The Seven Principles Of Value For Unjust Enrichment

What is something worth? And if it’s worth something to you, is it worth the same to me? Or is everything in the eyes of the beholder?

These are tough questions at the best of times. But they are even tougher in the case of a claim for unjust enrichment. In unjust enrichment, value is simply at large. There is no contractual context to develop an express or implied intention to establish the criteria for value.

The recent decision of the UK House of Lords in Benedetti v. Sawiris is a Must Read for anyone who is interested in the law of unjust enrichment. It is also a must read for anyone who enjoys five English law lords spending 78 pages pondering over the meaning of value, writing in true British elegant style and relying on everything from Vanity Fair to Oscar Wilde. The decision is truly a tour de force.

This decision is particularly important for construction projects because it provides a comprehensive approach to value when building services or materials are provided without a contract, which happens more often than one might suppose.

Full tribute to this decision cannot be given in one article. So the background will be related and then the seven principles which appear to arise from the decision will be stated.

Background

Mr. Benedetti learned of an opportunity to obtain control of an Italian telecom company. He went to Mr. Sawiris and offered to help Mr. Sawiris’ family obtain control. An elaborate agreement was prepared under which Benedetti was to be paid for his services. However, control of the Italian telecom company proved impossible on the terms contemplated by that agreement. Ultimately, the Sawiris family did get control of the Italian telecom but only upon devoting much more capital than had been contemplated in the agreement with Benedetti. Benedetti acknowledged that he was not entitled to compensation on the basis of that agreement, or any other agreement, but asserted that he was entitled to compensation on an unjust enrichment basis. Sawiris agreed that Benedetti was entitled to compensation on that basis. The dispute between them was about how much.

During the whole process, Benedetti was able to engineer the arrangements so that he in fact received €67 million. The trial judge found that the services for which Benedetti received that amount were only 60 percent of what he had actually done. The trial judge found that the fair market value of the compensation for the sort of services which Benedetti provided was €36million. During the negotiations of the commercial arrangements whereby the Sawiris family obtained control of the Italian telecom, and during the settlement discussions, Sawiris offered Benedetti €75 million which Benedetti declined, insisting on much more.

So what was the value to which Benedetti was entitled?

The Decisions

The trial judge held that Benedetti was entitled to €75 million. He held that, while the market value of Benedetti’s services was €36 million, the value of those services to Sawiris was, by Sawiris’ own admission in the offers he had made, much greater. Therefore there should be an upward “subjective revaluation” of that value for the purpose of an award in unjust enrichment.

The Court of Appeal held that Benedetti was entitled to €14 million. The Court of Appeal held the law of unjust enrichment did not recognize any principle entitling Benedetti to an upward revaluation of the award due to any greater subjective value of the benefit to Sawiris evidenced in the offers made by Sawiris. The Court of Appeal got to €14 as follows. It said that, on the trial judge’s findings, Benedetti had only been paid (in the €67 million) for 60 percent of the services he had provided. He was entitled to be paid for the other 40 percent. Since 100 percent of the services were worth €37 million, then 40 percent was worth 40 percent of €37 million, or €14 million.

The UK Supreme Court agreed with the Court of Appeal that the law of unjust enrichment does not permit the upward revaluation beyond market value based on the so-called subjective value of the services to Sawaris. The Supreme Court disagreed with the Court of Appeal’s award of €14 million. It held that the services provided by Benedetti were captured within the services which had a market value to Sawiris of €37 million. Since Benedetti had received €67 million, he had been over-paid and his action was dismissed.

Discussion

I will set out what I believe to be the Seven Principles of Value for Unjust Enrichment that can be drawn from this decision:

