Supreme Court Finds Contractor Has A Duty To Tell Sub-Subcontractors About The Existence Of A Payment Bond

Third parties

In a much anticipated decision, the Supreme Court of Canada has recently held that a contractor which is a trustee under a payment bond has an obligation to advise sub-contractors of the existence of the bond applicable to the project.

In Valard Construction Ltd. v. Bird Construction Co., 2018 CarswellAlta 261, 2018 SCC 8, the Supreme Court reversed the decisions of the Alberta courts below, and set aside over 40 years of lower court decisions which had held that owners and contractors had no such duty.

Background

Bird was the general contractor on an oilsand construction project near Fort McMurray, Alberta. Bird subcontracted the electrical work to Langford, and that subcontract required Langford to obtain a labour and materials payment bond.

That bond was in the standard form CCDC 222-2002 format. It was issued by the Guarantee Company of North America for $659,671. The bond named Bird as Obligee, Langford as Principal, and the Guarantee Company as Surety.

Under the terms of the bond, a beneficiary of the bond was a provider of work/labour or materials who had not received payment from Langford within 90 days of the last day upon which it provided work/labour or materials. The beneficiary was entitled to sue Guarantee on the bond for the unpaid amount. The bond designated Bird as the trustee, holding in trust for the beneficiaries their right to recover from Guarantee. The bond required the beneficiary to give note of its claim to Langford, Guarantee and Bird within 120 days of its last provision of work/labour or materials.

Neither the bond, nor notice of it, was posted on the notice board at the work site. Neither Bird nor anyone on its behalf notified Valard of the bond’s existence. Valard was unaware of the bond until after the 120 day notice period had expired. .

Valard began its work on March 17, 2009 and finished on May 20, 2009. At that date, unknown to Valard, the 120 day notice period under the bond started to run.

Valard’s invoices went unpaid by Langford and on March 9, 2010, it was granted default judgment against Langford for $660,000. By then, Langford was insolvent.

In April 2010, or about seven months after the 120 day notice period under the bond had expired, Valard’s project manager learned that there was a payment bond on another project upon which it and Bird were engaged. Valard inquired of Bird whether there had been a payment bond on the project on which it had not been paid, and was told Yes. This was a surprise to Valard’s project manager since he had never encountered a payment bond on a privately owned oilsands project.

Valard then filed a claim with Guarantee for the unpaid amount. Guarantee denied the claim due to Valard’s failure to give timely notice of its claim. Valard then sued Bird for breach of trust, alleging that Bird had failed to inform the beneficiaries of the bond of the existence of the bond and their right of action provided by the bond.

The Alberta Court of Queen’s Bench and the Alberta Court of Appeal dismissed Valard’s claim. Those decisions were reviewed by me in articles dated April 15, 2016 and May 25, 2017. Basically, those courts held that subcontractors on construction projects have a duty to look after their own self-interest and make their own inquiries about the existence of payment bonds; and that since a decision of an Ontario county court judge back in 1970, it has been the understanding in the construction industry that owners or contractors, when they act as a trustee under a payment bond, do not have the obligation to advise subcontractors and sub-subcontractors of the existence of a payment bond.

Decision of the Supreme Court

In reversing the courts below, the majority of the Supreme Court applied the following reasoning:

  1. A trustee has a duty to disclose to the beneficiaries the existence of the trust wherever it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed of the trust’s existence:

“Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates, and in light of the beneficiary’s entitlement thereunder. For example, where the enforcement of the trust requires that the beneficiary receive notice of the trust’s existence, and the beneficiary would not otherwise have such knowledge, a duty to disclose will arise. On the other hand, “where the interest of the beneficiary is remote in the sense that vesting is most unlikely, or the opportunity for the power or discretion to be exercised is equally unlikely”, it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence.

  1. Valard was unreasonably disadvantaged by Bird’s failure to inform it of the trust’s existence:

“Valard required knowledge of the trust in order to enforce it. The expiry of the 120-day notice period before Valard learned of the bond effectively prevented it from enforcing the trust by making a claim against the Guarantee Company and recovering sums owed under its contract with Langford. I would therefore find that Bird, as trustee, had a duty to disclose the bond’s existence to Valard.”

  1. While one of the purposes, and perhaps the main purpose of payment bonds is to protect the trustee — being the owner or a general contractor — from the risk and expense of liens, that purpose can only be meaningful if the beneficiaries are capable of enforcing the bond. Accordingly, the proper operation of the trust “tends to affirm rather than negate the necessity of disclosing their existence.”
  1. While there are longstanding lower court decisions holding that a contractor does not have a duty to inform sub-subcontractors about the existence of a bond applicable to a construction project, that does not prove that there is an understanding and practice in the construction industry to this effect. The existence of such a trade practice or understanding is a matter of fact and would have to be proven by evidence.   The evidence before the court in this case was that payment bonds were uncommon on private oilsands construction projects.
  1. The entitlement of Valard, under s. 33 of Alberta’s Builders’ Lien Act, to obtain a copy of the main contract between the owner and contractor and the subcontract between the contractor and subcontractor, does not eliminates the unreasonable disadvantage that arises from Valard being uninformed about the trust. Nothing in Section 33 is tantamount to a statement that a trustee is absolved of its fiduciary duty to disclose the existence of a trust contained within the bond.
  1. Bird Construction was not just a bare trustee with no duties to perform. A bare trusteeship assumes that the beneficiaries are capable of calling for the trust property on demand. Here, the beneficiaries did not know of the trust’s existence. Accordingly, the trust obligation imposed by the bond at least required the trustee to advise the beneficiaries of the bond.
  1. Bird Construction had the obligation to act an honest and reasonably skillful and prudent trustee. Its obligation to disclose the existence of the trust extended “not to ensuring that every potential beneficiary knows of the trust, but only to taking reasonable steps to that end.” The evidence was that Bird had an on-site trailer in which notices were normally posted. The subcontractors were required to attend daily “toolbox meetings” in Bird’s trailer. In these circumstances:

“Bird could have satisfied its duty to inform beneficiaries of the trust by posting a notice of the bond in its on-site trailer. This would have provided a significant portion of potential beneficiaries with notice of the bond’s existence. The cost of doing so would have been negligible to Bird, and this method of notice would not have been otherwise onerous. I note that this method of notice is already statutorily required on public worksites in Alberta: Public Works Act, R.S.A. 2000, c. P-46, s. 17.

This does not mean, however, that taking such steps will always be necessary in order to resist every claim for breach of trust made by a disappointed beneficiary of a labour and material payment bond. It is also possible that some other method of giving notice — had the evidence disclosed it — might have sufficed. To reiterate: the question is not what Bird could have done in this case, but what Bird should reasonably have done in the circumstances of this case to notify beneficiaries such as Valard of the existence of the bond. Here, Bird did nothing. It filed the bond offsite, did not post it, and told nobody about it. In some circumstances (where, for example, the industrial practice is such that the use of labour and material payment bonds to offset the risks arising from unpaid subcontractors are common), it may well be that very little, or even nothing, will be required on the part of a trustee to notify potential beneficiaries of the trust’s existence. In the circumstances of this appeal, however, where the evidence was that labour and material payment bonds were uncommon, something more than nothing was required from Bird to discharge its duty. Bird therefore committed a breach of trust.”

Judges Côté and Karakatsanis dissented from this reasoning of the majority. They held that a trustee under a payment bond does not in general have a proactive duty to take steps to inform potential claimants of a bond’s existence.

However, Justice Côté held that, by reasons of correspondence between Bird and Langford, Bird was put on specific notice of difficulties that Valard was facing in getting paid by Langford.

On August 10, 2009, an employee of Langford sent an email to Bird’s project manager, advising him of a “serious problem” that Langford was having in paying Valard’s invoices. This email was also sent to Valard’s project manager. The email indicated that the owner was refusing to pay any further amount to cover Valard’s invoices. Langford asked Bird for assistance as to how it should proceed. Bird sent a response by email to Langford, but did not copy Valard, indicating that “We would help you if we could, but Suncor was already upset with our last claim.”

Based on this evidence Justice Côté concluded as follows:

“Upon receiving Langford’s email, Bird was informed of “serious problem[s]” between Valard and Langford Electric, and was alive to the very real possibility of Valard not being paid in full for its services — especially since it knew that additional funds from Suncor Energy Inc. would not be forthcoming. Moreover, Bird was expressly asked to advise on how the parties should proceed with their dispute. Valard, as a recipient of the email, had full knowledge of this. Indeed, it was Valard’s issue with the payment offered by Langford up to that point which prompted Langford to email Bird in the first place.

39      As noted above, I accept that a trustee has an equitable obligation to accurately answer all requests from potential claimants for information pertaining to the existence and particulars of any labour and materials payment bond. As I see it, the August 10, 2009 email effectively amounted to such a request. Although the email was not sent by Valard, and did not explicitly raise questions regarding the existence of any bond, I do not see this as particularly significant. In my view, it is not necessary that a potential claimant articulate a particular set of words before being entitled to information about any existing bond from the trustee. ……On the facts of this case, it is sufficient that Langford’s email alerted Bird to the payment problems between Valard and Langford, and ended with a clear request that Bird outline how the parties should proceed with this payment dispute. As one of the recipients of this email (and part of this conversation), Valard was entitled to expect that, if a labour and materials payment bond were available, its existence would have been disclosed by Bird (as trustee/obligee) at this time.

40      Rather than doing so, Bird removed Valard from the email chain and informed Langford that additional funds from Suncor would not be forthcoming. It is my view that, by failing to notify Valard of the L&M Bond’s existence upon receiving what effectively amounted to a request for guidance as to how this payment dispute could be resolved and with knowledge that additional money from Suncor was unavailable, Bird breached the equitable duty it owed to Valard. Valard was entitled to assume that this request would have triggered a duty on the part of the trustee to advise it of any available bond, and that it therefore did not need to make any further requests in this regard.” (emphasis added)

Accordingly, Justice Côté agreed with the majority that the appeal should be allowed.

Justice Karakatsanis held that nothing in the facts of this case activated Bird’s duty to inform Valard of the existence of the bond. Accordingly, she would have dismissed the appeal.

Discussion  

This decision is obviously of great importance to the law relating to labour and material payment bonds on construction projects.

There are two specific factual bases upon which the duty to disclose the existence of a payment bond was found to exist in the present case:

  • According to the majority, because the “construction project” was not the sort of project upon which payment bonds are normally used, then the duty to disclose the bond arose in this case. The legal principle behind that decision is much broader: the duty arises wherever it could be said to be to the “unreasonable disadvantage” of the beneficiary not to be informed of the trust’s existence. But the majority declined to define what other circumstances would trigger that duty to disclose.
  • According to Justice Côté, because Bird received notice (from Langford) of the difficulty that Valard was having getting paid by Langford, it had a duty to respond to Valard and advise Valard of the existence of the bond.

The importance of Justice Côté’s decision is apparent. She agreed with Justice Karakatsanis that generally there is no duty on the contractor to advise the sub-subcontractor of the existence of the bond. But she found that such a duty was triggered when the contractor learned of a sub-subcontractor’s difficulty in getting paid, even though that information was not received from the sub-subcontractor (and indeed in this case, it was received from the defaulting subcontractor!). So the duty found by Justice Côté can arise even if the use of payment bonds on such a construction project is common. In effect, Justice Côté’s decision has a much broader application to construction projects than that of the majority.

The majority of the Supreme Court would seemingly agree with Justice Côté’s approach since the “unreasonable disadvantage” to the sub-subcontractor in not being advised of the bond is much more obvious when the sub-subcontractor is having difficulty getting paid by the subcontractor, and the contractor knows that.

If one combines these two elements of the Valard decision, then it may be highly risky for an owner or contractor which is a trustee under a payment bond not to take steps to alert the beneficiaries of the existence of the bond. Applying the majority’s decision, the circumstances in any particular case may amount to an “unreasonable disadvantage” to the beneficiaries, thereby triggering the duty to disclose. Applying Justice Côté’s reasoning, some email, job minute or other event may later be found to have been sufficient notice to the trustee to trigger the duty to disclose the bond. Both these elements are pretty indefinite, which may make the risk of non-disclosure of the bond too high.

If this is so, then owners and contractors who are trustees under payment bonds may start posting notice of the bonds on the site or otherwise take steps to bring the bonds to the attention of subcontractors and sub-subcontractors, simply in order not to run the risk that the Valard decision will be used against them. The Valard decision may change the whole industry landscape by changing the conduct of owners and contractors.

Another issue is: can the ruling in Valard be avoided by re-wording the bond? For instance:

  1. If the owner or contractor under the bond is not named as a trustee, will the result in Valard apply?

The trusteeship role of the owner and contractor under a payment bond is intended to avoid the rule under common law that a third party cannot enforce a contract. And so the owner or contractor is a party to the bond as a trustee for the beneficiaries. But can the structure of the bond be changed so that this trusteeship role is done away with and yet the bond can be enforced by the beneficiaries? There are other forms of payment bonds in which the owner or contractor is not shown as a trustee, but rather as an agent. But the law of agency may raise the same duty of disclosure as the law of trusts. In any event, bonding companies, owners and contractors may be considering ways in which bonds may be re-structured to avoid the result of the Valard decision.

  1. Can the duty found to exist in Valard be negated in the bond itself? Can the bond validly state that there is no duty on the trustee to advise the beneficiary of the bond? If the existence of the duty is based upon an implied duty, can the implied duty be over-ruled by an express statement to the contrary?

Or is this duty to inform of the existence of the bond part of the fundamental nature of trusteeship, such that it cannot be over-ruled, especially without the knowledge and consent of the beneficiaries? Can the right of the beneficiary to know of the bond be eliminated by the wording of the bond which they don’t even know exists?

