Breach Of Covenant To Obtain Fire Insurance Coverage For Another Party Means No Claim May Be Made Against That Party: Ontario Court Of Appeal

Those involved in building projects should always be alert to court decisions dealing with insurance, or insurance clauses in contracts, even if those contracts are not building contracts. Those decisions will inevitably impact the interpretation of insurance clauses in building contracts.

So the decision of the Ontario Court of Appeal in Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc., (2016), 130 O.R. (3d) 2016 ONCA 246 should be noted by those involved in the building industry and construction law. In a landlord-tenant setting, the court held that when a tenant covenanted in the lease to obtain fire insurance covering the tenant’s property in which the owner would be named as an additional insured, and failed to obtain insurance in which the landlord was so named, the tenant and its insurer could not recover against the landlord even though the fire was caused by a contractor hired by the landlord.

Changing landlord, tenant and contractor to owner, contractor and subcontractor, the same result would likely apply in the building contract setting.

Background

The lease required the tenant to obtain insurance against all risks of loss or damage to the tenant’s property. If fire insurance was not provided by that insurance, the tenant was required to carry insurance against the risk of damage to its property caused by fire. The lease also required the tenant to include the landlord as an additional insured on the liability and property damage policies. In the lease, the landlord indemnified the tenant for damage arising from the act, default or negligence of the landlord, its agents, contractors and others, and the tenant indemnified the landlord in similar language. The property damage insurance obtained by the tenant did not name the landlord as an additional insured.

A welding contractor engaged by the landlord caused a fire while working at the premises, causing damage to the tenant’s property and business. The limits of the tenant’s property damage insurance policy did not cover the tenant’s losses. The tenant sued the landlord to recover its property and business losses. It sought to recover both the subrogated losses and the uninsured losses.

The motion judge granted summary judgment against the landlord. The landlord’s appeal was allowed by the Court of Appeal.

Decision of the Ontario Court of Appeal

The Court of Appeal held that, by agreeing to obtain insurance against “All Risks of loss or damage to the Tenant’s property” and “against the risk of damage to the tenant’s property within the Premises caused by fire”, the tenant assumed the risk of loss or damage to its own property caused by fire. That covenant relieved the landlord from liability for that loss or damage, even if caused by the landlord’s negligence, unless the lease elsewhere provided to the contrary. The lease did not provide elsewhere to the contrary. The court concluded:

“Here, the parties specifically agreed that the tenant would insure against the risk of loss or damage to its property by fire. That is the very risk that materialized. No coverage exclusion applied under the Lumbermen’s policy and the tenant’s claim was paid to the extent of the policy limits. The fact that, as it happens, the tenant was underinsured for this risk does not mean that its failure to obtain full protective coverage can be laid at the landlord’s door.”

The Court of Appeal also held that the tenant’s failure to obtain insurance, which named the landlord as an additional insured barred its subrogated claim against the landlord, for two reasons.

First, as already found, the tenant had assumed the relevant risk so the tenant’s insurer could be in no better position.

Second, the tenant’s covenant to add the landlord as an additional insured, if honoured, would have barred a subrogated claim by the tenant’s insurer since an insurer cannot sue another insured under the same policy. The court said:

“The tenant’s insurer can be in no better position than that of the tenant itself….where, as here, the risk of loss or damage by a specific peril passes to one contracting party under the terms of its insurance covenant, there is no basis for the covenantor’s insurer to assert a subrogated claim against the beneficiary of the covenant. Simply put, because the covenantor (in this case, the tenant) has contractually assumed the risk of liability for loss or damage caused by a specific peril, neither it nor its insurer can seek to recover for loss or damage caused by that peril from the beneficiary of the insurance covenant (in this case, the landlord). Further, had the tenant complied with its s. 8(5) obligation to have the landlord named as an additional insured on its property damage insurance policy, no right of subrogation for the tenant’s property loss or damage due to fire would arise. An insurer cannot assert a subrogated claim against its own insured…”

Finally, the Court of Appeal held that the covenant whereby the landlord indemnified the tenant did not over-ride the insurance clause, but only applied in the event that the insurance to be obtained by the tenant did not cover the loss. Referring to the approach taken by a judge in a previous decision, the court said:

“Applied to the facts of this case, this interpretive approach gives meaning to all the challenged provisions of the lease. It holds the tenant to its contractual bargain under the tenant’s insurance covenants to assume responsibility for the risk of loss or damage to its own property caused by fire and requires the landlord to indemnify the tenant under the landlord’s indemnity covenant for those types of risks against which the tenant is not required to insure. It also ensures that, under the immunity provision, the landlord is not exposed to negligence claims where the tenant has agreed to insure against an underlying risk, such as fire… “

Discussion

In this decision, the Ontario Court of Appeal has followed and applied previous decisions of that court and the Supreme Court of Canada holding that an insurance clause in a contract, requiring one party to take out insurance, necessarily places the risk of loss specified in that insurance clause on the party required to take out that insurance. Neither that party nor its insurer may then sue the other party for that loss. That result flows from contract law.