  1. Prima facie, the value of the benefit or enrichment to be compensated is the market value of the benefit (in this case, the services rendered by Benedetti) to the defendant at the time the benefit was received. It is to the extent of that value, and that value only, that the defendant has been enriched
  2. That value is to be determined by the price at which the particular defendant could have purchased the benefit in the market. If the defendant could have obtained the benefit in the market at lower than the “normal market rate” then the lower rate is to be used. Similarly, if the particular defendant would have had to pay a price higher than the “normal market value” then the defendant may be required to pay that higher price. For example, if the defendant is a government and the benefit is the unjustified receipt of money (for instance, by a taxpayer paying money it did not owe) and if the benefit is be compensated for by way of interest until repayment, then the interest rate is the rate which a government would have paid during the relevant period of time, not what an individual would have paid.
  3. The difference between the “normal market value” and the “defendant’s market value” is to be demonstrated by objective evidence. Thus, if in the period immediately before or after the events in question, the defendant has purchased the benefit at a higher or lower rate in the market, then that is objective evidence of value to the defendant.
    In addition to the market value of the benefit to the defendant, as determined under the first three principles, there may be a dispute about whether the value of the benefit has a lesser or greater value due to the subjective worth of the benefit to the particular defendant. The reduction of the value could be called “subjective devaluation” if the subjective value of the benefit to the defendant is less than market value, or “subjective revaluation” if the subjective value of the benefit to the defendant is worth more. With respect to these issues:
  4. The claimant will not be entitled to an increased value of the benefit, above the market value to the defendant, because the defendant subjectively viewed the benefit as more valuable. Subject revaluation upward should not be permitted. That is because the defendant could always have purchased the benefit in the market, even though he or she valued it at more than the market value. Only if there is a contract between the parties should a defendant be required to pay more than market value, because the defendant agreed to do so in the contract. [For this reason, the trial judge was wrong to award €73 million based on Sawiri’s offers.]
  5. (a) On the other hand, a defendant may be able to show that the benefit was worth less to him or her than the market price at which he or she could have purchased the services in the market. In this case, “subjective devaluation” may be permitted. This may occur if the defendant demonstrates that, for whatever reason, the benefit was not worth the price at which he or she could have purchased them in the market. Again, however, there must be some objective evidence or reason for the devaluation, not just the defendant’s say-so. [Three of the judges adopted this approach to “subjective devaluation.”]
    [One of the judges did not accept this approach to “subjective devaluation.” He approached the issue through a “choice of benefit approach.”]
    (b) Awarding less than the market value of the benefit to the defendant should only occur when the defendant has been forced to accept the benefit, yet should pay something for it. Only in rare cases will a defendant be required to pay anything for something that he or she did not contract for, did not request and did not accept except involuntarily. In those circumstances, the law must recognize the freedom of choice, the freedom not to accept the benefit. So, if the law requires the defendant to pay something for the benefit, the court may require the defendant to pay less than the market value of the services to him or her. This approach can be called the “choice of benefit approach,” which may give the same result as the “subjective devaluation” approach. [The fifth judge said that he would not decide which of the two approaches was the correct one, as it was not necessary to do so on the facts of the present case.]
  6. Offers to settle or to smooth over business relations are poor, or even dangerous, evidence of value. [So the offers of Sawiri were not reliable evidence of value. In fact, the trial judge held that the market value was about half of Sawiris’ offers.]
  7. If a claimant has already been paid for the benefit he or she provided to the defendant, then that payment must be brought into account, assuming the payment relates to the same sort of benefit for which compensation is claimed, even if the result of the benefit (in this case, the ultimate agreement to acquire the Italian telecom) was different and between different parties than originally contemplated. In addition, when the evidence shows that benefits of that nature are normally paid and valued by way of one lump sum, all-in, fee, then if the claimant alleges that part of the benefit he or she provided was not paid for, he or she must prove the separate value of that part. If that is not proven, then no recovery can be made for the alleged extra benefit. [For this reason, the Court of Appeal was wrong to award any compensation for the alleged unrewarded services.]

This analysis may seem complicated now. But it will be invaluable when the next unjust enrichment case comes along. Indeed, it will bear re-reading whenever a valuation issue arises in a legal context. So let’s keep this decision close at hand, and when the occasion arises, let’s pull out that decision in Benedetti v. Sawiris!

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

Benedetti v. Sawiris, [2013] UKSC 50

Building Contracts – Unjust Enrichment – Valuation

Thomas G. Heintzman O.C., Q.C., FCIArb November 16, 2013

www.heintzmanadr.com

When Is An International Arbitration Award Enforceable Against A Non-Signatory To The Arbitration Agreement?

An important issue relating to enforcement of an arbitral award is whether the award can be enforced against a party who did not sign the arbitration agreement. If the arbitral tribunal sitting outside Canada finds that party to be a party to the arbitration agreement, even if that person did not sign the agreement, what should a Canadian court do when the award is sought to be enforced? Is the finding binding on the court where enforcement is sought? Or is it to be given deference? Or must the court itself decide the jurisdictional issue?

Those are the issues which the British Columbia Supreme Court recently addressed in CE International Resources LLC v. Yeap Soon Sit, 2013 BCSC 1804.  The decision raises interesting questions when compared to a recent decision of the UK Supreme Court regarding the law about “piercing the corporate veil” and the effect to be given to the arbitral tribunal’s decision about whether a non-signatory is a party to the agreement.

Background

 CE International Resources (CEIR) applied to the BC court for an order enforcing an international commercial arbitration award made in New York.  The award arose from two contracts.  Under the first contract, S.A. Minerals Ltd. Partnership (SAM) sold to CEIR a quantity of rare minerals at a certain price. Under the second contract,Tantalam Technology Inc. (TTI)  bought about the same quantity of the same rare mineral from CEIR at a higher price. CEIR paid 90 percent of the purchase price for the mineral, but the mineral was never delivered by SAM and TTI never paid the purchase price to CEIR.