There is much to think about as the full implications of the Valard decision are analyzed.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 15, part 6.

Labour and material payment bonds – duty to disclose existence of the bond to beneficiaries

Valard Construction Ltd. v. Bird Construction Co., 2018 CarswellAlta 261, 2018 SCC 8

Thomas G. Heintzman O.C., Q.C., LLD (Hon.)                                          April 23, 2018

www.heintzmanadr.com

www.constructionlawcanada.com

One Arbitration Under Two Separate Arbitration Agreements Held To Be Invalid

In A v B, [2017] EWHC 3417 (Comm), the High Court of Justice of England and Wales has recently held that an arbitrator in an arbitration commenced by a single request to arbitrate did not have jurisdiction to decide disputes under multiple arbitration agreements.

What makes this decision so important and interesting is that the British Columbia Supreme Court recently arrived at a somewhat different result. As I reported in my article posted on January 2018, in South Coast British Columbia Transportation Authority v. BMT Fleet Technology Ltd. 2017 CarswellBC 2587, 2017 BCSC 1683, the B.C. Supreme Court held that a single Notice to Arbitrate to initiate an arbitration under several arbitration agreements was not totally invalid. The court held that disputes under multiple arbitration agreements could not, absent the parties’ consent, be resolved in a single arbitration, but that the arbitral authority (the British Columbia International Commercial Arbitration Centre (BCICAC)) had the authority to separate the disputes into separate arbitrations which could validly proceed.

The question of whether there can be a single notice to arbitration under multiple arbitration agreements is of fundamental importance to construction law. This is because, in a single construction project, there are usually multiple building contracts. Each contract may contain its own arbitration clause. Disputes under these contracts usually involve basically the same facts, and over-lapping parties. A single notice to arbitrate reflects the reality of the single construction project. But the issue still arises as to whether arbitral statutes, arbitral agreements and the rules of arbitral authorities allow a single notice arbitrate to be issued under several arbitration agreements, and if so, whether the arbitrator under that single notice to arbitrate may decide disputes under those multiple arbitration agreements.

In A v B, the English court held that a single notice to arbitrate under several arbitration agreements was invalid and the arbitrator had no authority to decide disputes under several arbitration agreements. Let’s explore the basis upon which that decision was arrived and then consider the differences, if any between the decision in that case and the B.C. Supreme Court in South Coast, and whether these two decisions can be reconciled.

Background

B sold two consignments of crude oil to A pursuant to two separate contracts. Each contract was governed by English law and contained an arbitration clause requiring arbitration pursuant to the rules and procedures of the London Court of International Arbitration (LCIA). Each contract also incorporated B’s General Terms and Conditions, including an LCIA arbitration clause.

These consignments were re-sold by A to a third part C under separate contracts which mirrored (save for a mark- up) the contracts between A and B, including the incorporation of LCIA arbitration clauses.

On September 23, 2016 B commenced one LCIA arbitration against A, claiming that A had failed to pay the price due under the two contracts. B delivered a single Request for Arbitration and paid a single registration fee to the LCIA. B claimed the purchase price under both contracts with A.

On October 31, 2016 A served its response to the Request denying liability and stating that the Response should not be construed as submission to the arbitral tribunal’s jurisdiction to hear the claim as currently formulated; and reserving A’s rights to challenge the jurisdiction of the LCIA and any arbitral tribunal appointed. A included similar statements and reservations in its correspondence with the LCIA and the arbitral tribunal which was appointed by the LCIA.

On October 31, 2016 A commenced a separate LCIA arbitration against C, mirroring B’s claim against it.

On February 8, 2017, the LCIA appointed the Tribunal for the arbitration between A and B.

On March 23, 2017, C challenged the jurisdiction of the arbitral tribunal in the arbitration between A and C on the grounds that A’s request for arbitration was invalid. That challenge was upheld on 11 May 2017.

On May 24, 2017, A challenged the validity of the B’s Request for Arbitration under both of the crude contracts between A and B. This challenge was made shortly before the date (June 2, 2017) on which A’s Statement of Defence was due in the arbitration. A served its Statement of Defence on that date, reserving its position with respect to the jurisdiction of the arbitral tribunal.

On July 7, 2017, the arbitral tribunal made a partial award in which it dismissed A’s challenge to its jurisdiction on the ground that it was brought too late. The tribunal held that the requirement in the LCIA that a jurisdictional objection be raised “as soon as possible after the matter alleged to be beyond its jurisdiction is raised” meant that A was required to specifically raise its objection based on the “two arbitration agreement” issue at the time of its response to the Request for arbitration. When it raised that objection at the time of filing its Statement of Defence, it was too late.

A then commenced proceedings in court on August 4, 2017 to set aside the arbitral tribunal’s decision.

The Position of the Parties

On the jurisdictional issue, A’s position was that a request for arbitration could only validly encompass a dispute under one arbitration agreement, and that therefore B’s Request for arbitration failed to validly commence an arbitration. A said that there remained the question of whether the Request for arbitration could be amended to refer to only one arbitration agreement, but that in its present form, the Request for arbitration was invalid.

B did not dispute that an arbitration could only encompass a dispute under a single arbitration agreement, but submitted that its request for arbitration validly commenced two arbitrations, one under each contract. B argued that the reference in the LCIA rules to “an arbitration” could encompass two arbitrations, relying on general statute law that states that, in deeds and contracts, the singular includes the plural and vice versa. B relied upon the decision in The Biz, [2011] 1 Lloyd’s Rep. 688 in which it was held that a single notice to arbitrate validly commenced 10 separate arbitrations under 10 bills of lading each of which contained a London arbitration clause.

Decision of the Court

The judge in A v B said that “the approach set out in The Biz is correct and [I] adopt it in full.” However, he went on to hold that The Biz “was a case where no arbitral rules were applicable, let alone the LCIA rules.” He held that the LCIA rules precluded the same result in the present case, for the following reasons:

  1. It was “entirely plain” that the “LCIA Rules treated a single request [to arbitrate] as giving rise to a single arbitration, the payment of fees for one arbitration, and the formation of a single arbitral tribunal.”
  2. In addition, and “perhaps conclusively in this regard, Article 22.1(x) [of the LCIA Rules] gives the arbitral tribunal (once formed) the power to consolidate the arbitration with one or more other arbitrations, but only where all parties agree (reflecting the statutory restriction on consolidation of arbitration proceedings under section 35 of the [English] 1996 Act)”.
  3. In light of these provisions, it was “inconceivable that the LCIA Rules could be read as permitting a party to pay only one fee when commencing multiple arbitrations” and it was “undoubtedly impermissible to read them as giving rise to consolidated proceedings without the consent of all parties.

Accordingly, the English court held that the Request to arbitrate was “an ineffective attempt to refer separate disputes to a single arbitration. It was accordingly invalid.”

The court disagreed with the arbitral tribunal’s finding that the objection to the tribunal’s jurisdiction had been raised too late. In the English Arbitration Act, 1991, the requirement that an objection to jurisdiction must be raised “as soon as possible” applied to jurisdictional objections arising during the course of the arbitration, not to those raised at its inception. As to those latter objections, the English Act plainly required them to be raised by the time of the delivery of the taking of the first step in the proceeding. That wording closely followed the wording of the UNCITRAL Model Law which requires such an objection to be made no later than the delivery of the statement of defence. It was “inconceivable” that the LCIA Rules intended to impose an earlier date than that. “It would entail that a party could lose the most fundamental of objections (such as that it was not party to the relevant agreement or that there was no LCIA arbitration clause in an agreement to which he was a party) without having taken any steps in the arbitration and without even having appointed an arbitrator (a step which would not, in itself, amount to a waiver of the right to object to jurisdiction).”

If it had been necessary for him to decide the issue, the English judge said that he would have held that the provision in the English Arbitration Act, 1991 as to the time limit within which to raise a jurisdictional objection prevailed over any shorter time limit imposed by the LCIA Rules.

The court concluded as follows: “I find that the Request was invalid, with the result that the Tribunal did not have jurisdiction to make the Award. I further find that A has not lost the right to challenge the Tribunal’s jurisdiction as it objected not later than the time for its Statement of Defence.”

Discussion

There are many important aspects of this decision. I will not address the second issue – whether the LCIA Rules could validly, or did, impose a shorter time limit for objection than that contained in the applicable arbitration statute. That issue is itself worthy of further analysis. It is interesting that the English Court would have held that the LCIA Rules relating to raising jurisdictional objects were trumped by the provisions of the English Arbitration Act, 1991, yet it held that the LCIA rules were effective to preclude the single arbitration of disputes under more than one arbitration agreement.

Rather, this discussion will focus on the English Court’s finding that the Request for arbitration was “invalid” and the arbitral tribunal did not have jurisdiction because the Request included disputes relating to more than one arbitration agreement. This decision seems to be at odds with the decision of the B.C. Supreme Court in the South Coast decision. There, the B.C. court held that the initiation, by one originating document, of an arbitration proceeding relating to several arbitration agreements was substantively valid, but procedurally invalid, and the arbitral authority (BCICAC) had jurisdiction under its rules to correct that invalidity by allowing the claimant to pay the fees for multiple arbitrations and file requests for the appointment of arbitrators for each of the three arbitrations encompassed in the original originating document. I refer readers to my article dated January 18, 2018 for a fuller discussion of the South Coast decision.

In A v B, neither of the parties (and in particular, B, the claimant) sought to correct the alleged invalidity by asking the LCIA to divide the file into separate arbitrations, and by paying the fees for separate arbitrations. Nor did either party submit to the court that the original Request for arbitration should be preserved in this fashion. Accordingly, the court in A v B did not decide whether the LCIA (or the arbitral tribunal appointed by the LCIA) would have had the authority to effectively sub-divide the original Request for arbitration into separate arbitrations.

The issue of whether a single request for arbitration can validly commence one arbitration under several arbitration agreements is not an academic exercise. It may be crucial for limitations purposes. If the single request for arbitration is entirely invalid, then a limitation period may be missed.

What then can be made of these three decisions: A v. B, The Biz and South Coast? Are they reconcilable on the question of whether a single request for arbitration of disputes under several arbitration agreements is substantively valid or invalid? Let me take a stab at trying to reconcile them by proposing the following principles:

  1. If the provisions of the applicable arbitration agreements and arbitral statute do not otherwise provide, a single notice requesting arbitration under several arbitration agreements is substantively valid to commence separate arbitrations under each agreement, provided that the notice contains all the facts, allegations and other elements required to assert separate claims under each arbitration agreement.

Each of these three decisions seems to be consistent with this principle. This principle seems to be what the courts in South Coast and The Biz decided. The court in A v B accepted that principle as correct, but held that the single request to arbitrate in that case was invalid due to the provisions of the LCIA Rules.

  1. The Rules of an arbitral authority or an arbitration agreement may prohibit or allow a single request for arbitration to initiate arbitration under multiple arbitration agreements. Upon objection from the respondent, the arbitral authority or tribunal is required to sub-divide the disputes into separate arbitrations on a timely basis.

This principle may be more debatable. Certainly, in South Coast the B.C. Supreme Court applied this principle. It examined the rules of the BCICAC and held that those rules allowed the BCICAC to accept a single request for arbitration and then, when an objection was raised by the respondent, to divide the file into separate arbitrations. While this issue was not squarely addressed in A v B, the fact that the court analyzed the LCIA Rules and held that those Rules precluded a single request for arbitration from having any validity seems to indicate that the court could have come to the opposite conclusion if it had the opposite view of the effect of those Rules.

It is unfortunate that the court in A v B did not have a copy of the decision in South Coast because the B.C. Court analysed the “single fee” issue and still decided that BCICAC Rules allowed the BCICAC to divide the request for arbitration into several arbitrations. Indeed, the BCICAC had subdivided the request for arbitration and received fees for the several sub-divided arbitrations by the time the issue came to court. This fact may distinguish the South Coast decision from the A v B decision.

Also, in South Coast, the B.C. Supreme Court held that, once the BCICAC accepted the single request for arbitration, then by the very wording of its rules, a valid arbitration had been commenced. In effect, the court said that, once having accepted that request and having stated to the parties that an arbitration had been commenced, the BCICAC could not maintain that a valid arbitration had not been commenced and it was the BCICAS’s obligation to figure out what to do next, not the parties’.

Could that submission be made under Rule 1.4 of the LCIA Rules (2014)? That rule states: “The date of receipt by the Registrar of the Request shall be treated as the date upon which the arbitration has commenced for all purposes (the “Commencement Date”), subject to the LCIA’s actual receipt of the registration fee.“  (Underlining added) If the LCIA accepts the Request to arbitrate and appoints the arbitral tribunal, can the LCIA assert to that an arbitration has not been commenced, and if not, can any other party?

  1. Unless the arbitral agreement or the applicable rules of the arbitral authority so provide or the parties agree, the arbitrator does not have authority to conduct a single arbitration in respect of disputes under more than one arbitration agreement.

This principle appears to flow from all three decisions. Indeed, in each of them the parties themselves appear to have conceded that the arbitral tribunal did not have authority to conduct a single arbitration in respect of disputes under several arbitration agreements.

This principle separates the commencement of the arbitration from the conduct of the arbitration. The commencement of the arbitration by one commencing document would be considered to be valid, but the conduct of arbitrations under multiple arbitration agreements by a single arbitral tribunal to be invalid.

If this is the case, instead of saying that “the Request is invalid”, the court in A v B could have said: “The arbitral tribunal has no jurisdiction to conduct a single arbitration in respect of disputes under more than one arbitration agreement.” If it had done so, would that have entitled either the LCIA or the arbitral tribunal to make an order separating the arbitration into two arbitrations, as was done in The Biz and South Coast?