And if the insurance clause requires that party to name the other party as an insured in the policy, that is icing on the cake. Due to the principles of subrogation, the insurer cannot sue the other party. That result flows from insurance law.

Perhaps the most interesting aspect of this decision is its resolution of the conflict or tension between the insurance clause and the indemnity clause in the lease. On their face, these clauses seem totally at odds with each other. But then the principles of contract interpretation swing into play. A way must be found to reconcile these seemingly opposing paragraphs. And the court has said that the way to do so is to allow the insurance clause to operate within the coverage that the insurance clause says the party obtaining it is to secure, and to allow the indemnity clause to operate outside that coverage.

Insurance clauses and the impact of a failure to obtain insurance conforming to that clause in the context of construction projects, were discussed by me in previous articles dated February 20, 2012 and June 24, 2012.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., Chapter 14, parts 7and 8.

Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc, (2016), 130 O.R. (3d) 2016 ONCA 246

Insurance – insurance clauses – subrogation – indemnity clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 29, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

 

Contractor’s Contract With The Buyer Of Land Was A Sufficient Reason To Deny A Construction Lien And Unjust Enrichment Claim To The Contractor

In J. Lepera Contracting Inc. v. Royal Timbers Inc. the Ontario Divisional Court recently dealt with a claim in unjust enrichment by a contractor who had done work for the purchaser of land. The purchaser had agreed to buy the land under an agreement of purchase and sale, but later defaulted under that agreement, and then failed to pay the contractor for its work. The land reverted to the selling owner on the purchaser’s default, together with the improvements made by the contractor.

The court concluded that the contractor had no claim against the selling owner under the Construction Lien Act of Ontario because the selling owner had not requested the work. The court also concluded that the contractor had no claim in unjust enrichment against the selling owner because the building contract between the purchaser and the contractor provided a “juristic reason” for the selling owner’s benefit and the contractor’s detriment.

Is this result fair? Should the contractor at least have a lien claim in respect of the greater value of the land due to its work? And if the contractor’s claim does fall outside the lien statute, should the existence of the contractor’s contract with the purchaser entitle the owner/vendor to the benefit of the improvements without payment, and impose that detriment on the contractor?

Background

Royal Timbers owned two plots of land, Lot A and Lot B. It agreed to sell Lot B to Sonoma. Royal Timbers was going to develop Lot A and Sonoma was going to develop Lot B. Royal Timbers and Sonoma hired the same architect who sent out an invitation to tender for work on both lots. The invitation to tender stated that the invitation was being issued by Royal Timbers for Lot A and Sonoma for Lot B. Lepera was the successful bidder for the work to install services on both lots.

Lepera entered into a contract with Royal Timbers to do the services work on Lot A, did that work and was paid by Royal Timbers for that work. Lepera entered into a contract with Sonoma to do the services work on Lot B, did that work and submitted its invoice to Sonoma for the work, and was not paid by Sonoma for that work as Sonoma had defaulted on its agreement to buy Lot B from Royal Timbers.

Lepera filed a lien claim against both Royal Timbers and Sonoma in respect of Lot B. Lepera also asserted a claim in unjust enrichment against Royal Timbers in respect of the work that Lepera had done on Lot B.

The trial dismissed Lepera’s lien claim against Royal Timbers for the work done by Lepera on Lot B on the ground that Royal Timbers had not requested the work to be done on Lot B and was, therefore, not an “owner” of that lot within the meaning of the Construction Lien Act.

The trial judge dismissed Lepera’s unjust enrichment claim against Royal Timbers on the basis that Royal Timbers had not caused the deprivation of Lepera, but rather, the deprivation was caused by Sonoma’s breach of its contract with Lepera.

The Divisional Court’s Judgment

  1. Lien Claim

The Divisional Court upheld the trial judge’s decision with respect to the lien claim. It held that Royal Timbers was not an “owner” with respect to Lot B because Sonoma, not Royal Timbers, had requested that the work be done on Lot B.