CEIR commenced an arbitration in New York under the arbitration clause in the two contracts. CEIR joined a Mr. Yeap as a party to the arbitration, and asserted that Mr. Yeap was a party to the contracts. Mr. Yeap appeared at the arbitration and asserted that he was not a party to the contracts.  The arbitrator found that he had jurisdiction over Mr Yeap under the arbitration clauses in the two contracts. He made that finding on the basis that Mr. Yeap was a party to the contracts because, so he found, TTI had acted as Mr. Yeap’s alter ego.  Accordingly, the arbitrator found that he had authority to the pierce the corporate veil of SAM and TTI and hold Mr. Yeap to be party to and liable upon the contracts. The arbitrator also found that Mr. Yeap was estopped from denying that he was a party to the contracts because he “knowingly accepts the benefit of an agreement with an arbitration clause.”  The arbitrator said that, had he been required to do so, he would have found Mr. Yeap guilty of fraud for having transferred more than half of the monies paid by CEIR to SAM out of SAM’s bank account and into his own bank account shortly after the monies were received by SAM.

The arbitrator ordered SAM, TTI and Mr. Yeap to deliver the mineral to CEIR or make payment of about $8 million to CEIR.  The deliveries and payments referred to in the award were not made. The final arbitration award was confirmed by the New York court and judgment was entered in New York against SAM, TTI and Mr. Yeap. Mr. Yeap did not take any steps in the New York courts to contest his liability under the arbitral awards.

The BC Decision

 The British Columbia court enforced the award against Mr. Yeap. In doing so it held:

  1.  The issue of the arbitrator’s jurisdiction over Mr. Yeap and Mr. Yeap’s status as a party to the contracts were matters for the arbitrator to determine. In the court’s view, “it is not the role of this Court on such an application to consider the merits of a substantive issue that was the arbitrator’s to decide.”
  2. If Mr. Yeap was to challenge his status as a party to the contracts, he could have done so in a court of law. Instead, he chose to challenge that status in the arbitration, and had taken no steps in New York to overturn the arbitrator’s finding on that issue.
  3. While section 36 of the BC International Commercial Arbitration Act precludes the enforcement of awards when “the subject matter of the arbitration is not capable of settlement by arbitration under the laws of British Columbia” or if such enforcement would be contrary to the public policy of British Columbia, the enforcement of an award against a non-signatory to an arbitration agreement is not contrary to either of those provisions if the arbitrator has found that the non-signatory is in fact and law a party to the arbitration agreement.

Discussion

 This decision deals with two issues which have recently been dealt with by the UK Supreme Court (formerly known as the House of Lords).  While the decisions of English courts are not, of course, binding in Canada, it usually thought that decisions in the Anglo-Canadian world should be consistent.  Consistency is desirable in the field of international commercial arbitration since comity and the consistency of enforcement are two of the hallmarks of the New York Treaty and the UNCITRAL Model Law under which international commercial arbitration awards are made and enforced.

Is The Jurisdictional Decision Of The Arbitral Tribunal Binding In Enforcement Proceedings?

The first issue concerns the decision of the arbitrator that Mr. Yeap was a party to the commercial contracts and therefore a party over whom the arbitrator  had jurisdiction under the arbitration agreements in those contracts. The BC court held that this issue was finally determined by the arbitrator and could not be re-considered in the enforcement application.

The UK Supreme Court has taken a different view. In Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, Dallah sought to enforce an arbitration award against a non-signatory to the commercial agreement, the government of Pakistan.  The arbitral tribunal found that, while the Government of Pakistan had not signed the agreement, it was a party to it because the party that had signed the agreement, a Pakistani trust, was an instrument of the government of Pakistan.  When Dallah sought to enforce the arbitral award in the United Kingdom, the English courts found that the government of Pakistan was not a party to the commercial agreement or the arbitration clause contained in that agreement. The English courts refused to show any deference to the arbitral decision and made their own independent decision.

In the Dallah case, the government of Pakistan did not appear before the arbitral tribunal, so in that respect the circumstances were different in the CE International Resources case.   But in Dallah, the UK Supreme Court made it clear that, in its view, the effectiveness of the jurisdictional decision of the arbitral tribunal depends upon it being established that the non-signatory consented to the arbitral tribunal having jurisdiction to decide the jurisdictional issue, or waived or was estopped from asserting any jurisdictional objection. In other words, the competence-competence principle allows the tribunal to make a decision for the internal purposes of conducting the arbitral proceedings, but it has no effect outside those proceedings unless a non-signatory consents to the arbitral tribunal deciding the issue, or waives or is estopped from asserting the objection.

Lord Mance in the UK Supreme Court put it this way:

 …absent specific authority to do this, [the arbitrators] cannot by their own decision on such matters create or extend the authority conferred upon them. Of course, it is possible for parties to agree to submit to arbitrators (as it is possible for them to agree to submit to a court) the very question of arbitrability – that is a question arising as to whether they had previously agreed to submit to arbitration (before a different or even the same arbitrators) a substantive issue arising between them. But such an agreement is not simply rare, it involves specific agreement (indeed “clear and unmistakable evidence” in the view of the United States Supreme Court in First Options of Chicago, Inc. v Kaplan 514 US 938, 944 (1995) per Breyer J), and, absent any agreement to submit the question of arbitrability itself to arbitration, “the court should decide that question just as it would decide any other question that the parties did not submit to arbitration, namely, independently”: ibid, per Breyer J, p.943.