Of course, the jurisdictional objection may be waived, in particular by filing a Statement of Defence in the arbitration without making any objection to the fact that it purports to be an arbitration about disputes arising from more than one arbitration agreement.

  1. There is no point in issuing a single notice or request to arbitrate in respect of disputes under more than one arbitration agreement, unless the arbitral agreement or the rules of the applicable arbitral authority permit, or the parties agree, to a consolidated arbitration hearing.

The lesson from these three cases is that (unless the arbitral rules or arbitration agreement permit arbitration hearings to be held together or consolidated) the issuance of such a single notice or request to arbitrate is futile. If the respondent objects to such a notice or request, then it will only result, at the very best, in the arbitral authority or tribunal ordering that separate arbitrations proceed under each arbitration agreement, putting the parties back to where they would have been if separate notices or requests to arbitrate had been issued. At the worst, it may result, as it did in A v B, in the notice or request being held to be invalid.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 11, part 4

A v B, [2017] EWHC 3417 (Comm)

Arbitration – Commencement of arbitral proceedings- Single arbitration of disputes under multiple arbitration agreements – Time for objecting to jurisdiction of the arbitral tribunal

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                                April 4, 2018

www.heintzmanadr.com

www.constructionlawcanada.com

 

                 

 

The Ontario Construction Act: What Does It Mean, Especially Regarding Paid When Paid Clauses?

The Ontario Construction Lien Act, 2017 was given Royal Assent on December 12, 2017 as S.O. 2017 C.24. This statue changes the name of the Ontario Construction Lien Act to the Construction Act (which I will refer to as the new Act) and fundamentally changes the law relating to construction projects in Ontario.

Before further comment, it should be noted that different parts of the new Act will come into effect at different times. As the Explanatory Note to the new Act states: “The commencement section of the Bill (section 86) provides that, for the most part, the housekeeping and non-substantive amendments come into force on the day the Bill receives Royal Assent, and the substantive amendments come into force on proclamation of the Lieutenant Governor.”

The Prompt Payment provisions contained in section 6.1 to 6.9 of the new Act, which are referred to in this article, are enacted by section 7 of the Ontario Construction Lien Act, 2017. Under subsection 86(2) of that Act, section 7 (and therefore the Prompt Payment provisions of the new Act) and most of the substantive provisions of the new Act will come into effect on a day to be named by proclamation of the Lieutenant Governor.

The expected dates of proclamation are as follows: July 1, 2018 for the amendments to modernize the Act and the holdback rules; and October 1, 2019 for the amendments related to prompt payment, adjudication and liens against municipalities. With an Ontario election looming, there may be further adjustments to these proclamation dates, and for the necessary organization of the prescribed forms and the adjudication regime that will enable the Prompt Payment regime to function.

In three articles, I have reviewed the Report leading up to the new Act, and the draft legislation. Those articles were posted on this site on May 3, September 10 and 27, 2017. So my thoughts about the various provisions of the new Act are set out in those articles in some detail.

There is one aspect of the new Act that remains a puzzle to me. What will the new Act do, and in particular, what will the Prompt Payment regime in the new Act do, to Pay When Paid clauses?

As I discussed in those articles, it remains a puzzle to me because the Ontario law with respect to Pay When Paid clauses is itself a puzzle.

On the one hand, the majority of a divided Ontario Court of Appeal held, in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. 1988 CarswellOnt 773, that a Pay When Paid clause can be relied upon to preclude both interim and final payments to the subcontractor if the contractor has not been paid by the owner. On the other hand, in Arnoldin Construction & Forms Ltd. v. Alta Surety Co. 1995 CarswellNS 31 the Nova Scotia Court of Appeal held (basically following the logic of the dissenting Justice Finlayson in the Timbro case) that a Pay When Paid clause should be interpreted as only being a payment timing mechanism during the project, and does not entitle the contractor to refuse payment to the subcontractor at the end of the job unless that interpretation is very clear to that effect. The Nova Scotia Court of Appeal held that it was not clear in that case. Leave to appeal from both decisions was refused by the Supreme Court of Canada.

More recent cases in Ontario have applied the logic in the Arnoldin decision, not so much by expressly refusing to follow the Timbro decision as by applying a tough standard of interpretation before the clause will be held to negate the subcontractor’s ultimate right to be paid.

The Report leading to the new Act, and the legislature in the new Act, did not expressly address this puzzle. This is puzzling in itself since, under the U.K. legislation on which the Ontario legislation is based (the Housing Grants, Construction and Regeneration Act 1996 (U.K.)), Pay When Paid clauses were rendered ineffective unless the third party payor (such as the owner who has not paid the contractor) is insolvent. Many U.S. states have also banned Pay When Paid clauses. So it remains for practitioners to work on the puzzle.

On the one hand, practitioners may rely upon the effect of the legislative choice not to expressly deal with Pay When Paid clauses in the new Act. Those in favour of Pay When Paid clauses may say that by not doing anything expressly, the legislature intended to leave the law in Timbro alone and not import into Ontario law the prohibition against Pay When Paid clauses which was staring the legislature so clearly in the face by way of the U.K. legislation. On the other hand, those opposed to Pay When Paid clauses may say that by not doing anything expressly, the Ontario legislature intended to leave the case law in Ontario alone, thereby leaving a very high degree of contractual clarity before a Pay When Paid will entitle a contractor to withhold final payment to the subcontractor because it has not been paid by the owner.

Let’s then consider the ingredients of the new Act and see if they help us determine whether Pay When Paid clauses will be more enforceable after the Prompt Payment provisions of the new Act are brought into force than they were before. At first blush, it seems that the new Act will strengthen the arguments of those in favour of the enforceability of Pay When Paid clauses, but a further analysis seems to sway the argument the other way.

The argument that the new Act enhances the enforceability of Pay When Paid clauses may be supported by the whole structure of the new Prompt Payment regime. That regime will mandate a payment system based upon the contractor giving the owner a “proper invoice”. Once that proper invoice is given, then the owner will have to pay the invoice unless the owner gives the contractor a “notice of non-payment”.

Under subsections 6.5(5) and (6) of the new Act, the contractor will be then able to give the subcontractor a notice of non-payment in a form to be prescribed in the Regulations, for two reasons:

  1. Because the contractor has not been paid by the owner, in which case the notice of non-payment to the subcontractor must be made within 7 days of the notice of non-payment by the owner, or if no notice of non-payment has been given by the owner then within the 35 days that the contractor must otherwise pay the subcontractor. In these circumstances, the contractor must undertake to have the “matter” adjudicated; or
  1. Because it disputes the subcontractor’s claim in which case the notice of non-payment to the subcontractor must specify the amount not being paid and detail “all of the reasons for non-payment”, and must be given with the said 35 day period.

Those arguing in favour of Pay When Paid clauses will point to the first reason for non-payment, namely non-payment by the owner, and ask: why did the legislature insert that ground for non-payment to the subcontractor, and provide a prescribed form for it, unless that notice to the subcontractor was to have effect and entitle the contractor not to pay the subcontractor? The legislature did not stipulate that this provision would only operate if there was a Pay When Paid clause in the contract; the provision apparently applies even if there isn’t such a clause in the building contract.

Indeed, it may be argued that the legislation has inserted a statutory Pay When Paid clause into Ontario building contracts, even if there is no such clause in those contracts, and this may well be the practical effect of the new Act for payments made during the project for all building contracts and not just those with Pay When Paid clauses. But if the contract does contain a Pay When Paid clause, then it may be argued that the legislature has now stipulated that the Pay When Paid clause is a good and valid reason for the contractor not to pay the subcontractor.

On reflection, in my view that argument is not as strong as the opposing argument, for a number of reasons.

  1. The Prompt Payment regime creates a right to prompt payment, but it does not create a substantive right to Pay When Paid at the end of the project. On its face, it is a procedural regime applicable to payments during the ongoing project and does not create a substantive rights to withhold payment.

Thus, with respect to the second ground for giving a Notice of Non-Payment – disputing the subcontractor’s claim – the regime does not give the contractor substantive rights not to pay the subcontractor by reason of giving a notice of non-payment. The contractor may dispute the subcontractor’s claim to payment for all sorts of reasons – the work was badly done, the work was delivered late, the amount charged is wrong etc., etc. But these substantive rights or defences are not determined or affected by the contractor’s right to give a notice of non-payment. These rights or defences will be determined in adjudication, arbitration or litigation. The legislature obviously hopes that their resolution will be more expeditiously determined through the adjudication regime contained in the new Act. But whether the dispute arises out of the first or second type of notice of non-payment, it does not appear that the legislature intended that the contractor’s entitlement to give a notice of non-payment to a subcontractor affected the subcontractor’s final entitlement to payment, whatever that entitlement may be.

On balance, the fact that the legislature didn’t say that a notice of non-payment entitles the contractor not to pay the subcontractor at the end of the project (if not paid by the owner or if the contractor disputes the subcontractor’s right to payment) seems to weigh more heavily in favour of the view that the notice of non-payment has no substantive effect, and leaves the legal rights of the parties enforceable as they now are (or are not), governed by the new procedural rights in place which will hopefully assist the parties to resolve the dispute more quickly.

  1. The argument then may be that the Prompt Payment regime creates an enforceable Pay When Paid regime if the contract contains a Pay When Paid clause, but not otherwise. That argument seems to be a bridge too far.

The new Act does not expressly create such a statutory regime, and it seems unlikely that the legislature intended to create such a regime applicable to some building contracts (those with Pay When Paid clauses) and not to others (those without), especially when so many other legislatures have expressly abolished Pay When Paid clauses.

While the Prompt Payment regime may not formally legalize the non-payment by contractors of subcontractors due to non-payment by owners, it may condone that practice in the short run, and cause or permit contractors to “throw out the anchor” by serving a notice of non-payment when they might otherwise not do so. In an apparent effort to inhibit that practice, the legislature has required a contractor serving such a notice due to non-payment from the owner to undertake to refer the matter to adjudication, which will presumably speed up the resolution of the non-payment. Such an undertaking by the contractor is not required if the notice of non-payment is given by the contractor by reason of a dispute with the subcontractor. The requirement of such an undertaking may be good evidence that the regime wasn’t intended to legalize non-payment of subcontractors due to non-payment by owners. As a further inducement to prompt payment, interest on outstanding amounts will now be payable at the greater of the contract rate or the Courts of Justice Act rate.

In the result, when the Prompt Payment regime of the new Act is proclaimed into force, it may stir up the debate about the effect of Pay When Paid clauses upon the ultimate right of the subcontractor to be paid by the contractor if the contractor is not paid by the owner. And the new Act may result in quicker adjudication of the disputes about those clauses. But it seems unlikely that the new Act will change the trend in the existing case law. That trend may only change if the Supreme Court grants leave to appeal to resolve the debate.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 6, part 2(d)(i), chapter 15, part 10(e), and chapter 16, part 3.

Ontario Construction Lien Act, 2017 , S.O. 2017 C.24

Pay When Paid Clauses – Construction Lien Amendment Act, 2017 and Construction Act

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb               March 11, 2018

www.heintzmanadr.com

www.constructionlawcanada.com

 

Alberta Court Applies Principles Of Contract Interpretation And Limitations To A Client-Consultant Contract

In the recently released decision in Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11, the Alberta Court of Queen’s Bench applied three potential aids to the interpretation to a client-consultant contract: contra proferentem; post-contract conduct; and estoppel. The court also applied the limitation period to a claim for a percentage-based fee.

The Interpretation and Limitations Issues

After the project was finished, the architects asserted that, on a proper interpretation of the client-consultant agreement, the fee should have been paid on a percentage basis, not a fixed fee basis. The architect relied upon the principle of contractual interpretation known as contra proferentem since the client (the University) had prepared the six drafts of the agreement. The owner asserted that the fee was a fixed fee, and also said that the contract should be interpreted in light of the parties’ actual performance of the contract and that the consultant was estopped from asserting that the fee was based on a percentage of the cost of construction.

The owner also asserted that the consultant’s claim was barred by the limitation period since more than two years had expired from the time when, if the consultant was correct, the fee would have amounted to more than the consultant was paid under the contract and the consultant knew or should have known that the owner was in breach of the contract.

Contra Proferentem

The Alberta court held that there was very little, if any, place for the application of the contra proferentem rule in the present circumstances:

“Where an ambiguity arises in respect of a matter that has been specifically flagged for future negotiation between two sophisticated parties, it should be resolved through the usual principles of contractual interpretation. This includes have regard to the factual matrix and, in some limited circumstances, post-contract conduct that might assist in determining the objective of the parties. The doctrine of contra proferentem has very limited utility or application in that analysis.”

