LAW ror | PROFESSIONAL _ ENGINEERS Fourth Edition Canadian and Global Insights D. L. MarstonLAW ror PROFESSIONAL ENGINEERS Fourth Edition Canadian and Global Insights Donald L. Marston, B.Sc., P.Eng., LL.B. Barrister & Solicitor Arbitrator, Mediator, and Dispute Resolution Neutral The Osler ADR Centre Toronto, Canada Fellow of the Canadian College of Construction Lawyers Fellow of the American College of Construction Lawyers Special Lecturer in Engineering Law (1976-1997) Faculty of Applied Science and Engineering University of Toronto McGraw-Hill Ryerson Toronto Montréal Boston Burr Ridge, IL. Dubuque, IA Madison, WI New York San Francisco St. Louis Bangkok Bogoté Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan New Delhi Santiago Seoul Singapore Sydney Taipeiara Law for Professional Engineers McGraw-Hill Canadian and Global Insights Ryerson Fourth Edition Copyright © 2008, 1996, 1985, 1981 by McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in a data rettieval s without the prior written permission of McGraw-Hill Ryerson Limited, or in the case of photocopying or other reprographic copying, a licence from The Canadian Copyright Licensing Agency (Access Copyright). For an Access Copyright licence, visit www.accesscopyright.ca or call toll free to 1-800-893-5777. ISBN-13: 978-0-07-098521-6 ISBN-10: 0-07-098521-9 123456789 10TCPO098 Printed and bound in Canada Editorial Director: Joanna Cotton Marketing Manager: Claire Morrison Executive Sponsoring Editor: Leanna MacLean Developmental Editors: Sarah Fulton/Kara Stahl Editorial Associate: Stephanie Hess Senior Production Coordinator: Jennifer Hall Senior Supervising Editor: Anne Nellis Copy Editor: Michael Kelly sign: Blizabeth Priest Cover Image Credit: © Bill Frymire/Masterfile Composition: Laserwords Private Limited Printer: Transcontinental Printing Group Library and Archives Canada Cataloguing in Publication Marston, D. L. (Donald L.), 1939- Law for professional engineers: Canadian and global insights / Donald L. Marston. —4th ed Includes bibliographical references and index. ISBN: 978-0-07-098521-6 1. Engineering law—Canada. 2. Engineering contracts—Canada. 3. Engineers—Legal status, laws, etc —Canada. I. Title. KE2730.M37 2008 346.71002'462 €2007-905559-1 KF2928.M37 2008DEDICATION “To my amazing soulmate, Pauline, without whose bold energies and courageous actions I would have perished on fiery Mt. Btna, October, 1999.” —DLMTABLE OF CONTENTS Preface, 1 THE CANADIAN LEGAL SYSTEM... Historical Basi The Theory of Precedent. The Common Law Legislation. Federal and Provincial Powers The Federal and Provincial Court Systems Public and Private Law The Law of Quebec. The Rule of Law Basic Terminology 2 BUSINESS ORGANIZATIONS .. Basic Forms .. The Independence of the Corporate Entity Duration of Partnerships and Corporations. Effect of Personal Guarantees.. Basic Tax Considerations.......... Summation of Exceptions to Salomon Principle .. The Engineering Corporation ...... The Partnership Agreement .. Limiting Partnership Liability Limited Liability Partnership: Incorporation. Objects .... “Private” and “Public” Corporation: Shareholders, Directors, and Officers .. Shareholders’ Agreements... The Director’s Standard of Care Disclosure of Conflicts. The Joint Venture .. Sample Case Study GLOBAL CONSIDERATIONS... nizations in Foreign Jurisdiction Political Risks Foreign Legal Systemsvi Table of Contents Licensing Requirements. Financial Risks. Contract Form: Global Dispute Resolution Differences between Common Law and Civil Law Arbitration Clauses and Governing Law Provision: UNCITRAL Convention on the International Sale of Goods RAT LIABILITY Fundamental Purpose. Principles of Tort Law. The Engineer’s Standard of Care Development of Tort Law .. Strict Liability ... Vicarious Liability Concurrent Tortfeasors. Products Liability Standard of Care and Duty to Warn Economic Loss. Other Relevant Torts ... Sample Case Studies... ‘5 LuMITATION PERIODS Discoverability .... The Limitations Act, 22 (Ontario) .. 26 Amendments (Ontario) Other Aspects in Ontario Other Provinces and Territories Sample Case Study..... 6 PROOF..... The Burden of Proo’ Engineers as Expert Witnes CONTRACTS Assignment of Right 8 OFFER AND ACCEPTANCE. Irrevocable Offers The Option Contract Manner of Communicatio The Battle of the Forms Sample Case Study .... 