 Leaving aside the rare case of an agreement to submit the question of arbitrability itself to arbitration, the concept of competence-competence is “applied in slightly different ways around the world”, but it “says nothing about judicial review” and “it appears that every country adhering to the competence-competence principle allows some form of judicial review of the arbitrator’s jurisdictional decision ….. : as Devlin J explained in Christopher Brown Ltd v Genossenschaft Osterreichischer [1954] 1 QB 8, 12-13,…: [arbitrators] are entitled to inquire into the merits of the issue whether they have jurisdiction or not, not for the purpose of reaching any conclusion which will be binding upon the parties – because that they cannot do – but for the purpose of satisfying themselves as a preliminary matter whether they ought to go on with the arbitration or not. If it became abundantly clear to them, on looking into the matter, that they obviously had no jurisdiction as, for example, it would be if the submission which was produced was not signed, or not properly executed, or something of that sort, then they might well take the view that they were not going to go on with the hearing at all. They are entitled, in short, to make their own inquiries in order to determine their own course of action, and the result of that inquiry has no effect whatsoever upon the rights of the parties.” (Underlining added)

Moreover, the failure to take court proceedings to object to the jurisdiction, accordingly Lord Mance of the UK Supreme Court, does not amount to consent or waiver:

 “the argument based on issue estoppel was always doomed to fail. A person who denies being party to any relevant arbitration agreement has no obligation to participate in the arbitration or to take any steps in the country of the seat of what he maintains to be an invalid arbitration leading to an invalid award against him. The party initiating the arbitration must try to enforce the award where it can. Only then and there is it incumbent on the defendant denying the existence of any valid award to resist enforcement.”

 This does not appear to have been the approach taken by the BC court. Rather, the court held that the arbitrator had jurisdiction to decide the jurisdictional issue which, if exercised, was binding on Mr. Yeap.  It may well be that Mr. Yeap did consent or waive any objections to the jurisdiction of the arbitrator to make the jurisdictional decision, either expressly or by implication (by continuing, if he did, to participate in the arbitration after the jurisdictional decision was made).  But the BC judge did not expressly determine this issue. As the UK Supreme Court noted in the Dallah case, it usually requires clear and unmistakeable evidence before a non-signatory will be found to have consented to the jurisdiction of an arbitral tribunal.  Which is the right or correct approach?

When can “piercing the corporate veil” make a non-signatory a party to an agreement?

 This issue was addressed in my last blog entitled Can a Company be made Liable on a Contract by “Piercing the Corporate Veil”?  In that blog I reviewed an article which Brandon Kain and I recently wrote about two recent decisions of the UK Supreme Court: VTB Capital Inc. v. Nutritek International Corp., [2013] UKSC 5 and Prest v. Petrodel Resources Limited [2013] UKSC 34.   In those decisions, the UK Supreme Court basically held that when a company actually enters into a contract, the controlling shareholder cannot be made a party to it by “piercing the corporate veil.” Otherwise, the laws of contract and corporate liability would be over-ruled. If, however, the shareholder has used the corporation to avoid an original obligation of the  shareholder (by, say, using a corporation to avoid a restrictive covenant binding on the shareholder), or to disguise the shareholder’s original obligation (by, say, secretly using a corporation to earn money when the shareholder is a trustee and not entitled to earn that money), then the shareholder can be held liable on its obligation, not because the corporation’s veil is pierced but because the shareholder remains responsible for its obligations.

Canadian law is not so clear on the circumstances in which the corporate veil may be pierced. Furthermore, in CE International Resources case the decision to pierce the corporate veil was made by an arbitrator sitting in New York where the law on piercing the corporate veil may be very different.  The question in the present case was whether the arbitrator’s decision to pierce the corporate veil entitled or obliged the BC court to refuse to enforce the award.

If the court had found that the law in BC was as stated in VTB Capital and Prest, then it appears to have been arguable that the corporate veil of SAM and TTI could not be pierced since those companies were the ones that in fact entered into the two contracts, and the obligations which CEIR was seeking to enforce against Mr. Yeap do not appear to have been pre-existing obligations which Mr. Yeap was trying to avoid or conceal by using a corporation. If this is so, should the arbitration award have been recognized in BC if the legal basis of it was not recognized in BC?  Those are two “ifs” but both of them raise interesting issues for the enforcement of foreign awards.