Post-contractual conduct

During the performance of the contract, the parties proceeded on the basis that the fee was a fixed fee, not a percentage fee, but that the consultant was entitled to extra payment for work done in relation to change orders. The Alberta Court held that, in interpreting the contract, it was proper to look at this post-contractual in arriving at the proper interpretation of the contract, particularly when the conduct was consistently and unambiguously in favour of one interpretation:

“…..Such post-contract conduct is not properly considered as part of the factual matrix bearing on the intention of the parties at the time the contract was entered into. It may be considered, however, in the resolution of ambiguity in the contractual language used: Shewchuk v Blackmount Capital Inc., 2016 ONCA 9123 at 41….A cautionary approach is required where evidence of such subsequent conduct is used for the purpose of divining intention. It must generally be given limited weight, but “will have greater weight if it is unequivocal in the sense of being consistent with only one of the two alternative interpretations that generated the ambiguity triggering its admissibility”: Shewchuk at para 54. In this case, the language used in each of the six Change Orders signed by the parties during the project is both consistent and unequivocal in treating the work done by RKA as being part of the basic services. The language is also consistent with being compensated through adjustments to the “Fee for Service” under Section 1 of Schedule C to the Service Agreement.” (underlining added)

Estoppel

For the same reason, the Alberta court held that, by conducting itself throughout the project on the basis that the fee was payable on a fixed basis, the consultant was now estopped from asserting the contrary:

“…..it is reasonable to infer from the evidence that, had RKA refused to approve and sign-off on the Change Orders as worded, there would have been, at minimum, a discussion and negotiation of how RKA should be compensated, having regard for the wording of Article 4.3.2 and the fee negotiation contemplated in respect of fees for “Additional Services.” By RKA acquiescing in the Change Order process as implemented, only to assert its entitlement to additional fees well after conclusion of the project, the University was deprived of that negotiation (or termination) opportunity to its detriment…… Accordingly, had I accepted the position of RKA regarding the proper interpretation of the Service Agreement, I would have nonetheless found them to be estopped from claiming damages for breach of the Service Agreement.”

The Limitation Period

The Alberta Court held that the consultant’s claim was barred by the Alberta two year limitation period. If the consultant was correct that the contract provided for a fee based on a percentage of the cost of construction, then during the course of the project it would have been apparent to the consultant that the cost of construction had much exceeded the projected cost and that the consultant was owed a much higher fee than was being paid to it. More than two years passed from that point in time before the consultant made its claim.

The consultant asserted that the fee was not truly payable until its legal entitlement to percentage-based compensation was known, which it asserted was not known until the building was complete and the construction costs were known with certainty.

The Alberta court accepted the owner’s submissions:

“The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed. It is also clear that RKA was being paid for ongoing work, excluding the separately negotiated FFE Agreement, pursuant to a series of Change Orders purporting to contain add-ons to the basic services fee described in Section 1 of Schedule C…..Accordingly, the essential facts supporting a breach of contract under RKA’s interpretation of the Service Agreement were probably known as early as March 23, 2009. These facts were certainly known when the post-project reconciliation of amounts paid to RKA, as against amounts owing under the contract, was done in March 2010. Accordingly, if RKA is correct in its interpretation of the Service Agreement, and is not estopped from claiming a breach, it would nonetheless have been out of time pursuant to the Limitations Act.”

The Merits Of The Claim

The court reviewed what it described as the “poorly drafted” and “confusing and ambiguous language” of the contract. Thus, the RFP for the contract stated that the “fees will be based as a percentage (%) of the total construction budget” and the heading to Article 4.3 of the contract stated that the fee was a “Percentage-Based Fee”. However, article 4.3.2 stated: “For greater certainty, the Fee for Services as set out in Schedule C is a fixed fee, and there will be no adjustments to the fee in the event of changes in Construction Cost due to inflation. The fee will only be adjusted in the event and in accordance with an approved Change Order which changes the Scope of Work and results in an upward adjustment in the Construction Cost or Contract Time.” Schedule C to the contract stated: “(a) Fixed Base Fee…”

After sifting through all this inconsistent language, the Alberta court held that the contract provided for a fixed fee, not a percentage fee based upon the cost of construction. The court also held that the consultant was entitled to extra fees in relation to work done on the change orders:

“Article 4.3.2 shows that the parties intended that the fee for services be a fixed fee….. Although poorly drafted, Article 4.3.2 also shows that, on an objective basis, the parties intended that compensation for basic services in respect of changes to the scope of work being done, as opposed to “Additional Services,” are to be governed by Article 4.3 and the corresponding provisions of Schedule C…..The language used by the parties in Article 4.3.2 allows the University to exercise a measure of cost control by reviewing and approving Change Orders, and to adjust the base fee for services through the Change Order process. Section 1.3(a) of Schedule D of the Service Agreement includes, as “Additional Services,” revising or providing additional drawings, specifications, or other documents “caused by instructions inconsistent with instructions or written approvals previously given by the owners, including revisions made necessary by adjustments in the Owner’s program or Project Budget….The better view, however, is that the inclusion of services associated with a scope of work change in Article 4.3.2 was intended to bring them within the ambit of services compensable through adjustment to the fixed base fee as set out in Section 1 of Schedule C.”

Accordingly, the court dismissed the consultant’s claim for further fees based on a percentage of the cost of construction.

Discussion

It is not often that one construction law case deals with a number of contract interpretation principles and the limitation period. This decision will be a useful guide to those principles for application in similar circumstances.

The court was strongly influenced by the fact that, throughout the project, the consultant participated in the calculation and payment of the fee on a fixed fee basis, and did not suggest, until the project was well over, that the fee should have been paid on a percentage basis. Clearly there is a lesson for consultants here: be up front about the basis for the fee, and don’t try to assert a different basis after the fact.

The court’s conclusion on the limitations issue might be contentious. Under section 3(1) of the Alberta Limitation Acts, the limitation period starts to run when the claimant knew or ought to have known that: (i) injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to conduct of the defendant, and that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.

Accordingly, the limitation period only commences when the cause of action arises and (not or) the claimant knows or ought to know that it has a claim. In other words, the fact that the claimant knows or ought to know that the defendant’s conduct amounts to a breach of contract, and that the claimant will have a claim, does not start the limitation period unless the time for the obligation to be performed has arrived and an accrued cause of action exists (unless the claimant treats the defendant’s conduct as an anticipatory breach of contract and terminates the contract forthwith).

If the fee in this case was payable by installments, and each instalment was itself legally due and payable during the project at the stipulated time or event, then the limitation period for each payment then arose. But if, on the proper construction of the contract, the fee was one fee only earned on the completion of the project, although payable during the project by way of part-payments, then the limitation period would only arise when the fee was fully earned. And even in the first case, the limitation period would only expire payment by payment, and would not expire for those payments payable less than two years before the action was commenced.

The Alberta court did not discuss when the cause of action for the fee payments arose. In its view, the essential question was: “when the facts giving rise to the claimed breach were known or discoverable.” It further stated: “The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed.” It appears to have assumed that the obligation to pay had by then arisen. If that assumption is correct, then the court’s conclusion is correct. If the obligation to pay had not yet arisen, even though the clamant had submitted interim bills, then the court’s conclusion may not be correct. In addition, if any of the client’s payment obligations fell within two years of the commencement of the action, then the action may have been timely with respect to those payment obligations.

All of which is to say that the parties to a building contract that take a long time to perform should be careful about limitation periods that may arise during the contract. A building contracts is usually considered to be “entire”, “dependent” or “whole” contract, under which the obligations are not independent but dependent on one another, and not fulfilled until entirely fulfilled. However, the part payment obligations under a building contract are usually considered to be severable and presently enforceable as to each payment. This is how the Alberta court considered the payments under this consultant’s agreement. The issue may be disputable under another building or consultant’s contract.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, part 3(f), chapter 2, parts 2(3)(f), 2(4)(iii) and chapter 9, part 3(a).

Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11

Building Contracts – Interpretation – Estoppel – Contra proferentem – Post-contract conduct – Limitation periods

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                     January 29, 2018  

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

Notice Commencing Several Arbitrations Held Not To Be Totally Invalid By B.C. Court

In South Coast British Columbia Transportation Authority v. BMT Fleet Technology Ltd.

2017 CarswellBC 2587, 2017 BCSC 1683, the British Columbia Supreme Court recently held that a single notice purporting to commence several arbitrations against several respondents was procedural invalid. However, the notice was not totally void and could be amended by the applicant to provide for several arbitrations and thereby correct the procedural irregularity.

In view of the absence in most arbitration statutes of the right to consolidate arbitral proceedings, this decision is important as it allows an apparently invalid commencement of arbitral proceedings to stand in a corrected form. Whether this decision has any application to arbitrations outside British Columbia, or to an ad hoc arbitration, are issues to be considered.

Background

South Coast British Columbia Transportation Authority (known as, and referred to in this article as, TransLink) entered into two separate contracts with a ship architect, a contract with a ship consultant and a contract with a shipyard for the design and construction of a new ferry. Each contract contained a clause requiring arbitration of any disputes under the British Columbia Arbitration Act.

On April 1, 2011, TransLink delivered a Notice to Arbitrate to the British Columbia International Commercial Arbitration Centre (“BCICAC”). The notice purported to commence one arbitration proceeding under all the contracts against each of the architect, consultant and shipyard. TransLink paid a fee of $1,680 ($1,500 plus H.S.T.), the fee to be paid for one arbitration proceeding for a claim over $50,000. The Notice identified each respondent and the respective contracts with TransLink, set forth the relevant provisions of each contract and separately identified each cause of action and remedy being sought against each party.

BCICAC opened File No. DCA-1313 and wrote to the parties notifying them of the arbitration, stating in part “We acknowledge receipt of a Notice to Arbitrate (the “Notice”) . . . on behalf of . . . TransLink . . . received at this office on April 1, 2011. This arbitration is deemed to have commenced on April 4, 2011.”

Then counsel for the shipyard telephoned BCICAC to raise concerns about the propriety of a single arbitration proceeding against multiple parties under multiple contracts. TransLink advised BCICAC that the Notice to Arbitrate “may have been irregular”. BCICAC suspended the Arbitration until they “have had the opportunity to discuss the form of the Notice further with counsel”. Various correspondence was exchanged and then in May 2011, BCICAC advised TransLink that if it decided to proceed with arbitration, separate Notices to Arbitrate would have to be filed with the BCICAC since the respondents were not bound by the same arbitration agreement.

The parties participated in an unsuccessful mediation of their differences, and in April 2016, TransLink issued and served a Notice to Appoint an Arbitrator, to which the respondents replied, amongst other things, that the issue of the propriety of the commencement of the arbitral proceeding against several respondents under several arbitration agreements would have to be addressed.  Then in February 2017, TransLink’s new counsel wrote to counsel for the ship architect and consultant acknowledging that the Notice to Appoint an Arbitrator dated April 19, 2016 is “arguably irregular”, but stated that three contracts had been effectively commenced, one involving the ship architect and the other two involving the consultant. TransLink issued a new and separate Notice to Appoint an Arbitrator under each contract. TransLink’s counsel requested that BCICAC File No. DCA-1313 be administratively restructured to reflect separate arbitrations for each of the three contracts in issue, and provided BCICAC with an additional fee of $3,150 plus GST for two additional arbitrations. TransLink did not seek to maintain an arbitration against the shipyard.

TransLink then applied to the B.C. court for a declaration that an arbitration proceeding against each of the ship architect and the consultant had been effectively commenced, and for an order that a specified individual be appointed as arbitrator for each arbitration.

British Columbia Arbitration Act and BCICAC Rules

Like most of the arbitral statutes in Canada, the B.C. Arbitration Act (section 21) empowers the court to consolidate two or more arbitrations if, among other conditions, “all parties to those agreements agree on the appointment of the arbitrator and the steps to be taken to consolidate the disputes into the one arbitration.”

Unlike most other provincial arbitral statutes, the B.C. Act (section 22) provides that unless the parties to an arbitration otherwise agree, the domestic rules of the BCICAC apply to arbitrations governed by that Act, unless those rules are inconsistent with another governing arbitral statute or the B.C. Act. .

The BCICAC rules provide for the payment of fees upon the commencement of an arbitration and state (in rule 10) that “the arbitration is deemed to have commenced when the Arbitration Notice or Joint Submission has been filed with the Centre and the commencement fee paid. The Centre shall notify the parties when an arbitration has commenced.”

Decision of the B.C. Supreme Court

The B.C. Supreme Court held that the Notice to Arbitrate contained all of the information required by the rules of the BCICAC relating to the commencement of an arbitration: the names of the parties and their addresses for delivery; a brief statement of the matter in dispute; the remedies sought; a precise estimate of the amount claimed; and the number of arbitrators proposed.

The court found that “the respondents clearly understood the nature and substance of the specific claims being made against them, the contractual provisions being relied upon, the remedy being sought, and the fact that a request for arbitration was being made in respect to those claims. Had TransLink photocopied the Notice to Arbitrate and filed the same document four times (including in respect of the claim against Victoria Shipyards), there could be no dispute that it was fully compliant.” The parties had “adopted arbitration as the means by which their disputes would be resolved and must now be content with the informalities of the arbitration process.”

The court noted that BCICAC accepted the fee that accompanied the Notice to Arbitrate, stated that the arbitration was deemed to have been commenced and had not returned the funds. The court held that “BCICAC’s deeming that the arbitration proceedings had commenced is analogous to the court registry having accepted a civil action for filing. The matter of the payment of a fee is for the BCICAC to address and administer. It is not a matter between TransLink and the respondents, and does not prejudice the respondents in any way. The payment of the incorrect fee can hardly be described as a fundamental breach of the parties’ contracts or going to the substance or “root” of the parties’ rights inter se.”

Accordingly, the court found that “TransLink’s April 1, 2011 Notice to Arbitrate, although an irregularity, was effective to commence four separate arbitration proceedings”, two against the ship architect and one each against the consultant and shipyard.

The court also held that the irregularity in the appointment of the arbitrator had been remedied by TransLink by its issuance of separate notices of appointment in February, 2017. The language of Section 17 of the B.C. Arbitration Act was mandatory and required the court to appoint an arbitrator if the arbitrator was not appointed by the parties. Accordingly, the court appointed the arbitrator nominated by TransLink for each of the arbitrations.