9 |NTENT Mutual Intent. Letters of Intent...Table of Contents vii 10 CONSIDERATION Consideration .... Equitable Estoppel Sample Case Study .. rete Minors... Mental Incompetenc Corporations.. 12 VEGA LITY... Contrary to Statute Law .. Coptrary to Common Law . SAmple Case Study .... 13/THE STATUTE OF FRAUDS.. \/ Derivation of Statute... 104 . 107 108 108 108 \/ AND UNDUE INFLUENCE - 109 Misrepresentation. 109 110 110 WW 113 ~115 M5 ~~ Rectification. Unilateral Mistake 15 Ron Engineering's “Contract A” 120 16 JENDERING ISSUES — CONTRACT A..... 121 Express and Implied Terms of Contract A 123 The Owner’s Option to Reject All Bids and Start Again...... 125 Advisability of Legal Advice when Doubts Arist 125 Subcontractors’ Bids — Some Illustrative Cases 125 Potential Liabilities for Engineers and Consultants on Tendering Matters... in Stanco Project: fle of Contra Proferentem arol Evidence Rule. Implied Term: Study Questionsviii 18 \ Aerformance as a Means of Discharge. 19 Remedies Table of Contents DISCHARGE OF CONTRACTS... Agreement to Discharge. Discharge Pursuant to Express Terms.. Discharge by Frustration Sample Case Study ..... BREACH OF CONTRACT. Repudiation... Direct and Indirect Damage: Duty to Mitigate. Penalty Clauses Quantum Meruit Substantial Compliance . Specific Performance and Injunction Specific Performance .. Injunction. Study Question: FUNDAMENTAL BREACH Sample Case Study ... THE AGREEMENT BETWEEN CLIENT AND ENGINEER The Agency Relationship The Engineer's Remuneration. Estimated Fee... Standard-Form Engineering Agreements Limiting Liability by Contract Engineer's Compliance with the Law Planning and Zoning... 22 CONCURRENT LIABILITY IN TORT 23. 24 CONSTRUCTION CONTRACTS “ Certificates Fraudulently Prepared... AND CONTRACT..... THE DUTY OF HONESTY... Inspection Service The Engineer’s Advice to the Contractor. Contract Administration... Drawings and Specifications. ‘The Tendering Process Types and Forms of Construction Contract Project Management...Table of Contents ix Prime Contract and Subcontracts.. 194 Delay and Interference Claim: 194 Compliance with Notice Provisions. 195 Departures from Traditional Contracting Approaches. 198 Similarities between Canadian and American Construction Industries ... Study Questions .... 25 RISKS IN CONSTRUCTION Project Structuring ... Contract Forms...... Contractual Allocation of Risk .. Project Financing Risk.... Risk of Concealed or Unknown Conditions Risk of Delays. The Risk of Toxic and Hazardous Substances and Materials The Risk of Changes in Governing Regulations. Construction Safety Risks... Dispute Resolution Risks... Risk of Proceeding with Changes without Final Agreement on Price and Time Adjustments .... Risk Summary. Security for Ri: The Risk of Unenforceability of Clauses Limited Liability Risks Relating to Limitation Perio. Alliancing Agreement. 26 BONDS AND INTERNATIONAL PERFORMANCE GUARANTEES Bid Bond. Performance Bond .... Labour and Material-Payment Bond Letters of Credit... International Performance Guarante 27 SUBSURFACE ISSUES... Contractor Responsible for Quantity Estimates. Damage to Other Existing Facilities Duty to Disclose Correct Informatior pics Dictated by Contract Documents. 28/ ARBITRATION AND ADR .. Appointment of Arbitratot Arbitration Statutes...... | : : :x Table of Contents New Approaches to Respond to Dispute Resolution Difficulties on Construction Projects..... 29 ADR ON INTERNATIONAL PROJECTS. Recognition of the Problem The Consultant’s Conflict Dispute Resolution Boards on Canadian and International Projects Corfclusion 30 LIEN LEGISLATION ... Differences in Provincial Lien Acts. Persons Entitled to Lien Right: Rights Against Owner Where No Contract Effect of Lien... The Ontario Construct The Trust Fund.. Engineers’ Rights to Lien Claim: Lien Statutes... 31 THE COMPETITION ACT... Misleading Advertising. Bid-Rigging. Conspiracy Trade Associations 32 REGULATORY ASPECTS AND ETHICS Purpose of Legislation .. Definition of Pro’ Professional Engineer's Seal Partnerships and Corporations Disciplinary Hearings .. Penalties woe Certificates of Authorization. Overlapping in the Scope of Engineering and Architectural Practices... 7 Background to Changes in Ontario Legislation. Litigation versus Disciplinary Matter The Code of Ethics. 