The Divisional Court agreed with the trial judge that the invitation to tender established separate tenders for the two lots, and did not constitute a request by Royal Timbers for work on Lot B. In addition, the trial judge was correct in finding that the surrounding facts did not establish a request by Royal Timers with respect to the work on Lot B.

  1. Unjust Enrichment Claim

The Divisional Court disagreed with the trial judge on the role of causation in the law of unjust enrichment. The Divisional Court held that there is no need for the defendant to cause the claimant’s deprivation. The Court said:

“While the deprivation must be linked to the benefit received by the defendant, based on a straightforward economic approach, none of the cases require that the defendant must have caused it.”

However, the Divisional Court upheld the trial judge’s decision on the basis that there was a juridical reason for the deprivation suffered by Lepera, namely, its contract with S. It said:“Lepera’s claim for unjust enrichment cannot succeed on the basis that Lepera’s claim for the monies owing for work it did on Phase 1 arises from its contract with Sonoma. In my view, that contract constitutes a juristic reason sufficient to defeat Lepera’s claim against Royal Timbers in unjust enrichment…Further, on the facts as found by the Trial Judge, it is clear that the reasonable expectations of the parties at the time that the work began was that Lepera would be paid by Sonoma for the work done by it on Phase 1 in accordance with their contract and not by Royal Timbers, with whom it had a separate contract for the work on Phase 2.”

Discussion

This decision raises important issues about the policies underlying the Construction Lien Act and the law of unjust enrichment, and the proper intersection of those policies. If a contractor does work for someone who has agreed to buy land from the owner, should those policies mean that the contractor has neither a construction lien claim against the land nor a claim in unjust enrichment, at least to the extent of the increase in value of the land due to the contractor’s work?

With respect to the Act, if the lien claimant seeks to impose its lien on, and obtain priority against, the seller’s interest in the land, the lien claimant must establish that the seller was an “owner” under the Act by reason of a “request” for the improvement. There are many cases on this point. The present facts seem to cry out for the application of the lien legislation. If the purchaser defaults on the purchase agreement, the lands revert to the seller, and the seller gets the services on the purchased parcel free of charge. According to the logic of the court’s decision it could be the seller that defaults on the purchase contract; the seller would still get the services free of charge on the parcel agreed to be sold.

However, since as early as 1917, in the 3-2 judgment of the Supreme Court of Canada in John A. Marshall Brick Co. v. York Farmers Colonization Co., 1917 CarswellOnt 18, 54 S.C.R. 569, it has been held that a selling owner in this circumstance is not an “owner” under the Act because it did not request the work.

In the John A. Marshall case, the Supreme Court held that, although the contractor could not succeed in its claim that the seller was an “owner’” under the Act, the contractor could assert an alternative claim that the seller’s interest was that of a mortgagee, due to the provisions of what is now section 78(3) of the Act. Accordingly, the contractor was entitled to assert a lien on the increased value of the property after the first lien arose. That issue was not discussed in the present case.

So far as unjust enrichment is concerned, there are cases which hold that a direct contract between the parties may constitute a justification for the detriment to the claimant. But in the present case, there was no direct contract between the selling owner Royal Timbers and the contractor, Lepera.

There are also cases which hold that a subcontractor cannot assert a claim for unjust enrichment against the owner when the subcontractor has a contract with a superior contractor through whom the monies cascading down from the owner are to flow. The contract with the superior contract, and the payment and holdback regime in the lien legislation, have been held to justify any deprivation to the subcontractor if that subcontractor fails to use the lien legislation to protect its interest and assert its claim.

But the present situation does not involve the cascading of money down from the owner in the typical payment and holdback scenario existing in construction projects. Here, the contractor’s contract is with a purchaser of the property and is outside any such cascading or pyramid payment arrangements with the owner. In that scenario, why should the contract with the would-be purchaser be justify the selling owner (to whom the land reverts on the purchaser’s default) obtaining the improvements without paying for them, and for the contractor’s deprivation?

No explanation was provided by the Divisional Court for why Lepera’s contract with Sonoma should be a justification which can be asserted by the selling owner, Royal Timbers, for the deprivation imposed on Lepera and the benefit obtained by Royal Timbers. If the statutory scheme to protect the contractor does not apply, as the court found, should that be the very situation in which unjust enrichment principles should apply?

There are two decisions of the Ontario Court of Appeal on point. In Nicholson v. St. Denis, 1975 CarswellOnt 831, 8 O.R. (2d) 315, the Ontario Court of Appeal held that a contractor who had done work for a purchaser of land did not have an unjust enrichment claim against the selling owner. In that case, however, the selling owner had no knowledge of the improvement made by the contractor, and the contractor had not asserted any lien rights. On the other hand, in Dixon Roof Truss & Building Components Ltd. v. High Street Construction Ltd., 1983 CarswellOnt 730, 43 O.R. (2d) 691, the Ontario Court of Appeal held the selling owner liable to the contractor who had done work for the purchaser, both under the lien legislation and on the basis of unjust enrichment.