Discussion

This decision deals with the classic problem faced by arbitration in construction projects. There is an arbitration agreement in each of the contracts between the owner and various participants in the project (say, the contractor and the consultant). There is also an arbitration agreement in each of the contracts between the various other participants in the project (say, the subcontractors, suppliers, etc). Standard arbitral law requires that there be separate arbitrations for each of these arbitration agreements, even though that will result in much greater time, inconvenience and the expense of multiple arbitrations instead of one consolidated arbitration, and with the possibility of inconsistent decisions.

The solution to this problem is not the one first adopted by TransLink, namely, the issuance of one Notice to Arbitrate under four contracts. Ultimately, TransLink did not gain consolidation of the arbitrations. Indeed, it was fortunate to end up with a court decision that validated the commencement of the arbitrations, and divided them into separate arbitrations. So TransLink was back to where it would have been had it commenced separate arbitrations.

Although the decision in this case seems fair, an appellate court might not uphold it having regard to section 21 of the B.C. Act. That section only contemplates the consolidation of multiple arbitrations with the parties’ consent. Accordingly, it might be read, by inference, as prohibiting the commencement of multiple arbitration by one commencement document. In addition, this decision might also not apply in the case of an ad hoc arbitration conducted under an arbitration agreement which is not subject to the auspices or rules of an arbitral tribunal.

The fact that the notice was accepted by BCICAC, that BCICAC stated that an arbitral proceeding was deemed to have been commenced, and that the BCICAC rules deem the proceeding to have been commenced, were key factors in the court’s decision. In effect, the court held that the fault was that of BCICAC, if there was “fault”, in accepting the single Notice of Arbitration in respect of several arbitrations, and that if there was something ineffective about that notice, then it was BCICAC that should not have accepted it. Having accepted the notice, separate effective arbitrations against each of the respondents had been commenced. The joinder of those arbitrations was an irregularity which could be cured.

The arbitration agreement contained in most Canadian building contracts provide for ad hoc arbitration, not arbitration conducted under the auspices of an arbitral institute, such as the BCICAC, ADRIC, ICC, LCIA or ICDR. Thus, the arbitration clause in the CCDC contracts does not name an institute under which the arbitration is to be conducted. If the arbitration is not conducted under the auspices of an arbitral institution, the authority of the ad hoc arbitrator to decide that multiple arbitrations were commenced by one notice to arbitration seems more doubtful.

If an arbitration is commenced under the auspices of an arbitral institution other than BCICAC, the institution’s rules may not state that an arbitration is “deemed to have commenced” when an Notice to Arbitrate is received by the institution, and the facts may not otherwise satisfy a court that multiple valid arbitrations were commenced against multiple parties just because the institution accepted the notice of arbitration and stated that an arbitration proceeding has commenced.

The better solution for the multiple arbitration problem is to deal with it up-front in the arbitration agreement in each of the contracts between the owner and other parties, such as in main contract between the owner and the general contractor and in the contract between the owner and the consultant.

That arbitration agreement can provide that each party agrees to participate in, and agrees to a consolidation of the disputes into one arbitration before one arbitral tribunal in respect of all contracts on the project. The owner and general contractor can then ensure that this sort of wording is incorporated into subcontracts through an “incorporation by reference” clause in the general contract requiring that the provisions of that contract are to be incorporated into each subcontract, and for the contractor to ensure that that occurs. That “incorporation by reference” clause may appear in either the arbitration agreement itself, or may be applicable to all the parts of the general contract that are to be incorporated into the subcontracts.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 4

South Coast British Columbia Transportation Authority v. BMT Fleet Technology Ltd.

2017 CarswellBC 2587, 2017 BCSC 1683

Building contract – arbitration – commencement of arbitration – consolidation of arbitrations

Thomas G. Heintzman O.C., Q.C., LL.D. (ontHon.), FCIArb              January 18, 2018

www.heintzmanadr.com

www.constructionlawcanada.com

 

Contract To Build A Building Contrary To A Building Bylaw Held To Be Illegal

In Nzeadibe v. Khan, 2017 CarswellBC 2251, 2017 BCSC 1456, the British Columbia Supreme Court recently held that a building contract was illegal and unenforceable because it provided for the construction of a building which would have been contrary to the municipal building bylaw. The decision raises, once again, the contentious role of the doctrine of illegality in contract law.

The defendant agreed to manage the construction of a residence for the plaintiff. The plaintiff said that he bought the property after entering into that agreement with the defendant. The plaintiff alleged that the management agreement called for the construction of a house of 3,638 square-foot and containing a self-contained suite. The written agreement between the parties did not refer to those features, but the plaintiff alleged that they had been agreed to orally. The defendant denied agreeing or representing that the building would have those features. The plaintiff sued for breach of the contract and fraud.

The building as built was substantially smaller than 3,638 square feet and it did not contain a self-contained unit. The construction of a residence in that location with that square footage and incorporating a self-contained suite would have been contrary to the municipal bylaw.

The Trial Judge’s Findings  

The trial judge found that the plaintiff obtained a draft copy of the plan for the building prior to purchasing the property and that the defendant orally committed to building the house according to that plan and informed the plaintiff that he could build a 3600 square-foot house with a secondary suite before the plaintiff purchased the property. However, the judge found that “the plaintiff’s experience would have shown him that this rough plan would not be the final or last plan necessary to obtain a building permit” and that the plaintiff “did not reasonably expect the defendant to build a house contrary to Surrey’s bylaws limiting the size of the structure and prohibiting a secondary suite” and was aware that a self-contained suite would be unlawful. The trial judge also found that the defendant forged the plaintiff’s signature on the alleged written agreement.

The Trial Judge’s Conclusions

The trial judge concluded that: the plaintiff agreed to purchase the property “based on the defendant’s statement that he could build a house with an area of 3500 ft.”; that the defendant’s statement was not a promise but was a representation; and that the defendant “knew that the house could not be built to the size or anywhere close to the size shown on the roof plan.”

The trial judge first found, in one short paragraph, that he could not arrive at a conclusion as to what exactly the contract between the parties was. He then considered, in forty-three paragraphs, whether the contract asserted by the plaintiff would have been illegal and thereby unenforceable, and concluded that it would have been:

“….in the context of personal contracts the inflexible application of the law of illegality is sometimes mitigated so that justice may be done. This principle does not, in my view, extend to the specific context and particular public policy considerations that pertain to the imposition on neighbourhoods of houses built at 30 percent above the allowable limit and encompassing illegal secondary suites that affect each neighbours’ enjoyment of their neighbourhood. Taking into consideration the context of the contract between the parties and the fact that the plaintiff has suffered little if any damage due to the alleged breach of the contract I find that the principles outlined in Top Line supports a conclusion that the contract alleged by the plaintiff is unenforceable….I conclude this case falls squarely within the parameters of an illegal contract that is unenforceable and against public policy. Municipalities have responsibilities to enforce the building protocols set out in their bylaws because of the aesthetic impact on neighbours and additional strains on public services. All neighbouring properties have an interest in enforcement of secondary suite bylaws because the densification created by unlawful suites affects neighbours….The contract to build a structure with an area of 3638 square feet with a secondary suite was contrary to a City bylaw permitting only 2765 square feet and precluding a secondary suite was an illegal contract and should not be enforced.”

In arriving at this conclusion, the trial judge relied principally upon the decision of Justice Newbury in Top Line Industries Ltd. v. International Paper Industries, 2000 BCCA 23. In that case, a lease of a portion of unsubdivided parcel of land was entered into, contrary to the restrictions established under s. 73 of the Land Title Act, and the court found that the lease was illegal.

The trial judge in the Nzeadibe case also concluded that the defendant misrepresented to the plaintiff that a house on the property could comprise more than 3000 square feet, that this representation induced the plaintiff to buy the property, that the defendant knew of the size limitation and suite prohibition affecting the property and made the representation to the plaintiff knowing that it was not true or being reckless as to its truth.

Discussion

This decision raises important questions about the role or purpose of the doctrine of illegality in construction law.

Is that role or purpose to prohibit contracts that have as their object or purpose the doing of something that is illegal or immoral? Or is its role or purpose to prohibit any contract the actual performance of which is contrary to a bylaw or other public law? And in either case, should the court delete the illegal portion of the contract and enforce the rest of it? None of these questions were satisfactorily addressed by the court in this case.

The doctrine of illegality has been addressed by the Supreme Court of Canada several times in the last twenty years or so, most noticeably in KRG Insurance Brokers (Western) Inc. v. Shafron, [2009] 1 S.C.R. 157, Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1S.C.R. 249 and Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986. These cases were not dealt with by the trial judge in the Nzeadibe decision.

The modern trend has been to not strike down a contract just because a statute is violated, and to apply judicial discretion across a broad spectrum of remedies, particularly if the rights of third parties are affected. The court may allow the contract to stand and apply the “blue pencil test” and excise the objectionable portions, but only if the purpose and policy of the statute is not subverted.

There are older Supreme Court of Canada decisions, in Walker v. McMillan, 1882 CarswellNB 71, 6 S.C.R. 241 and Spears v. Walker, 1884 CarswellNB 64, 11 S.C.R. 113, holding that a contract for the erection of a building which is itself contrary to municipal bylaws is an illegal contract. These decisions were not cited by the court in the present case, and they have hardly been cited by any court in the last 50 years. One wonders if these decisions, from an older era when contracts were routinely struck down if their performance infringed a public law, would still be applied.

Although the judge in this case did not address the “blue pencil test”, it is unlikely that the application of that test would have saved this contract. The court was confused enough about the terms of the contract. It is unlikely that the court could have concluded that the parties would have entered into the contract had it not contained, say, the provision relating to the separate suite.

One might expect that the legal principles would be clear in determining whether a building contract is illegal if it involves the construction of a building which is contrary to building or zoning bylaws. One might have that expectation since the construction of buildings that contravene bylaws is not an exceptional event. Yet, no clear statement of those principles emerges from the present decision.

In the present case, the judge seems most motivated by the degree to which the proposed building violated the bylaw, and the aesthetic impact upon neighbours that the building would have had. These are fairly subjective criteria and leave the court with a large discretion, and the parties with considerable uncertainty as to whether the contract will or will not be struck down.

The mere fact that a building contravenes a bylaw, no matter how incidentally, should not invalidate a building contract. Is it the degree to which the building violates the bylaw that makes it illegal? Is it the knowledge of both parties, or the plaintiff, or the defendant, that the building contravenes the bylaw? Is it the mutual purpose of the parties to contravene the bylaw? Is there any difference between a building bylaw (which this case involved) and zoning bylaws? And when, if ever, will the “blue pencil test” be applied to a building contract involving the breach of a bylaw?

We’ll wait for some appellate court to answer these questions.

See Heintzman & Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, section 3(e)

Nzeadibe v. Khan, 2017 CarswellBC 2251, 2017 BCSC 1456

Building contract – illegality – breach of building bylaws – “blue pencil” test

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                      December 10, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Alberta Court Rejects Assertion That The Mortgagee Was An “Owner” Under The Builder’s Lien Act

In Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254, the Alberta Court of Queen’s Bench made a number of decisions relating to the priorities between lienholders and mortgagees.

The court found that a mortgagee was not an “owner” of the land within the Alberta Builder’s Lien Act. In any event, by not claiming in its lien and lien action that the mortgagee was an owner, the lien claimant could not assert a claim that the mortgagee was an owner.

The court also found that under the Alberta Act, the mortgage advances had priority over the lien claimant even though they exceeded the value of the land at the time that the first lien arose.

Background

The mortgagee W was controlled by V. V also controlled the prior owner of the lands who had sold them to the present registered owner S. S was controlled by G.

W “advanced” monies under its mortgage but $1 million of that advance went into a GIC in W’s name, as security for the mortgage loan and in particular for the completion of “deep services” on the land. In addition, about $600,000 of the mortgage advance went into a GIC in W’s name as security for a development agreement with the municipality.

S agreed to sell the land to B, and B claimed priority under its agreement of purchase and sale.

Contractor P registered a builder’s lien and commenced a lien action against S. It joined W to the action, not as an owner, but as a “nominal” defendant and encumbrancer.

In the subsequent court proceedings, both mortgagee W and buyer B made tenders to buy the property and B was the successful bidder.

Both contractor P and buyer B claimed that mortgagee W was an “owner” under the Alberta Builder’s Lien Act.

Decision

The court held that “[r]emedies against a mortgagee or landlord such as declaring them to be an owner under the Builder’s Lien Act are unusual and rare. Clear circumstances must exist for this extraordinary remedy to be imposed. In my view, those circumstances are absent here.”

The court relied upon the following factors in finding that the mortgagee W was not an owner:

  1. there was no information that W and V were not acting at arms-length to the owner S.;
  1. there was nothing sinister or suspicious about the dealings;
  1. while W advanced more money than the land was worth at the time the mortgage was advanced, $1.5 million was “advanced” to invest in GICs in W’s name as security for S’s obligations under the mortgage loan;
  1. most of the registered owner S’s creditors on the project were paid. Accordingly, there was no basis for a suggestion that the mortgagee W and the registered owner S colluded to harm contractors and subcontractors;
  1. there was no evidence of direct dealings between the mortgagee W and any of the contractors or subcontractors. W did not pay the contractors or subcontractors directly and had no involvement with the construction on the lands, other than to release monies from one of the GICs to the registered owner S after it was satisfied that certain work had been completed;
  1. there was no evidence that, at any time before S defaulted on the mortgage, the mortgagee W had any intention of having an interest in the lands other than as mortgagee.
  1. there is no evidence of any request, express or implied by the mortgagee W that any contractor do any work on the property.
  1. the fact that G, who controlled the registered owner S, worked for or with the mortgagee W after the mortgage default was not relevant. G “undoubtedly had an interest in working with a major creditor to minimize his risks.”

