Q4 | Torys QuarterlyFall 2023

Managing litigation risk on infrastructure and energy projects

This article is also part of our Litigation risk outlook for 2024.

To manage the risks associated with developing large infrastructure and energy projects, it is essential that owners, contractors and other project participants consider litigation risks during planning, contract negotiation and throughout project execution prior to disputes arising. This article addresses five risks that regularly give rise to construction disputes and provides suggestions for how to manage those risks at the front end.

1. Force majeure

Force majeure emerged as a major source of disputes during the COVID-19 pandemic. For infrastructure and energy projects, the costs of these disputes and the amounts at stake can be significant. But it is not just COVID-19 that has triggered increased force majeure risk. With the growing frequency of natural disasters driven by climate change (e.g., forest fires affecting projects across the country in recent years), we expect to see force majeure events continue to be a significant source of risk going forward.

Mitigating risk

Parties can take steps to control force majeure risk both at the contract negotiation stage and during project execution.

Contract negotiation

Courts will apply force majeure clauses in accordance with their wording when determining the parties’ rights. It is important that parties tailor their force majeure clauses to their needs as well as to reflect the commercial allocation of risk for such events. Parties should consider whether the clause covers the intended scope of impacts to a project of a force majeure event—for example, is it clear what constitutes a force majeure event? Does the clause provide for both schedule relief and cost relief? Are there categories of costs that are not protected, such as the cost of financing the increased project costs? Are there reasonable limits to the relief a party can obtain? Does the clause exclude relief for consequences which a party could avoid?

Project execution

When a potential force majeure event arises during project execution, it is critical to document the existence and impacts of the force majeure and all efforts to mitigate any losses. Having detailed contemporaneous records to prove the facts in real time, and demonstrate diligence, can help to minimize the potential for disputes.

2. Planning and budgeting

Inadequate project planning and unrealistic budgeting assumptions made at the procurement stage of a project can result in significant litigation risk during project execution when plans cannot be realized and the facts on the ground turn out to be different than what was assumed. This is especially true in large-scale energy and infrastructure projects. Incorrect assumptions and insufficient planning relating to geotechnical conditions, project access (especially for remote projects), stakeholder consultation (including obtaining required consents from First Nations or other land users), and budgeting that is vulnerable to supply chain and labour market fluctuations can lead to costly disputes.

Mitigating risk

There are two principal means to mitigate this type of planning and budgeting risk: due diligence during procurement and contractual allocation of risk. Ideally, project proponents are given the time and information needed to conduct detailed upfront planning and pricing before bidding on a project. But that is not always feasible. Where a material risk cannot be fully assessed or priced at the procurement stage, it is important to clearly allocate the risk contractually—making clear who bears the risk, the limits on the risk (e.g., through limitation of liability or exclusion of liability clauses), and whether the risk falls inside or outside the scope of applicable force majeure clauses or similar provisions. We are seeing models such as the collaborative contracting project model emerging to address risk allocation and other budgeting and project governance considerations for large and complex projects. 

3. Insurance risk

Fluctuations in the insurance market can make it increasingly difficult to secure project-specific liability insurance in sufficient dollar amounts for use in larger projects. Even when the required quantum of coverage is available, exclusions and other coverage restrictions, as well as the interplay between insurance policies, can create uncertainty over the extent of protection afforded by insurance. This uncertainty creates added risk during dispute resolution.

Mitigating risk

To minimize exposure to uninsured risk and insurance-related dispute risk, it is important to pay attention to the precise scope and terms of insurance coverage when negotiating the project contracts. Parties should assess the appropriate quantum and structure of insurance coverage, taking into account the scope and complexity of the project. If it is challenging to secure a prudent quantum of project-specific coverage, consideration will need to be given to whether the parties’ own liability coverage provides sufficient protection or whether alternative means of securing payment in the event of liability are needed. When securing insurance for the project, care should be taken to ensure that ambiguities or gaps in coverage are identified and resolved at the contracting stage to minimize the potential that unintended risk materializes later when disputes arise.

4. Permitting and licensing concerns

Licences and permits are vital to infrastructure and energy projects. Delays in obtaining the necessary permits and licences can have a significant impact on the construction schedule, especially for large or remote projects and where permits are needed from multiple government agencies. When the project agreement is unclear about who bears permitting risk, including the risk for delay caused by late permit or licence approval, litigation risk increases.

Mitigating risk

To mitigate the risk of permitting-related litigation, parties should clearly identify at the contracting stage what permits and licences are required—and who is responsible for obtaining them and when. Risk should be clearly allocated to cover schedule or cost impacts if permits or licences approvals are delayed.

5. Indigenous engagement

Major infrastructure and energy projects typically involve government action that will affect Indigenous peoples. Properly discharging the duty to consult affected Indigenous peoples is required before construction can begin. It is also essential to ensure that Indigenous peoples are meaningfully included in project-related planning and during project construction. Failure to properly consult and involve Indigenous peoples throughout the planning and construction phases of a project can be harmful to the Indigenous peoples involved. If not resolved early, these issues can lead to project delays and disruption, and ultimately to disputes and litigation.

Mitigating risk

In order to minimize these risks, it is important that parties identify their consultation and engagement obligations up front and expressly address their engagement obligations during the project. This is a significant exercise that requires identifying affected groups, as well as considering both the non-Indigenous and Indigenous legal protocols and orders. During construction, it is important that parties keep open lines of communication with local Indigenous communities to ensure transparency and flexibility in mobilization and construction planning.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

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