CE International Resources LLC v. Yeap Soon Sit, 2013 BCSC 1804

 Arbitration – Recognition and Enforcement – Contract Liability – Piercing the Corporate Veil

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                               November 10, 2013

 

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Can A Company Be Made Liable On A Contract By “Piercing The Corporate Veil”?

An incorporated company is the most common form of business organization, and this is no truer than in the construction industry.  One of the purposes of incorporation is to ensure that the liability for the business activities of the organization is solely that of the company and not that of the shareholders.  But what happens when the other party to the contract with the company alleges that the company is not the real party to the contract, but rather the controlling shareholder of the company is the real party to the contract? This allegation is called “piercing the corporate veil”.

The United Kingdom Supreme Court has recently examined this issue in two decisions:  VTB Capital Inc. v. Nutritek International Corp. and Prest v. Petrodel Resources Limited.  These are extremely important decisions because the U.K. Supreme Court analyzed in great detail whether, and in what circumstances, contractual liability can be imposed upon an entity which has not signed a contract, namely its controlling shareholder.  I have written a lengthy article on this subject with Brandon Kain: Through the Looking Glass: Recent Developments in Piercing the Corporate Veil.  The article is posted on this website. I will not repeat the full contents of that article but will provide the highlights of it in the hopes that readers will turn to the article for a full analysis of these decisions.

Basically, the U.K. Supreme Court has held that the corporate veil of a corporation cannot be pierced to make another entity, the controlling shareholder of the corporation, liable on the contract unless the controlling shareholder is liable on that contract under other legal principles, such as the law of agency. The use of the corporation for “bad purposes” (my words) does not make the controlling shareholder liable on the contract.  In particular, establishing a corporation so that it is responsible for the contractual obligations, and not the controlling shareholder, is not a “bad purpose.”

In the VTB Capital case, the U.K. Supreme Court held that the corporate veil of a Russian Bank which had in fact loaned money to the plaintiff could not be pierced in order to make the controlling shareholder of the bank liable on the loan facility agreement. Lord Neuberger said:

“Subject to some other rule (such as that of undisclosed principal), where B and C are the contracting parties and A is not, there is simply no justification for holding A responsible for B’s contractual liabilities simply because A controls B and has made misrepresentations about B to induce C to enter into the contract. This could not be said to result in unfairness to C: the law provides redress for C against A, in the form of a cause of action in negligent or fraudulent misrepresentation.”

This view of the law was repeated in Prest.  The U.K. Court acknowledged that the controlling shareholder of a corporation may be liable for abusive conduct even if a contract is made by the corporation, and to this extent the “corporate veil” may be pierced. But the circumstances in which that can occur are limited. The court divided the “corporate veil” issue into two circumstances.

The first circumstance is one of evasion. The controlling shareholder is the real party to the original contract, and inserts the corporation in order to evade liability.  For example, A is party to a non-compete agreement with B, obliging A not to compete with B in a certain area for three years. A then sets up a company, C, which then proceeds to compete during the three years. In that circumstance, A cannot evade its liability under the original contract and to this extent the corporate veil of C is pierced.

The other circumstance is concealment. For example, A is a trustee for B and A secretly sets up a company, C, to receive payments which A would be precluded from receiving as trustee. Again, A is liable and to this extent the corporate veil of C is pierced.

In both these situations the liability of A is independent of the liability of the corporation C.  In these circumstances there is a “limited principle” under which the A is liable if A :

“…is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrated by interposing a company under his control.”

But if C is the original party to the contract, then A cannot be made liable on a contract to which it is not a party on the ground that reliance on the corporate existence of C is abusive. As Lord Sumption said:

“It is not an abuse to cause legal liability to be incurred by the company in the first place. It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller’s because it is the company’s. On the contrary, that is what incorporation is all about. “

The Prest case involved a matrimonial dispute and the question was whether certain assets owned by corporations controlled by the husband should be accounted for when determining the assets and income of the husband. The U.K. Supreme Court held that this issue was largely a factual matter and could be dealt with under straight forward principles of property and corporate law without the necessity of any corporate veils being pierced.

The case law in Canada appears to assume that the corporate veil can be pierced in exceptional circumstances, and then sets out to define those circumstances.  What is lacking in Canadian case law is a principled examination of why the corporate veil should be pierced at all.  Only once that examination occurs can a satisfactory basis be established for the exceptions to the general rule of limited corporate liability.

It is likely that the VTB Capital and Prest decisions will spawn a further debate in Canada about what the Canadian law should be regarding piercing the corporate veil.  Brandon Kain’s and my article explores the unresolved issues under Canadian law and the likely arguments that will be made when the corporate veil issue is raised once again in Canadian courts.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 1, part 1(a)(i)(E).

Building Contracts – Liability – Corporations – Piercing the Corporate Veil

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                  October 30, 2013

www.heintzmanadr.com

www.constructionlawcanada.com 

 

Is A Deposit Forfeited In Absence Of Proven Damages?