The court also found that the contractor P’s claim that the mortgagee W was an “owner” of the land failed due to its failure to file a lien against the estate of W as owner:

“Essentially, a builder’s lien has no value until it is registered. While registration may have some retroactive effects, as under s 11(1) referenced above, it does not attach any interest in the lands until it is registered. A builder’s lien claim against an owner who has not contracted directly with the claimant provides in rem remedies only, and does not make an owner personally liable to the claimant. It is the owner’s interest in the lands that is at stake, not the owner’s other assets….Here, any builder’s lien claim against [W] is well past the filing deadline. Not by a few days or weeks, but rather years. Despite not claiming a lien against [W] interest in the lands, [P] has made no attempt to amend the lien it did file to include a claim against [W].

The court held that the mortgagee had priority over the lienholder and purchaser even to the extent of advances made which exceeded the value of the land when they were made:

“No authority is cited for the proposition that advances beyond the value of the mortgaged lands are not entitled to the same priority as advances up to the value of the lands and buildings. That may be the case in jurisdictions where lien claimants have priority over mortgagees to the extent that the lien claimants have increased the value of the property since the last mortgage advance. That is not the law in Alberta.”

The court also held that the contractor P’s claim against the mortgagee W could not be corrected under the curative section, section 37 in the Alberta statute, because “[t]he court has no discretion to depart from statutory requirements.”

Discussion

This decision provides a good check-list for those factors which may be considered in determining whether a mortgagee – or landlord or other person – is an “owner” under the lien statute. Here, there were circumstances which on the surface might raise suspicions: the prior owner was controlled by the same person who controlled the mortgagee which sought to be the buyer in the ultimate court proceedings. Was the “man in the middle”, S, simply a stooge? The court went through an eight point check-list and found no evidence to that effect.

The decision is also a warning that, if an ownership claim is to be made against any person, then the lien must be filed against that person’s interest in the land and an action asserting such a claim must be made against that person. And if such a claim is not made, the curative section will be of no avail.

The court’s finding that the mortgage advances had priority over the lienholder even to the extent of the advances exceeding the value of the land is noteworthy. Section 11((4) of the Alberta Builder’s Lien Act says that a registered mortgage “has priority over a lien to the extent of the mortgage money in good faith secured or advanced in money prior to the registration of the statement of lien” and does not mention the value of the land at the time when the first lien arose. By contrast, section 78(3) of the Ontario Act says that a prior mortgage has priority over liens “to the extent of the lesser of, (a) the actual value of the premises at the time when the first lien arose” and the amount of the advances.

In this case, a large portion of the “advances” made by the mortgagee were effectively to itself and were put into GICs in its name which provided security for the mortgage and for performance of the builder’s obligation and obligations under the development agreement with the municipality. Were these payments truly “advances” under the mortgage so far as the lien statute is concerned?

The curative section in the Ontario lien statute is proposed to be widened by the Construction Lien Amendment Act, 2017, which has now received second reading. Under new subsection 6(2) of what will be known as the Construction Act, the “minor irregularities” that are not to invalidate a certificate, declaration or claim for lien are expanded. They will now include minor errors or irregularity in the name of the owner, or person from whom materials or services are provided, or the legal description of the premises, or in placing owner’s name in the wrong portion of a claim for lien. However, it seems unlikely that this expanded section will cure the failure in a lien to make a claim against a party as an owner, or to do so in the statement of claim.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 16, section 4(a)(iv), 4(d) and 4(l)(C).

Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254

Building contracts – builder’s and construction liens – claim against mortgagee as owner – curative section

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                                 November 14, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Payment Clause Held Not To Be A “Pay-When-Paid” Clause

In Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51, the Yukon Supreme Court recently considered whether a payment clause in a construction contract was a pay-when-paid clause which entitled the contractor to only pay the subcontractor if and when it was paid by the owner.

The clause in question read as follows:

“Payments shall be made monthly on progress estimates as approved by the Contractor covering 90% of the value of the Work completed by the Subcontractor to the end of the previous month; such payments to be made 7 days after the Contractor receives payment for such Work from the Owner.” (underlining added)

The court considered the conflict in the law at the appellate level in Canada. In Timbro Developments Ltd. v. Grimsby Diesel Motors Inc., [1988] O.J. No. 448, the Ontario Court of Appeal held that the clause in question was a pay-when-paid clause, and that the contractor did not have to pay the subcontractor until paid by the owner. Justice Finlayson dissented, holding that the clause was a timing provision and “in no sense puts the subcontractors at risk that they will not be paid if the contractor is not paid. They are not co-adventurers or partners in this construction contract. Having done the work as found by the trial Judge, they are entitled to be paid.”

In Arnoldin Construction & Forms Ltd. v. Alta Surety Co., [1995] N.S.J. No. 43, the Nova Scotia Court of Appeal held that the clause in question was not a pay-when-paid clause which entirely protected the contractor from paying until paid by the owner. Rather, the clause was a payment timing clause which provided that payments by the contractor would generally be paid after payment from the owner but did not preclude the contractor form finally paying the subcontractor even if unpaid by the owner. In the Arnoldin case, the clause was being relied upon by the payment bonding company and that factor may have been important since it makes less sense to interpret the clause as entirely relieving the contractor from paying the subcontractor when the contractor has provided a payment bond to deal with that very situation.

In concluding that the clause was not a pay-when-paid clause, the Yukon Supreme Court said:

“I am in agreement with the interpretation in Arnoldin where the words in the contract before it which were not as clear and precise as the words in Timbro where the contractor clearly assumed the risk of non-payment by the owner to the contractor. In the case at bar, I am of the view that the payment clause is a timing clause rather than a “pay when paid” clause as in Timbro. There is no clear wording that the payment on the Subcontract was conditional on the owner paying the contractor. Therefore, I order that the balance outstanding shall be paid regardless of whether Martian has paid Seko, subject to amount only under the two remaining issues.”

Discussion

This decision follows the trend of recent cases. Most of the recent court decisions have held that, unless the language of the contract makes it very clear that the contractor does not have to pay the subcontractor at all if not paid by the owner, then the provision will not preclude the ultimate obligation of the contractor to pay the subcontractor.

It is difficult to distinguish Timbro from Arnoldin based upon the wording of the respective contracts. In Timbro the relevant wording was “when we have been paid by the owner”. In Arnoldin, the words were “after payment has been received by the Contractor.” The recent cases, following the Arnoldin and not the Timbro decision, may reflect a judicial antipathy to a clause which, in the absence of very clear words, denies payment to the subcontractor when, as Justice Finlayson said, it has done the work.

This decision high-lights the importance of the Prompt Payment regime proposed to be introduced into Ontario law by the Construction Lien Amendment Act, 2017. Under that legislation, a contractor is entitled to deliver to a subcontractor a notice of non-payment, and may deliver such a notice if it has not been paid by the owner. The same regime applies down the payment pyramid.

This legislation may arguably introduce into Ontario a statutory pay-when paid regime. That would be a surprising result since the general trend is for legislatures to ban pay-when paid (as has occured in the U.K. and in several U.S. states) and for courts to strain against finding that a clause is a pay-when-paid clause unless that is very clear.

Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51

Building Contracts – pay-when-paid clauses – Prompt Payment legislation

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                         October 27, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Amendments To The Ontario Construction Lien Act Have Been Given First Reading (Part 2)

On May 31, 2017, the Ontario Legislature gave first reading to Bill 142 which will enact the Construction Lien Amendment Act, 2017. By this legislation, substantial amendments are proposed to the Ontario Construction Lien Act, including the change of the name of the Act to the Construction Act.

This proposed legislation (the Proposed Act) follows a lengthy Report: Striking the Balance: Expert Review of Ontario’s Construction Lien Act, delivered April 30, 2016 ( the Report). The Report recommended the changes to Ontario’s Construction Lien Act (the Existing Act) that are now contained in the Proposed Act, so the contents of the Report should be consulted in interpreting and understanding the Proposed Act. The Report is reviewed in my article dated May 1, 2017.

The text of Bill 142 may be found by googling Bill 142, Construction Lien Amendment Act, 2017. The text of the Report may be found by googling Amendments to the Construction Lien Act/Striking the Balance- Expert Review of Ontario’s Construction Lien Act

The proposed changes to the Act are so numerous that they are being dealt with me in two articles. This article is the second article. These articles do not address all the proposed changes to the Existing Act, only those that I consider to be interesting or important.

The changes will be dealt with largely in the order in which they appear in the Proposed Act. I will offer my Comments and Questions about the various sections in the Proposed Act.

Minor irregularities:

New subsection 6(2) expands the “minor irregularities” that are not to invalidate a certificate, declaration or claim for lien. They now include minor errors or irregularity in the name of the owner, or person from whom materials or services are provided, or the legal description of the premises, or owner’s name in the wrong portion of a claim for lien.

Comments and Questions

This is an important amendment. The power of the court to correct or allow irregularities in liens is substantially increased. There will likely be many applications to test the ambit of this wider corrective power.

Construction Trustee’s Records and Bank Accounts

New subsection 8.1(1) requires any trustee under the Act to deposit trust funds received by him or her into a bank account and to keep written records detailing the receipt, payments and transfers of each such funds for each project.

Under new subsection 8.1(2), if trust funds from separate trusts are deposited into a single bank account, the funds are deemed to be traceable, and such a deposit does not constitute a breach of trust.

Comments and Questions

This is an important amendment. The exact obligation of trustees regarding bank accounts and records will be explored in subsequent case law. The decisions from western Canadian provinces and the U.S.A. may be relevant since those jurisdictions have had more obligations and experience in this area than has Ontario.

It is to be noted that this amendment does not require the trustee to maintain a separate bank account for each project. But, as the Report notes, if the trustee does not then the trustee ’s books and records must “clearly show the allocation to each trust of the funds deposited in the general account” and the “trustee must keep separate books for each trust for which it is trustee (and if funds of separate trusts are in the same bank account, the trustee is to keep a record of such account showing the allocation to each trust of deposits and withdrawals); and the books and records of each trust must show specifically articulated particulars with respect to assets receivable, assets payable, trust funds received, trust payments made with trust assets and any transfers made for the purpose of the trust.”

Interim Dispute Adjudication

New Part II.1 and Sections 13.1 to 13.24 introduce into the Act a new regime dealing with Construction Dispute Interim Adjudication.

This part will enable either party to a construction contract, during the performance of the contract, to have an interim resolution of a dispute between the parties conducted by an adjudicator. Under subsection 13.3(3), only if the parties both agree can this new adjudication regime apply to adjudications commenced after the contract or subcontract is performed.

The effect of the adjudication is interim since, under section 13.15, the determination is only binding on the parties “until a determination of the matter by a court or any determination of the matter by way of an arbitration conducted under the Arbitration Act, 1991.”

These sections provide in detail for: an Authorized Nominating Authority to be designated by regulation which will appoint the adjudicators (sections 13.1 to 13.3); the procedures relating to an interim adjudication (sections 13.6 to 13.14); the power of the court to set aside an adjudication (section 13.18); and the obligation of the court to enforce the adjudicator’s determination (sections 13.19 and 13.20).

The adjudication regime can extend the period to protect the lien. Under new subsection 34(10), if the matter that is the subject matter of a lien is also the subject matter of an adjudication, then the lien is deemed, for the purpose of section 34 only, to have expired “on the later of the date on which the lien would expire under section 31 and the conclusion of the 45-day period next following”

(a) the receipt by the adjudicator of the notice requesting adjudication and related documents referred to in section 13.11; or

(b) in the case of consecutive adjudications, the receipt by the adjudicator of the section 13.11 documents for the last of the adjudications.

Comments and Questions

Section 13.3(5) says that a matter can be sent to adjudication even though that matter is subject to court or arbitration proceedings. How will all these regimes work together? The addition of the adjudication regime means that there are now at least four regimes applicable to construction disputes: contract litigation, arbitration, lien litigation, and adjudication. Enough already?

What effect should be given to the adjudicator’s determination in subsequent court or arbitration proceedings? No effect, because the adjudication is, by section 13.15, no longer binding once an order is made by a court or arbitrator? Some proof of the facts decided by the adjudicator, but rebuttable? Respect for the findings, but not binding if unreasonable? Having introduced the adjudication process into the Act, should the legislature tell us what effect the adjudication has in subsequent proceedings, or did it intend to do so in section 13.15?

Are the adjudicative procedures subject to the Arbitration Act, 1991? Subsection 13.12(6) says that they are not subject to the Statutory Powers Procedure Act, but the same statement is not made in relation to the Arbitration Act, 1991?

Are the adjudicative procedures confidential? Must the adjudicator’s reason, which must be given in writing (section 13.13(4)), be kept confidential? If the proceedings or reasons must be kept confidential, or can be ordered to be kept confidential, between whom must they be kept confidential: the contractor, owner, subcontractor, and supplier? Is this matter simply left up to the adjudicator to decide, under his or her power in subsection 13.12(4) to determine the appropriate manner to conduct the adjudication?

As discussed below, does new subsection 71(5) prohibit appeals from orders reviewing or enforcing (or refusing to enforce) an interim adjudication? It appears that it does.

Under the new subsection 34(10), the extension of the lien-preservation period by reason of adjudication runs to the date of the receipt by the adjudicator (or the last adjudicator) of the adjudication claim and related documents referred to in section 13.11, not (as might be assumed) the date of the adjudication itself (or appeal decision). So a party wishing to make a lien claim and an adjudication claim must, in remembering to preserve its lien claim, pay attention to the date that the adjudicator receives the adjudication claim.