33, INTELLECTUAL PROPERTY ~ Patents of Invention... Trade-Marks Passing Off Copyright . Industrial Designs Trade Secrets...Table of Contents xi 34 THE LAW OF QUEBEC Tntroduction..... The Civil Code of Quebec Contractual and Extracontractual Interpretation of Contracts Limitation of Liability. Force Majeure .... Disclosure of Trade Secrets Assessment of Damages Penal Clauses . Manufacturer’s Liability The Contract of Enterprise or for Services Presumption of Liability Legal Hypothecs Conclusions... 35 THE NORTH AMERICAN FREE TRADE AGREEMENT..... The Canada~United States Free Trade Agreement North American Free Trade Agreement Construction and NAFTA ... ‘Temporary Entry of Individuals into Canada under NAFTA. “ soseeeeeee 314 7 36/LAWS RELATING TO EMPLOYMENT Federal Laws Provincial Laws Provincial Statutes — Ontario... APPENDIX: COMMENTARY AND SAMPLE CASE STUDIES FOR ENGINEERING LAW COURSES AND EXAMINATION PROGRAMS Commentary Additional Samp! Sample Tort Cases... Sample Contract Law Case: TABLE OF ABBREVIATIONS TO CASE AND STATUTE CITATION TABLE OF CASES INDEX .....ABOUT THE AUTHOR Don Marston has been a registered pro- fessional engineer in Ontario since 1965 and a barrister and solicitor and member of the Law Society of Upper Canada since 1973. Throughout his law career, his Canadian and international practice has focused on construction law, engi- neering, and infrastructure project mat- ters. His broad experience has included “front end” contract negotiation as well as litigation and alternative dispute reso- lution (ADR). His ADR practice as an arbitrator, mediator, and dispute resolution neutral involves him in both Canadian and international issues. Don’s first edition of this text was published in 1981, inspired during the early years of his teaching engineering law and profes- sional liability courses at the University of Toronto, a teaching engagement he thoroughly enjoyed for more than 20 years. The first publication of this text also coincided with the implementa- tion by Professional Engineers Ontario (PEO) of its professional practice examination program for candidates for licensure as professional engineers in Ontario. Don has been responsible for setting and marking the engineering law examination portion of those professional practice examinations since 1981. Experienced on PEO committee and task force initiatives over the years, Don is currently a member of PEO’s Enforcement Com- mittee. A long-time partner of the law firm Osler, Hoskin & Harcourt LLP, Don was the founder of its Construction Law and Infra- structure Group and a member of the firm’s Commercial Arbitra- tion Group. Now at the Osler ADR Centre, he is an international arbitrator, mediator, and dispute resolution neutral. His disputexiv About the Author resolution board experience includes chairing roles on major projects in Eastern Europe and in New Brunswick. His arbitra- tion and mediation experience also includes both Canadian and international disputes. Don’s participation in professional organizations is extensive. He is a fellow of both the American College of Construction Law- yers and the Canadian College of Construction Lawyers, former chair of the International Construction Projects Committee of the International Bar Association, former chair of the Construction Law Section of the Canadian Bar Association (Ontario); and a member of the International Dispute Resolution Board Founda- tion. He is also the Canadian correspondent to the International Construction Law Review.PREFACE Consistent with the objective of the first edition of this text in 1981, the primary purpose of this fourth edition is to provide a reference law text to serve the Canadian engineering profession. It has also been written to: * assist candidates preparing for Canadian professional practice engineering law examinations requisite for licensure as profes- sional engineers; * update particular aspects of the law that have seen signifi- cant change through court decisions and legislation, including Canadian court decisions relating to Canada’s tendering laws and legislative changes in Ontario relating to limitation periods applicable to engineers, consultants, and contractors; and * expand the insights into international legal issues to assist engi- neers engaged, or interested, in the global marketplace. CANADA