The forfeiture of a deposit is one of the major tools for ensuring that contracts are performed.  But there is a debate about whether a deposit can be forfeited if the party forfeiting it has suffered no damages, or damages less than the amount of the deposit.  Until recently in British Columbia, there were decisions of the Court of Appeal going both ways:

-one holding that a deposit can be forfeited if the forfeiting party has suffered no damages;

-the other holding that a deposit can only be forfeited to the extent that damages are suffered by the forfeiting party.

The British Columbia Court of Appeal has recently resolved this debate. In Tang v. Zhang, that court adopted the first approach: the deposit can be forfeited even if the forfeiting party has suffered no damages.  However, the court still retains discretion to reduce or disallow the amount of the forfeiture if the amount of the deposit is unreasonable or its forfeiture would be unconscionable.

The Facts

The facts in the Tang case involved an agreement of purchase and sale in the standard form contract used by the Greater Vancouver Real Estate Board. The sale price was $2,030,000 and the buyer paid a deposit of $100,000.  The agreement said in effect that if the buyer did not complete the agreement, then “the amount paid by the Buyer will be absolutely forfeited to the Seller….on account of damages, without prejudice to the Seller’s other remedies.”

The buyer failed to close the transaction and the seller forfeited the deposit.  The buyer sued to recover the deposit and argued that the proper interpretation of the agreement was that the deposit could only be forfeited to the extent that the seller had suffered damages.

The Decision

The British Columbia Court of Appeal traced the law relating to deposits back into English law.  It referred to the decision of the English Court of Appeal in Howe v. Smith (1884) 27 Ch. D. 89 as being the “seminal authority on the nature of a deposit.”  That decision held that a deposit is “security for the completion of the purchase” and “creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.”  While the contract in that case said that the monies were paid “as a deposit and in part payment of the purchase money”, the court said that “the reference in the contract to part payment would have come into operation had the buyer completed the purchase.  That ‘alternative’, however, did not overcome the nature of the ‘deposit’ as security for performance that was forfeited when the buyer repudiated his bargain.”  The English Court of Appeal allowed the deposit to be forfeited even though the defendant had sold the property at the same price and had suffered no damages.

The British Columbia Court of Appeal traced the rule in Howe v. Smith into Canadian law and its adoption by the Supreme Court of Canada. That rule, the B.C. Court of Appeal explained, is an exception to the rule against penalties. A deposit, it said, is “non-refundable” by definition.  It is not necessary to use the word “absolutely” or other modifier to qualify “non-refundable” as the non-refundable nature of a deposit is “simply a matter of definition” subject to a contrary intention being shown.

Accordingly, the words “on account of damages” in the agreement in Tang-Zhang agreement referred to the fact that the monies would be applied on account of the purchase price if the purchaser completed the contract but did not mean that the deposit could not be forfeited if the seller suffered no damages.

The Court held that, while the rule relating to deposits was an exception to the common law rule against penalties, it was not an exception to the rule of equity prohibiting unconscionable forfeitures.  Accordingly, if the deposit was excessive, the court could grant relief.  The buyer had not argued that the deposit was penal or unconscionable. The court referred to a variety of cases and other sources in which a 10-20 percent deposit had been held to be reasonable. In those circumstances, the court upheld the deposit and over-ruled its prior decision to the contrary. The court set forth five helpful rules to apply to the interpretation of agreements referring to deposits.

Discussion

Deposits are not just found in real estate transactions. A wide range of commercial agreements use deposits to secure performance of the contract, and construction law often uses them for tenders.  So this decision is of general commercial interest.

The Tang v. Zhang decision is significant for a number of reasons:

First, the five principles stated at the end of the decision are a useful touchstone to pull out any time a refresher on the law of deposits is needed.

Second, the decision reminds us that, if the word “deposit” is used, then other adjectives will not destroy the forfeiture unless they demonstrate that forfeiture was not intended, and using words such as “on account of damages” or “in part payment of the purchase price” will not remove the forfeiting nature of a deposit.

Finally, if the amount of the forfeiture is egregious, the court still retains the equitable jurisdiction to relieve against the forfeiture.

 

See Heintzman and Goldsmith on Canadian Building Contracts, (4th ed.), Chapter 6, part 2(b)(i)(B).

Tang v. Zhang, 2013 BCCA 52         

Building Contract  –  Deposits  –  Liquidated Damages and Penalties  –  Relief against Forfeiture

Thomas G. Heintzman O.C., Q.C., FCIArb                                                        October 4, 2013

www.heintzmanadr.com                                                                                         www.constructionlawcanada.com 

 

When Should A Contract Arising From A Tender Be Declared Void For Mistake?

We don’t usually think of the law of mistake as having any relevance in the 21st century. Mistake seems to be an 18th century problem which couldn’t possibly apply to today’s building contracts, especially those arising out of the modern law of tender.