In Von Muenchhausen v. S.A. Taylor Building Ltd., 1995 CarswellNB 159, 23 C.L.R. (2d) 177, the New Brunswick Court of Appeal held that the contractor’s contract with A for the construction of a foundation for a house was not a juristic reason for denying an unjust enrichment remedy against B who benefited from the construction.

Since a claimant in unjust enrichment must show that the defendant was enriched, the claimant will have to show that the improvement made by the contractor actually increased the value of the land to the selling owner to whom the lands revert on the purchaser’s default. That may not always be the case since the improvement made for the purchaser of the land may be of no use to the seller of the land. But in the present case, the work was for services to the land and those services seem to have been valuable to the seller. In this respect, it may be that the claim in unjust enrichment arrives at the same result as the alternative lien claim outlined in the John A. Marshall decision, namely, that in each case the contractor has priority over, and a claim against, the increased value of the land after the first lien arises, due to the contractor’s work. That possibility was not explored in the present case.

It is hoped that in the near future appellate courts will explore these potential and alternative claims to the increased value of the land, and also revisit the issue of whether a contract between a contractor and a purchaser of land under an agreement of purchase and sale is, or is not, a good reason to deny the contractor’s claim in unjust enrichment.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 4 and chapter 16, part 4(a)(iv).

J. Lepera Contracting Inc. v. Royal Timbers Inc., 2016 CarswellOnt 15319, 2016 ONSC 2909 (Ont. Div. Ct.)

Construction lien – request by owner for improvement -unjust enrichment – justification for deprivation

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 22, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Privy Council Defines Extra Work Under A Fixed Price Building Contract

In Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius), the Privy Council of the United Kingdom recently set out some helpful principles to define the entitlement of a contractor to extra payment under a fixed price contract. The Privy Council held that the power to award extra payments under a fixed price contract is wider than the parties assumed, and upheld the entitlement of the contractor to extra payment.

Background

Mascareignes (MSC) was the owner and Chang Cheung Esquares (CCE) was the contractor under a contract to build a 13 storey office building. An architect was named in the contract but that architect did not take part in the administration of the contract and MSC terminated his appointment. A quantity surveyor was named in the contract. MSC engaged another architect to assist it in relation to technical matters, but that architect was not appointed under the contract and did not carry out the functions of the architect under the contract.

During the performance of the contract the quantity surveyor produced interim valuations of the work which CCE had carried out. MSC paid the amounts due under those valuations. At the completion of the contract works, the quantity surveyor prepared a final account showing the amount due to CCE by MSC. MSC then informed CCE that it had terminated the quantity surveyor. The arbitrator later found the removal of the quantity surveyor unlawful. MSC refused to pay the sum which the quantity surveyor stated was due in the final valuation.

CCE commenced arbitration and claimed the amount certified in the final account. The arbitrator awarded CCE, among other amounts, the amount which the quantity surveyor had certified as due in the final account. MSC appealed to the Mauritius Supreme Court which dismissed the appeal, and MSC then appealed to the Privy Council.

Decision of the Privy Council

The Privy Council dismissed the appeal. Its decision contains a number of elements which are of interest generally to the law of building contracts:

  1. Fixed Price contract not changed into a Measure and Value contract

The contractor originally alleged, and the arbitrator found, that by reasons of the conduct of the parties after the contract was entered into, the contract should be interpreted to be a measure and value contract.

The Privy Council rejected this approach, and indeed the contractor’s counsel accepted that it was wrong. The contract stated that:

“This contract shall be a fixed price contract and no increase whatsoever will be allowed for material or labour … The Contractor must allow in his prices for any possible increases that may affect their tender during the execution of the Works.”

The Privy Council held that there was nothing in the facts that contradicted the clear terms of the contract stating that it was a lump sum contract and that the arbitrator erred in relying on the subsequent conduct of the parties to construe the contract to be a measure and value contract.