IN THE GLOBAL CONTEXT Canada’s tendering laws are of relevance to the awarding of contracts on engineering, construction, infrastructure, and other Projects. It is very important for engineers engaged in contract administration in Canada to be aware of the issues that can arise in tendering. Canadian engineers play important leadership roles on a broad range of Canadian and international projects. The increased focus on the protection of the world’s natural environment, the need for cleaner energy sources, and the continuing demands for attention to these and other infrastructure needs, such as water treatment and transportation, are amongst the global demands that will con- tinue to increase the need for engineering leadership. The inter- est of governments in privatizing these infrastructure initiatives in Canada and abroad, through public/private partnerships, andxvi Preface build-operate-transfer (BOT) and similar hybrid projects, can lead to contractual complexities for engineers. Given the globalization of project opportunities, this fourth edi- tion expands on insights into selected legal and business consider- ations relating to participation in the world marketplace. Amongst these are a summary of some distinctions between common-law and civil-law systems and an explanation of creative dispute reso- lution techniques being implemented in Canada and elsewhere Focus of the Text Although broad in scope, this is not an exhaustive legal text. It deals with selected areas of the law. The approach taken has been to focus on salient aspects of the law in these areas and to illustrate issues and principles through summaries of selected court deci- sions. Obviously the purpose of this text is not to make lawyers of engineers, but rather to provide engineers with insights into legal issues and principles that can be applied in advantageously planning contracts and in dealing with legal issues should they arise. This is a general reference text. It is not a substitute for appro- priate legal advice on particular matters. It is most important for engineers to appreciate the advisability of taking specific legal advice. Such advice is highly recommended in the interest of avoiding problems through preventive planning and contracting, and is essential should legal problems arise. In its focus on fundamentals and legal principles of relevance to engineers, this book includes certain statutory examples that place emphasis on Ontario legislation, but some similar statutes of other common-law provinces are generally referenced. The chap- ter on the law of Quebec, as relevant to engineers, has also been updated. It is important that Canadian engineers are aware of the unique nature within Canada of the civil-law system in the prov- ince of Quebec. Exam Preparation To further assist candidates preparing for engineering law exami- nations, some additional samples of typical examination questions have been added, together with examples and guidance on how to analyze, identity issues, and explain applicable legal principles in answering examination questions. The appendix on examination preparation at the back of the text is strongly recommended to all examination candidates.Preface xvii Acknowledgments The broad scope of areas of the law summarized in this text has generated the need to update and revise several chapters in this fourth edition dealing with some specialty areas and specific issues. In this regard, I am very grateful for the excellent assist- ance of the following lawyers, who are some of my long-time partners and associates at Osler, Hoskin & Harcourt LLP: + Brian Bucknall (development and subdivision issues, Chapter 21); + Jan Karov (common law and civil law differences, Chapter 3); * Michelle MacGillivray (employment law, Chapter 36); * Lee Muirhead (competition law, Chapter 31, and intellectual property, Chapter 33); + Leigh Walters (intellectual property, Chapter 33); and + Allan Wells (employment law, Chapter 36). A very special thank-you is in order to my friend and colleague Carlo Greco of Osler, Hoskin & Harcourt LLP, who has me over many years in connection with the PEO prof practice engineering law examination program and has contrib- uted to the sample case studies in the appendix. 