But the recent decision in Asco Construction Ltd. v. Epoxy Solutions Inc. shows that this assumption isn’t correct. The Ontario Divisional Court held that a contract arising from a tender was void for mistake. The decision is a wake-up call about the need for reasonable certainty in tender information.  Otherwise the whole tender process may be for naught.

Facts

The City of Kingston hired Asco as the general contractor to renovate the Grand Theatre.  Asco invited tenders for the concrete and epoxy subcontract and gave bidders a sketch containing slab elevations. A revised sketch was also provided before tenders closed.

Epoxy Solutions submitted a bid for the subcontract work.  Asco confirmed that Epoxy was awarded the subcontract and the parties signed a letter of intent.  After Asco provided Epoxy with a draft contract to sign, Epoxy’s surveyor advised that the sketch forming part of the tender documents contained insufficient information, and that it was necessary to conduct an as built survey to calculate accurately the quantities of concrete necessary to perform the work.

Later, Epoxy told Asco that the elevations listed in the tender documents were inaccurate and that further work and material were needed for an additional cost of about $32,000. Epoxy refused to start the work without confirmation that it would be paid the additional amount. After accusatory correspondence between the parties which resolved nothing, Asco re-tendered the subcontract and hired another contractor at an additional cost of $17,800.00 plus taxes. Asco and Epoxy counter-sued each other for breach of contract.

The Decision

The trial judge dismissed Asco’s claim and awarded damages to Epoxy. The trial judge held that the sketch provided by Asco to Epoxy was misleading.  The parties appealed. The Divisional Court dismissed Epoxy’s appeal but allowed Asco’s appeal and dismissed Epoxy’s action. It did so on the basis that there was no contract between the parties arising from the tender process due to mistake.

The Divisional Court agreed with the trial judge regarding the misleading nature of Asco’s tender documents.  Epoxy was not aware of those errors and could not reasonably be expected to have discovered them prior to making its bid. The court found that Epoxy was under no obligation to investigate the accuracy of the tender invitation documents. The tender documents, it said, “constitute an implied representation to compliant bidders that the work described in the tender documents can be built as described. Contractors and subcontractors bidding on projects are entitled to rely on the accuracy of design information prepared by the owner or its engineers, rather than being compelled to duplicate design analysis prior to submitting bids.”

However, the Divisional Court dismissed Epoxy’s case because there was no contract between the parties due to mistake.  The Divisional Court arrived at this conclusion through the following reasoning:

“Both parties refused to budge from their positions. By their conduct, they walked away from any contractual obligations they had with each other. The positions they adopted arose from a common mistake. The sketch the appellant provided with the tender documents was not a detailed survey and failed to provide adequate information necessary to calculate accurately the costs of labour and materials required to do the work. The respondent did not become aware of the mistake until informed by its surveyor, almost ten months after submitting its bid, of the inadequacy of the sketch. We find that the mistake was so fundamental that it renders the contract between the parties void. No damages can flow from a contract that does not exist.”

Discussion

This decision raises a fundamental issue under the Ron Engineering line of cases in relation to tenders. If there is misinformation in the tender documents, or if those documents are indefinite or confusing, what is the impact on the Contract A arising from the tender under Ron Engineering analysis?

It does seem strange that Asco, the party whose tender information was found to be misleading, should be entitled to have the contract set aside for mistake. Usually, mistake will only lead to a remedy – rescission – if the party seeking relief is innocent of any wrongdoing leading to the mistake.  In this case, Asco was not innocent of wrongdoing and, perhaps recognizing this fact, had not even asked for rescission or asserted a mistake.

Without Ron Engineeering, there would be no real issue here. The letter of intent created no contract, and without Ron Engineering there would be no contract between the parties. Ron Engineering created Contract A which governed the tender process itself.  That contract obliged Asco to act in good faith toward Epoxy in considering its bid as the lowest tender, and obliged Epoxy to keep its bid open and to enter into a Contract B consistent with the invitation to tender.  If the information provided by Asco was either misleading or indefinite, then Epoxy would have been entitled to rescind Contract A, or the subject matter of the contract or the dealings would have been too uncertain to create a contract.

If rescission was to be granted for mistake or misrepresentation at Epoxy’s request – a request that was never made – then Epoxy might have been disentitled to damages due to its own fault in not detecting the errors in the sketch at the time of bidding.  This approach would have led to the same result.

All in all, this decision raises puzzling issues about how to properly apply the law of mistake to misleading information in an invitation to tender and a bidder’s failure to detect the errors on a timely basis.  What the decision does do is provide a warning to owners and contractors about the perils of inaccurate tender information.

Asco Construction Ltd. v. Epoxy Solutions Inc., 2013 CarswellOnt 7940, 2013 ONSC 4001 (Ont. Div. Ct.)

Tenders – Misrepresentations – Contract A – Contract B analysis – Rescission – Mistake

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                September 16, 2013

 www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Can A Payment Bond Impose Double Payments On A Contractor?

