and return to a market in which risk is priced at a reasonable level. If that happens, it is possible that we will see a return, where appropriate, to fixed price and fixed schedule contracting strategies, which have the benefit of providing certainty for owners and profit opportunities for bidders.

 

David Little is a partner in Bennett Jones’ Vancouver office, focusing on construction and infrastructure, procurement, public private partnerships, development, and service delivery.

Charlene Hiller is a partner in Bennett Jones’ Vancouver office, practicing law related to capital projects, construction and infrastructure, procurement, and service delivery. 

[This article originally appeared in the March/April 2024 edition of ReNew Canada]

Featured image: As Canada’s population continues to grow we will need healthcare infrastructure, such as the Projet Hôpital Vaudreuil-Soulanges, in Vaudreuil-Dorion, Que. (CISS)

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