1am also most grateful to my friend and colleague Olivier F. Kott, LL.L. of the law firm Ogilvy Renault in Montreal, who has kindly updated Chapter 34, “The Law of Quebec.” His insights into legal issues of relevance to engineers in the province of Quebec are an important contribution to this fourth edition and a most valuable reference for the benefit of engineers practising, or engaged in transactions or projects, in the province of Quebec. I would be remiss indeed if I did not also acknowledge the important opportunities to gain insights into engineering, con- struction, and infrastructure law through my many years of prac- tice as a partner of the construction law and infrastructure project group at Osler, Hoskin and Harcourt LLP. Many of the project insights and dispute resolution aspects reflected in this text have been derived through my partnership practice experiences with leading construction lawyers Bob Beaumont, Rocco Sebastiano, Harvey Kirsh, and Paul Ivanoff. My Canadian and international ADR practise as an arbitrator, mediator, and dispute resolution neutral also provides me with significant insights into the important engineering law issues described in this text. I am fortunate to practice in an area that is of such enormous personal interest. Donald L. Marston, June 2007CHAPTER ONE THE CANADIAN © LEGAL SYSTEM HISTORICAL BASIS The legal system of the nine common-law provinces and the ter- Titories of Canada is based upon the English common-law sys- tem. It is important to understand something of the evolution of the English system in order to appreciate how the Canadian system operates. ALone of its early states of development, the English legal sys- tem was very rigid. Certain specific remedies were available in only certain circumstances. This system of specific remedies was called the “common law.” As time passed, it became evident that the specific remedies provided by the common-law courts were not sufficient. Where relief beyond the scope of the common law was sought, special appeals were made to the English monarch; if the monarch saw fit to exercise his or her discretion, a rem- edy more “equitable” than that provided by the common law was declared. Eventually, the English “courts of equity” were devel- oped as a separate court system, providing more reasonable rem- edies as circumstances required. As pointed out in Black's Law Dictionary, the term “equity,” in its broadest and most general sense, denotes a spirit of fairness, justness, and right dealing ... grounded in the precepts of conscience. Eventually, the two systems — the old common-law system and the courts of equity — were combined, and an improved system was developed to provide remedies premised on both common-law precedents and on equitable principles. This improved system continued to be called the common law, and is the system from which the present Canadian common-law system evolved.2 Chapter One THE THEORY OF PRECEDENT In deciding cases, the courts apply legal principles established in previous court decisions that involved similar or analogous fact situations; this is called “the theory of precedent.” But the courts also dispense equitable relief and thus there is flexibility in the court’s decision-making process. At times, to slavishly follow precedent would not reflect society’s values: hence a court can exercise its equitable discretion to reach a policy decision that may represent a departure from case precedents. Factual distinctions between cases may also provide the basis for flexibility. A court may see fit to dismiss i a precedent on the basis of relatively minor factual distinctions between the precedent and the facts of the case before the court, provided the end result is justified. However, departures from established precedents are often very slow to evolve. This slow evolution is a characteristic of our legal system that may, at times, be criticized; nevertheless, the theory of precedent is of major importance and is the basis of predictability in the legal system. THE COMMON LAW A major source of law is “judge-made law” — court decisions establishing legal principles. LEGISLATION In addition to the common law or judge-made law, an extremely important source of law is “legislation” — statutes enacted by elected legislatures. A “statute” is a codification of the law as the legislature determines