  1. Contractor entitled to extra payment

The Privy Council nevertheless affirmed the decision of the arbitrator on the basis that the payments certified by the quantity surveyor were properly due on the basis of extras due to the contractor under a fixed price contract. The Privy Council made the following points:

a. The building as built was radically different than the building which CCE had agreed to build:

“MSC had radically redesigned the building from that which it proposed when the parties entered into the Contract. [The arbitrator] recorded CCE’s evidence that ‘the building has been completely changed from the initial project as per the contract, and this inside and outside, from the bottom to the top, the height, the look, the structure, the finish.’ ”

b.  The certificates issued by the quantity surveyor during and at the end of the project were due to two factors: the        radical changes to the building and the owner’s failure to appoint an architect to supervise the construction:

“What [the quantity surveyor] did in preparing the interim valuations resulted in part from the absence of an architect to operate the process of interim certification under the contract and in part from the changes that MSC was making at the time to both the design of the building and the allocation of work. What [the quantity surveyor] did in creating the final account statement was consistent with the building contract remaining a lump sum contract but being adapted, in accordance with clause 13.5 of the Contract, to the wholesale changes to the building works and the allocation of work.”

c.  The authority to grant extras to a contractor under a fixed price contract was larger than the parties had assumed:

“In the Board’s view there is more scope for flexibility in valuing additional or substituted work in a lump sum contract than the parties have submitted. Work which is not expressly or impliedly included in the work for which the contracted lump sum is payable is extra work. An early example of this in a much less formal building contract which commissioned work set out in a bill of quantities is Kemp v Rose (1858) 65 ER 910; 1 Giff 258, 268-269 per Vice Chancellor Sir John Stuart. In the present case the lump sum was made up of elements set out in the fully priced bills of quantities which the arbitrator held were part of the contract. There was thus a definition of the works which were the subject of the lump sum, from which the existence of additional or substituted work could be identified.” (underlining added)

d.  The Privy Council set forth a step-by step process for determining whether elements from the contract may be used to value the extra work. If some of those steps do not apply, the Privy council then identified when and to what elements the contract rates and pries, or an unjust enrichment analysis, should be applied:

“Under the [contract…..] additional or substituted work carried out within a lump sum contract may be measured and valued by use of the rates and prices set out in the contract bills if three conditions are met. First, the work must be of a similar character to the work set out in the bills; secondly, the work must be executed in similar conditions to those of the work in the bills; and, thirdly, the work must not significantly change the quantity of the work set out in the bills. If either or both of the second and third conditions are not fulfilled, the valuation can be based on the rates and prices on the bills but a fair allowance must be made for differences in conditions or quantity. If the work is not of a similar character to the work set out in the bills (ie the first condition is not fulfilled) the valuer must use fair rates and prices.” (underling added)

e.  Finally, the valuation of the extras in this fashion was not a contradiction to the contract being a fixed price contract:

“The use of measurement and value to ascertain the value of additional or substituted work is thus not inconsistent with a lump sum contract. In this case, [the quantity surveyor] treated the contract as a lump sum contract by preserving the preliminaries unchanged, but the sums attributed to each of the other components of the contract were significantly altered. Most of the significant works were measured and valued although some items (site works, professional fees and attendance and profit) were valued at figures which the parties had agreed as appropriate in view of the changes to the building and the allocation of work. While it is not correct to say, as the arbitrator did, that the contract was varied to become a measure and value contract, the bulk of the components of the contract were properly valued by measurement and valued in [the quantity surveyor’s] preparation of the final account statement as a consequence of the changes which MSC made to the building and the allocation of work since the signing of the written contract. Accordingly, in the Board’s view, the arbitrator’s mischaracterisation of the nature of the parties’ contract had no bearing on his decision that CCE was entitled to receive the [amount which the quantity surveyor] stated in his final account statement.” (underlining added)

Discussion

This decision contains a useful checklist of the issues which arise when a project is changed by the owner and the contractor incurs further costs. These events will not, without more, change a fixed price contract into a cost plus contract.

But they may entitle the contractor to extras, provided that the contractor has properly asserted and preserved its rights to extra payments. Unless the contract provides otherwise, the contractor is entitled to extra payment for work which does not fall within the express or implied work for which the lump sum is payable.

The Privy Council stated a process by which the extra work may be valued according to the contract values (if there are such values in the contract), or according to unjust enrichment.

-If the extra work is of similar character, conditions and quantity, the contract values may be used.

-If conditions and quantity are different than, but the character is the same as, contemplated in the contract, then the contract rates and prices may be used, but a fair allowance must be made for differences in conditions or quantity.

-If the character of the extra work is different than the contract work, then unjust enrichment principles must be use.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 6, parts 1(b) and 7.

Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius), [2016] UKPC 21

Building contracts – fixed price contract – cost plus contract – extras

Thomas G. Heintzman O.C., Q.C., FCIArb                                                  January 8, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.