Landlords

Section 19 (1) of the Act is replaced with an entirely new regime relating to the liability of landlords. Gone is the regime whereby notice could be given to the landlord of the improvement being made, which required the landlord to disavow responsibility for the improvement. Now:

Subsection 19(1) says that “if payment for all or part of the improvement is accounted for under the terms of the lease or any renewal of it, or under any agreement to which the landlord is a party that is connected to the lease, the landlord’s interest is also subject to the lien, to the extent of 10 percent of the amount of such payment.”

In addition, new subsection 19(5) says that “Nothing in this section prevents a determination in respect of a premises that the landlord is instead its owner, if he or she meets the criteria set out in the definition of “owner” in subsection 1 (1). (underlining added)

Accordingly, the landlord may be liable for the 10 percent holdback if the “improvement is accounted for under the terms of the lease, renewal or other connected or agreement” (whatever those words may mean); or in the alternative may be liable as an owner.

Lien claimants are granted the right to obtain information from landlords under the amended subsection 39 (1), which requires landlords to provide information about the names of the parties to the lease, and the amount of the payment by the landlord under the lease for part or all of the improvements referred to in subsection 19 (1).

Comments and Questions

Issues may arise as to what words in a lease amount to “all or part of the improvement is accounted for under the lease” so as to trigger the 10 percent liability in subsection 19(1).

Also, the very same wording in the lease may be part of the surrounding circumstances which may arguably make the lessor an “owner” under subsection 19(5).

Set-Off

Section 12 and subsection 17(3) are amended to provide that, in determining the amount of the trust funds to be retained by a trustee and the amount of a lien claim, a set-off can only be asserted in relation to debts, claims and damages relating to the improvement.

Comments and Questions

This is a very substantial amendment. Formerly, set-offs applied “whether or not related to the improvement.” A substantial body of case law has been rendered irrelevant.

Holdback

Several amendments have been made to the retention and payment of the holdback.

Under new subsection 22(4), a holdback can be maintained in various prescribed forms including a letter of credit and a demand-worded holdback payment bond.

Under the amended section 26, the payer under a contract “shall” (and no longer “may”) pay the holdback once all liens have been satisfied, discharged or provided for, subject to a payer publishing a non-payment notice under new section 27.1.

Under new sections 26.1 and 26.2, a holdback may now be paid on an annual or phased basis if the contract provides for payment of the holdback on one of these bases and the other provisions of these sections are satisfied and the contract amount exceeds an amount to be prescribed under the Act.

Under section 27.1, a payer of a holdback may refuse to pay some or all of the holdback if it publishes a notice to that effect in the prescribed manner and form within 40 days of the applicable certificate or declaration of substantial performance.

Comments and Questions

Must the entitlement to withhold payment of the holdback be reconciled with the new prompt payment regime?

Presumably, the 40 day period for giving notice of non-payment of the holdback is intended to do so, but some of the periods are not intuitively consistent. Thus, under section 6.3, the owner must pay the proper invoice within 28 days, unless it disputes that invoice and gives a notice of non-payment within 14 days after receiving the invoice. If the owner fails to give such a notice, can it still deliver a notice refusing to pay a holdback?

Preservation, Protection And Expiry Of The Lien

Sections 31(2)(a), 31(2)(b) and 31(3)(a) are amended to increase the time to preserve the lien from 45 days to 60 days.

Subsections 31(2)(a)(ii), 32(2)(b)(ii), 31(3)(b) and section 72 are amended to include the termination of the contract, in addition to its completion or abandonment, as an event starting the period in which the lien must be preserved. Under new subsection 31(6), the terminating party is obliged to publish notice of the termination in the prescribed manner and form, but doing so does not preclude the other party from challenging validity of the termination.

New subsection 31(4) provides for the expiry of a workers’ trust fund lien in the same time period as other liens, including the period from the termination of the contract.

As already noted, the time for preserving a lien under section 34 may be extended by an adjudication as a result of the new subsection 34(10).

Subsection 36 (2) of the Act is amended to increase the time for perfecting the lien from 45 to 90 days.

Comments and Questions

How will the lien preservation and perfection regime intersect with the adjudication regime?

Can the adjudication process be abused for the purpose of extending lien preservation and perfection rights?

The accumulated times for preserving and perfecting a lien is now 150 days, or about five months, instead of 90 days, a substantial increase in the lien claim process.

Subsection 34(10) extends the time for preserving the lien, which effectively extends the time for perfecting the lien. But that subsection does not appear to directly, or otherwise, extend the time for perfecting the lien.

The word “termination” is not defined in the Act. Under contract law, a contract is not entirely terminated by an accepted repudiation or rescission or the like. Rather, the contract remains alive for dispute resolution purposes. It appears that the word “termination” has been used in these new provisions in the sense of termination of the performance of the contract.

Condominium Common Elements

Section 34 of the Act is amended to provide a regime for giving notice of the preservation of a lien affecting the common elements of a condominium.

Remedies For False Or Exaggerated Lien Claims

Subsection 35(1) is repealed and replaced with a new subsection (1) which states that a person who preserves a claim for lien or who gives written notice of a lien in the following circumstances is liable to any person who suffers damages as a result if:

  1. The person knows or ought to know that the amount of the lien has been wilfully exaggerated.
  2. The person knows or ought to know that he or she does not have a lien.

In addition, under the new subsection 35(2), in the circumstances described in subsection 35(1).1 the court may “order that the lien amount be reduced by the exaggerated portion…if it finds that the person has acted in good faith.” (underlining added)

Subsection 47(1) is repealed and replaced with a new subsection (1) which empowers the court to discharge a lien if the claim for lien is frivolous, vexatious or an abuse of process, or on “any other proper ground”. Under new subsection 47(1.1), the court may vacate the registration of a claim for lien or certificate of action or both, declare that a written notice of lien has expired or is no longer valid, or dismiss an action.

Comments and Questions

Section 47 refers to a lien which is “frivolous, vexatious or an abuse of process”. Do these words mean the same as “willfully exaggerated” in subsection 35(1)? Recommendation 15 of the Report called for Section 35 to be amended “to replace the concept of “grossly inflated” liens with the concept of “wilfully exaggerated” liens, refocussing the threshold at a more sensitive level.” However, section 47 still refers to “frivolous, vexations or an abuse of process” which may or may not mean the same as “willfully exaggerated”.

It seems that subsection 35(2) is intended to be a sort of preservative exception to section 47; that is, if the person who registered the lien did so in good faith, the lien can be reduced in amount under subsection 35(2), but if the person who registered the lien did not act in good faith, then apparently the court has no power to reduce the lien amount by the exaggerated portion.

It is not clear how this provision will work. Recommendation 16 of the Report says:

“The provision [referring to section 35] should further be amended to allow the court to find, where there is wilful exaggeration, that the lien claimant is liable for any damages incurred as a result of the exaggerated claim, including bond premiums, costs, and, where the court considers it just, the lien amount should be reduced by an amount up to the amount of the difference between the wilfully exaggerated amount and the actual amount of the lien claim; provided that a defence of good faith should be available to the lien claimant.”

However, the new subsection 35(2) is found in section 35, not section 47, and the relief in section 35 relates to “damages” for filing an “exaggerated” lien which may or may not be equivalent to the amount of a lien which is “frivolous, vexations or an abuse of process”.

Procedures: Directions, Summary Procedures And Appeals

Section 50 of the Existing Act is the section which sets forth the general procedures for lien actions. Among other things, the present subsection 50(2) prohibits a lien and trust claim being joined in the same action. The Report recommended that the prohibition on joinder of lien claims and trust claims under section 50(2) should be removed from the Act, subject to a motion by any party that opposes joinder on the grounds of undue prejudice to other parties.

Under the Proposed Act, Section 50 is repealed and replaced by subsections which states that, except to the extent that they are inconsistent with this Act and the procedures prescribed for the purposes of this Part, the Courts of Justice Act and the rules of court apply to actions under this Part; and that the procedure in an action shall be as far as possible of a summary character, having regard to the amount and nature of the liens in question.

Accordingly, the procedures in lien actions are now to be dealt with as generally provided in the Courts of Justice Act and the Rules of Civil Procedure, and there is no further prohibition of joining a trust claim with a lien claim.

Sections 53 to 57 are repealed. These sections instituted specific procedures in lien actions. In particular, section 56 prohibited third party clams in lien actions without court approval. The Report recommended that this prohibition be removed, and it has been.

Section 66 (dealing with applications to the court for directions) and section 67 (dealing with Summary procedures) are repealed.

Section 71(3) is amended to permit appeals from interlocutory orders of the court to the Divisional Court, with leave of that Court. Formerly, no appeals could be taken from interlocutory orders in lien actions.

Under new subsection 71(3), with respect to appealing the confirmation of a report made under the Act, if the amount in issue is $10,000 or less, there is no appeal: formerly, the amount was $1,000.

Under new subsection 71(5), there is no appeal from an order of the court under Part II.1, that is, interim adjudication.

Comments and Questions

The elimination of section 67 means that interlocutory motions may now be brought and oral and documentary discovery may be conducted in lien proceedings, as recommended by the Report. The Report also recommended, however, that all lien proceedings be case managed in all regions in Ontario.

Does subsection 71(5) mean that there is no appeal from an order under new section 13.18, namely, an order granting or dismissing an application to set aside the determination of an adjudicator? Presumably yes, because the adjudicator’s determination is only intended to be provisional, until an order of a court or arbitrator is made.

Does subsection 71(5) mean that there is no appeal from an order enforcing an adjudicator’s determination under new sections 13.19 or 13.20? Such a prohibition seems somewhat more radical that a prohibition against appealing an order under section 13.18 since enforcement of the adjudication regime seems to be matter of importance. Then again, the adjudication regime is only intended to be provisional, and the parties can still go to court or arbitration outside that regime.

Surety bonds

A new Part XI.1 entitled Surety Bonds is introduced into the Act. This new part may be summarized as follows.

If a public contract (defined to be a contract between a contractor and the Crown, a municipality or broader public sector organization) exceeds the prescribed amount, then new section 85.1 requires the contractor to provide the owner with a labour and materials payment bond and a performance bond, both to be in the prescribed forms and written by a licensed insurer and in each case providing coverage of at least 50 percent of the contract price. The labour and material bond is required to provide coverage to the subcontractors and persons providing labour or materials to the improvement.

New subsection 86.3(1) provides that any person to whom payment is guaranteed under a labour and materials payment bond has a direct right of action against the surety. New subsection 86.3(2) provides that an owner has the right to enforce a payment bond against the surety and the contractor. New subsection 86.3(5) states that, on satisfaction of the obligations of a person under a bond, the surety is subrogated to the rights of that person.

Comments and Questions

For the most part, these amendments appear to be intended to allow third party beneficiaries to a bond to enforce it, overcoming the rule against the enforcement of a contract by a third party beneficiary of the contract. The case law has largely accomplished this result but these amendments may solidify the position of third party beneficiaries.

While subsection 86.3(5) appears to strengthen the subrogation principle in favour of sureties, the case law has protected other interests conflicting with those of the subrogating surety, including those of lien claimants, mortgagees and the Crown.

Thomas G. Heintzman O.C., Q.C., LL.D.(Hon.), FCIArb                     September 23, 2017

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Amendments To The Ontario Construction Lien Act Have Been Given First Reading (Part 1)

On May 31, 2017, the Ontario Legislature gave first reading to Bill 142, which will enact the Construction Lien Amendment Act, 2017. By this legislation, substantial amendments are proposed to the Ontario Construction Lien Act, including the change of the name of the Act to the Construction Act.

The text of Bill 142 may be found by googling Bill 142, Construction Lien Amendment Act, 2017.

This proposed legislation (the Proposed Act) follows a lengthy Report: Striking the Balance: Expert Review of Ontario’s Construction Lien Act, delivered April 30, 2016 (the Report). The Report recommended the changes to Ontario’s Construction Lien Act (the Existing Act) that are now contained in the Proposed Act, so the contents of the Report should be consulted in interpreting and understanding the Proposed Act. The Report is reviewed in my article dated May 1, 2017. The text of the Report may be found by googling Amendments to the Construction Lien Act/Striking the Balance-Expert Review of Ontario’s Construction Lien Act.

The proposed changes to the Existing Act are so numerous that they will be dealt with me in two articles. This is the first article. These articles do not address all the proposed changes to the Existing Act, only those that I consider to be interesting or important.

The changes will be dealt with largely in the order in which they appear in the Proposed Act. I will offer my Comments and Questions about the various sections in the Proposed Act.

Joint Ventures 

The definition of “contractor” in subsection 2(1) is amended to include a “joint venture entered into for the purpose of an improvement or improvements”.

Written Notice of Lien

The definition of “written notice of lien” in subsection 2(1) is changed to read “a claim for lien or a written notice of a lien in the prescribed form, given by a person having a lien.”

New subsection 87(1.1) provides that “a written notice of lien shall be served in a manner permitted under the rules of court for service of an originating process.”

Comments and Questions

These amendments are important. They do away with the prior informality of the form and the manner of service of a notice of lien. Now, the notice of lien must be in a prescribed form and must be served in the same manner as an originating proceeding in court.

Improvements involving “repairs” limited to capital repairs

The definition of “improvement” in subsection 1(1) is amended to include the word “capital” before the word “repairs”. In the result, only capital, and not operating, repairs are included within the word “improvement”.