at the time of enactment; it may be codifi- cation of existing common law or the enactment of new law. Applicability of a statute can be question in a lawsuit; if so, itis up to the court to determine whether the statute does apply to the facts of the case. The court must apply the statute appropriately. Some statutes provide for regulations as a further source of law. The Professional Engineers Act of Ontario! (and similar statutes of other common-law provinces), for example, provides that an ' RS.O. 1990, c. p-28 (Note that, in the interests of brevity, statute citations throughout the text do not include amendments.)The Canadian Legal System 3 elected and appointed council may prescribe the scope and con- duct of examinations of candidates for registration; and may regu- late other matters, such as the designation of specialists. When made in accordance with an authorizing statute, regula- tions are another source of law. Many statutes are relevant to the professional engineer. It is important that the engineer complies with federal and provincial statutes of relevance to his or her practice and that the engineer is aware of amendments and new statutes. FEDERAL AND PROVINCIAL POWERS Under the Canadian Constitution, the British North America Act, 1867 (renamed the Constitution Act, 1982), the federal govern- ment and the provinces have authority to enact legislation. The division of powers between the federal government and the prov- inces is expressed in Sections 91 and 92 of the Constitution Act, 1867, excerpts from which are reproduced, for illustrative pur- poses, as follows: 91. It shall be lawful for the Queen, by and with the Advice and Consent of the Senate and House of Commons, to make Laws for the Peace, Order, and good Government of Canada, in relation to all Matters not coming within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces; and for greater Certainty, but not so as to restrict the Generality of the foregoing Terms of this Section, it is hereby declared that (notwithstanding anything in this Act) the exclusive Legislative Authority of the Parliament of Canada extends to all Matters coming within the Classes of Subjects next herein-after enumerated; that is to say,.... 2. The Regulation of Trade and Commerce... 3. The raising of Money by any Mode or System of Taxation... 10, Navigation and Shipping... 15. Banking, Incorporation of Banks, and the Issue of Paper Money.. 21. Bankruptcy and Insolvency. 22. Patents of Invention and Discovery. 23. Copyrights... CanadaSubjects of Exclusive Provincial Legislation 4 Chapter One 27. The Criminal Law.... 29. Such Classes of Subjects as are expressly excepted in the Enumeration of the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces. And any Matter coming within any of the Classes of Subjects enumerated in this Section shall not be deemed to come within the Class of Matters of a local or private Nature comprised in the Enumeration of the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces. Exclusive Powers of Provincial Legislatures 92. In each Province the Legislature may exclusively make Laws in relation to Matters coming within the Classes of Subject next hereinafter enumerated; that is to say, 2. Direct Taxation within the Province in order to the rais- ing of a Revenue for Provincial Purpose: 5. The Management and Sale of the Public Lands belonging to the Province and of the Timber and Wood thereon. ... 10. Local Works and Undertakings other than such as are of the following Classes: — (a) Lines of Steam or other Ships, Railways, Canals, Telegraphs, and other Works and Undertakings connecting the Province with any other or others of the Provinces, or extending beyond the Limiis of the Province; (b) Lines of Steam Ships between the Province and any British or Foreign Country; (c) Such Works as, although wholly situate within the Province, are before or after their Execution declared by the Parliament of Canada to be for the general Advantage of Canada or for the Advantage of Two or more of the Provinces. 11. The Incorporation of Companies with Provincial Objects... 13. Property and Civil Rights in the Province. 14. The Administration of Justice in the Province, includ- ing the Constitution, Maintenance, and Organization of Provincial Courts, both of Civil and of Criminal