This point is emphasized in new subsection 1(1.1), which further defines the word “improvement” as follows:

            “Capital repair”

(1.1) For the purposes of clause (a) of the definition of “improvement” in subsection (1), a capital repair to land is any repair intended to extend the normal economic life of the land or of any building, structure or works on the land, or to improve the value or productivity of the land, building, structure or works, but does not include maintenance work performed in order to prevent the normal deterioration of the land, building, structure or works or to maintain the land, building, structure or works in a normal, functional state.” (underlining added)

Comments and Questions

The new legislation clearly re-draws the line around “repairs” to only include “capital” repairs. The debate will continue, however, but it will now be a debate about what is included in the definition of “capital repairs”, and whether the material or services fall within the words “extend the normal economic life” or “improve the value or productivity” on the one hand, or the words “prevent normal deterioration” or to “maintain” the building etc. in a “normal, functional state”, on the other hand.

The Report states that its approach to “capital” repairs and “maintenance” reflects the approach taken in the Income Tax Act. Accordingly, income tax cases may be of some assistance in interpreting this portion of the Proposed Act.

Price, Delay, Direct and Indirect Costs

In the definitions in subsection 1(1), the definition of the word “price” is amended in two respects:

First, if the parties have not agreed upon the price, then the price is to be set by the “market value” of the services and materials. Formerly, the price in this circumstance was to be set by the “value”, rendering it uncertain what scale or system of value was to be used.

Second, a new sub-paragraph (b) is added to state that if the contract is extended (that is, if there are delays) then only direct costs qualify as being part of the “price”. The amended definition reads as follows:

“ “price” means,

(a)  the contract or subcontract price,

(i)  agreed on between the parties, or

(ii)  if no specific price has been agreed on between them, the actual market value of the services or materials that have been supplied to the improvement under the contract or subcontract, and

(b)  any direct costs incurred as a result of an extension of the duration of the supply of services or materials to the improvement for which the contractor or subcontractor, as the case may be, is not responsible;” (underlining added)

The latter point about direct costs is further dealt with in subsection 1(1.2) to define what direct costs means, to define some of the possible ingredients of direct costs, and to specifically remove indirect damages from “price”. Subsection 1(1.2) reads as follows:

“Direct costs”

(1.2) For the purposes of clause (b) of the definition of “price” in subsection (1), the direct costs incurred are the reasonable costs of performing the contract or subcontract during the extended period of time, including costs related to the additional supply of services or materials (including equipment rentals), insurance and surety bond premiums, and costs resulting from seasonal conditions, that, but for the extension, would not have been incurred, but do not include indirect damages suffered as a result, such as loss of profit, productivity or opportunity, or any head office overhead costs.” (underlining added)

Comments and Questions

Although “indirect damages” do not now qualify as part of the price for lien purposes, indirect damages may qualify as recoverable damages, if they otherwise so qualify under the general law of contract and damages.

Do these new definitions mean that there can no longer be a debate about whether some of these items are direct or indirect costs for lien purposes?

Thus, in the first group – which is prefaced by the word “including” – is the additional supply of services or materials deemed to be a direct cost, even if the particular supply might, under contract law or accounting, be considered to be indirect? Does the word “including” have that effect?

So far as the second group – prefaced by the words “such as”, are loss of productivity or head office overhead now deemed to be indirect costs, or can it be shown that they are, in fact, law or accounting, direct costs in the particular circumstance? Does the word “such as” mean “for example”, and is that the same as “including”?

In sorting out what is included within or excluded from “direct costs”, the recommendation of the Report may be relevant. In its 5th recommendation, the Report stated that the “definition of “price” should be amended to include direct out-of-pocket costs of extended duration and exclude damages for delay.” (underlining added).

Crown and Municipal Ownership

Alternative Financing and Procurement arrangements

New subsection 1.1 may be summarized as follows:

When, as owner, the Crown, municipality or a “broader sector organization” [which is defined in the Proposed Act to have the same meaning as in the Broader Public Sector Accountability Act, 2010] enters into an agreement to undertake an improvement on behalf of the Crown, municipality or broader sector organization” with a “special purposes entity” then that entity is deemed to be the owner of the premises in place of the Crown, municipality or broader sector organization, and the contract between the entity and the contractor is deemed to be the contract, for the purposes of Part I.1 (prompt payment), Part II.1 (interim dispute resolution), Section 32 (certification and substantial performance), Section 39 (right to information) and any other portion or provision that may be prescribed. (underlining added)

With these exceptions, “the Crown, municipality or broader public sector organization continues to be the owner of the premises for the purposes of this Act,” and:

  “For the purposes of section 22, holdbacks shall be determined in reference to the agreement between the contractor and the special purpose entity.”

  For the purposes of section 85.1 (surety bonds), “the agreement between the contractor and the special purpose entity is deemed to be a public contract.” (underlining added)

Comments and Questions

These provisions relating to special purposes entities are somewhat duplicative, complicated and inter-dependent. The summary above is what I understand the provisions to mean. Exactly how they will work out will depend upon the final wording of the Proposed Act, and future experience and case law.

Definition of municipality

The definition of “municipality” in subsection 2(1) now includes a municipality or local board within the meaning of the Municipal Act, 2001, or a conservation authority established by or under the Conservation Authorities Act or a predecessor of that Act.

Crown and Municipal Land

Section 16 is amended to state that the land of the Crown or a municipality cannot be the subject of a lien. However, a lien may attach to the interest of any other person in the premises.

Under new subsection 16(3), the lien is a charge upon the holdback under section 21 even if the owner of the land is the Crown, a municipality or the land is a railway right-of-way.

Under new subsection 34(3.1), if the land is owned by a municipality, the claim for lien may be served by being given to its clerk.

            Comments and Questions

These amendments contain important clarifications or amendments of the existing law. Now, the prohibition against liening municipal land applies to all municipal land, not just a public street or highway owned by a municipality – as provided for in the Existing Act, subsection 16(3)(c). Now, it is clear that the lien may be a charge upon the holdback even if it is not a lien against Crown or municipal land or a railway right-of-way.

Sureties For Public Contracts

As will be noted in further detail in the second part of this article, if a public contract (defined to be a contract between a contractor and the Crown, a municipality or broader public sector organization) exceeds the prescribed amount, then new section 85.1 requires the contractor to provide the owner with a labour and materials payment bond and a performance bond in the prescribed forms and written by a licensed insurer and in each case providing coverage of at least 50 percent of the contract price.

Holdback, Substantial Performance and General Liens

Section 2 of the Existing Act defines when a contract is substantially performed for the purpose of the Act. It does so by stipulating that, when the cost of completion or correction are not more than certain amounts or percentages, then the contract is substantially performed.

Section 2 is amended by the Proposed Act to change the cost of completion or correction amounts in subsection 2(1) from $500,000 to $1 million, and the deemed completion amount in subsection 2(3) from $1,000 to $5,000 (or 1 percent of the contract price, whichever is the lesser).

In section 2(2), the non-completion of the improvement due to factors beyond the control of the contractor is removed as a reason for deducting the cost of completion from the contract price to determine substantial performance.

Subsection 2(4) of the Act is added to provide that separate improvements on separate lands may, if the contract so provides, be deemed to be made under separate contracts.

Comments and Questions

Does the new subsection 2(4) have any impact on the general lien, which is provided for in section 20? It seems to mean that, if the contract provides as now stated in subsection 2(4), then a general lien cannot arise on both or all improvements on “separate” lands.

Subsection 20(2) of the Present Act states that a general lien does not arise “under or in respect of a contract that provides in writing that liens shall arise and expire on a lot-by-lot basis.” Recommendation 20 of the Report was that “Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis.” Apparently, this recommendation will not be implemented as there is nothing in the Proposed Act deleting subsection 20(2).

Indeed, reading the new subsection 2(4) with the existing and remaining subsection 20(2), it seems that the present general lien regime continues to apply but with expanded rights to contract out of that regime, both under the existing right to contract out of it through a contract complying with subsection 20(2), and also under the new subsection 2(4) allowing for the contract to provide that there are separate contracts for “separate improvements” on “separate lands”.

Prompt Payment

New Part I.1 and sections 6.1 to 6.8 implement a “prompt payment” regime. The regime is detailed, so a careful review of it must be undertaken by all construction law practitioners. The following is a basic outline of the regime as I understand it:

  • Section 6.1 mandates the form of a “proper invoice”. Under subsection 6.2(1), unless the contract otherwise provides, a proper invoice must be given by the contractor to the owner each month. Under subsections 6.2(2) and (3), the contract cannot provide that the giving of a proper invoice is conditional on a prior certification of a payment certifier or the owner’s prior approval, but such a certification or approval after the proper invoice is delivered is not affected.
  • Under section 6.3, the owner must pay the proper invoice within 28 days, unless it disputes that invoice and gives a notice of non-payment within 14 days after receiving the invoice. The notice of non-payment must specify the amount of the proper invoice that is not being paid and must detail “all of the reasons for non-payment.” The owner must pay within the 28 days any amount not so disputed.
  • Under section 6.4, subject to giving a notice of non-payment to a subcontractor, the contractor must, within 7 days of receiving the amounts from the owner, pay the subcontractors whose materials or services were included in the contractor’s proper invoice to the owner. If the contractor has received partial payment from the owner, the contractor must pay any subcontractors for whose work the owner has paid the contractor. Otherwise the subcontractors are to be paid on a rateable basis.
  • If the contractor does not give notice of non-payment to a subcontract, then even if it has not been paid by the owner, it must pay any remaining amounts due to the subcontractors within 35 day of sending its proper invoice to the owner.

Under subsections 6.4(5) and (6), the contractor can give a notice of non-payment to a subcontractor:

  1. either due to the fact that it has not been paid by the owner, in which case the notice of non-payment must be made within 7 days of the notice of non-payment by the owner, and the contractor must agree to have the “matter” adjudicated; or
  2. due to the fact that it disputes the subcontractor’s claim in which case the notice must specify the amount not being paid and detail “all of the reasons for non-payment”, and must be given with the said 35 day period.
  • Under section 6.5, similar cascading regimes of payment, non-payment notices, etc. apply to subcontractors with slightly different time periods for notices and payment.
  • This prompt payment regime does not apply to wages.
  • Interest is payable on amounts due under these provisions at the greater of the prejudgment interest rate under the Courts of Justice Act, or the interest rate specified in the contract.

Comments and Questions

Contracting out/Pay-when Paid regimes. The first issue relating to this new prompt payment regime is whether the parties can contract out of it. In particular, does the new prompt payment regime replace and nullify, or enforce by statute, a “pay-when-paid” clause in a subcontract?

As to the first question, subsection 6.2(1) of the new statutory “prompt payment” regime states that proper invoices shall be given to the owner on a monthly basis “unless the contract otherwise provides otherwise.” Do those words apply to the whole regime? Or does that reference in this subsection to the parties’ entitlement to contract out mean that the parties cannot contract out of the other parts of these sections?

And does the “no waiver of rights” provision in section 4 of the Act nullify other conflicting contractual regimes?

As to the second question relating to pay-when paid clauses, two issues arise.

First, does the new prompt payment regime allow pay-when-paid clauses in subcontracts? There is nothing in the prompt payment regime that expressly mentions or nullifies pay-when-paid clauses.

In addition, the further question may be whether the new regime mandates a pay-when-paid regime whether or not the subcontract provides for such a regime. Thus, subsection 6.4(5)(a)(ii) states that the contractor is not obliged to pay the subcontractor under subsection 6.4(4) if it delivers a notice of non-payment to the subcontractor stating that the amount payable to the subcontractor is not being paid due to non-payment by the owner to the contractor. Does this subsection create a right to not pay the subcontractor if the owner has not paid the contractor, even if there is no pay-when-paid clause in the subcontract? Contractors may argue that it does, and that the statute has created a regime which must be followed.

In the United Kingdom under section 113(1) of the Housing Grants, Construction and Regeneration Act 1996 (U.K.), pay-when paid clauses are rendered ineffective unless the third party payor (such as the owner who has not paid the contractor) is insolvent.  This statute is the same one in which, in section 108, the adjudication regime is established. The two subjects – prompt payment and adjudication – are dealt with in the same payment regime, a regime in which pay-when paid clauses are banned except in the case of insolvency.

In the absence of such a prohibition of pay-when-paid clauses in the Ontario statute, does the proposed Ontario prompt payment regime effectively create a pay-when-paid regime which statutes in the U.K. (and in some states in the U.S.A.) have abolished? Where does the Ontario prompt payment regime provide a basis for the adjudicator (or arbitrator or judge) to require payment, either contrary to a pay-when-paid clause or contrary to a notice of non-payment under section 6.4 of the Proposed Act?

Second, if there are reasons why the pay-when-paid or other similar contractual regime could not presently be enforced by the contractor (for instance, if the contractor was the cause of the owner’s non-payment) can those reasons still be advanced by the subcontractor? While there is no provision in the Proposed Act to this effect, subcontractors will likely expect that they can do so. They may utilize the adjudication regime to require payment even though the contractor has served a non-payment notice on the subcontractor, alleging that the owner’s non-payment is due, among other reasons, to the fault of the contractor.

Is the non-payment regime arising from a disputed invoice or subcontractor’s invoice subject to the arbitration or other dispute resolution provisions of the respective contract?   Presumably yes, but there does not appear to be any link between the prompt payment regime and the either the court or arbitral dispute resolution systems. As noted below, this may mean that there are at least four dispute resolution regimes applicable to construction lien disputes.

Similarly, the link to, or impact of the prompt payment regime on, the certification or approval regimes is not entirely clear. Subsections 6.2(3) and (4) provide that a prior certification or approval regime cannot nullify a proper invoice, but it is unclear what the effect is of a certification or approval process after a proper invoice is delivered. Could such a process interrupt the contractor’s entitlement? What is the relationship between an owner’s notice of non-payment and a subsequent certificate denying payment or an owner’s non-approval? Could such a certificate or non-approval be the basis, by itself, of an owner’s notice of non-payment?

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                               September 10, 2017

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