Payment bonds come in various shapes and sizes and it is important to read them carefully before concluding what they bond. They may not just bond the payment obligation of the party obtaining the bond. They may also bond the payment obligations of all persons on the project.  If they do the latter, then the bond may expose the party which obtained the bond to more than one payment obligation.  That was the conclusion in Nova Scotia Court of Appeal in the recent case of APM Construction Services Inc. v. Caribou Island Electric Ltd.

 Background

ACS was an unpaid sub-sub-contractor on a building project of the province of Nova Scotia.  It sought payment under a bond obtained by the general contractor, APM, from Travelers Insurance. The bond stated as follows:

 NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that if the Principal shall at all times promptly make payment to all Claimants for all work, materials or services used or reasonably required for use in performance of the Contract, or as the same be changed, altered or varied, to the satisfaction of the Obligee, then this obligation shall be void.

. . .

IN THIS BOND where there is a reference to Claimant it shall mean any person, firm or corporation doing or performing any work or service or placing or furnishing any materials, or both, for any purpose related to the performance of the Contract:  work, service and materials being constructed to include all water, gas, power, light, heat, oil, gasoline, service or rental equipment which is supplied or used for or in connection with the performance of the Contract.   (underlining by the court)

APM’s subcontractor was Caribou Island Electric which had in turn subcontractred work to ACS, but had not paid ACS in full. Caribou owed taxes to the Canadian Revenue Agency and CRA made demand on APM for payment in full of the amounts owed by APM to Caribou.  The obligation of APM to pay CRA was undisputed, and the issue was whether, upon payment of those monies, Travelers had any fuher obligation to ACS and the other contractors or suppliers on the project.

ACS acknowledged that the payment by APM to CRA discharged APM’s payment obligation to Caribou under the subcontract and discharged the lien registered by ACS. Indeed, ACS acknowledged that this payment also discharged APM’s trust fund obligation, and in light of that admission the Court of Appeal said that the present case did not decide that issue.

However, ACS asserted that, even though APM’s contractual and lien obligations may have been discharged, the bond was not discharged.  It asserted that the bond was a separate and self-standing obligation which remained in effect, and Travelers was obliged to pay it under the bond.

APM and Travelers asserted that this interpretation of the bond was absurd, and that if Travelers was obliged to pay ACS’s claim, then APM would be obliged to recompense Travelers under the bond.  Effectively, APM would be obliged to pay monies twice, once to CRA and again to ACS. APM and Travelers said that that could not be the proper interpretation of the bond.

The Decision

 The Nova Scotia Court of Appeal helpfully stated the following principles applicable to the interpretation of a bond:

 

“1. The bond is a freestanding contract and its terms ultimately govern the interpretation exercise. The wording of the bond’s terms must be given its ordinary and literal meaning. The words cannot be interpreted in isolation but must be looked at in the context of the bond as a whole.

2. The court will look to the intentions of the parties and, in so doing, will try to give commercial efficacy to the agreement. However, the court will not replace the parties’ agreement with its own. Thus, if the wording of the agreement is clear and unambiguous, parties will be held to their agreement, even where the results appear to be draconian or absurd….

3. Where the disputed contract is part of a series of contracts, the court will look to the surrounding contracts as well. However, in the context of surety bonds, the terms of the bond ultimately govern; while the underlying contract may be considered, it will only be determinative if the specific obligations contained within it are incorporated by reference into the bond.

4. Contra proferentemis available but only where there is an ambiguity that cannot be resolved through other principles of contractual interpretation.”

The Court then considered the form of other bonds. The standard form CCDC bond says:

  “…A Claimant for the purpose of this Bond is defined as one having a direct contract with the Principal for labour, material, or both, used or reasonably required for use in the performance of the Contract….”  (underlining added)

 The bond required by the federal government says:

 “For the purpose of this Bond, a Claimant is defined as one having a direct contract with the Principal or any Sub-Contractor of the Principal for labour, material, or both, used or reasonably required for use in the performance of the Contract …”  (underlining added)

 The Court noted that in the CCDC form, only subcontractors were protected by the bond, while in the federal form, contractors and subcontractors are protected.  The bond in the present case protected any person providing work or materials to the project.

Discussion

If a payment bond taken out by the contractor is premised on payment, not just of subcontractors by the contractor, but payment of any person performing work or service or placing or furnishing any materials, or for any purpose related to the performance of the main contract, then the bond will not be discharged by payment by the contractor to the subcontractor nor by the discharge of the contractor’s obligations under construction or builders lien legislation.

Rather, if so expressed, then the bond is a self-standing independent obligation to pay all persons performing work on the project which, if not fulfilled, may be called upon by any of those persons. Accordingly, if the contractor is obliged to pay a taxation authority which claims unpaid taxes against the subcontractor and therefore has a claim to the monies due by the contractor to the subcontractor, that payment may discharge the contractor’s liability under the subcontract with the subcontractor and under construction and builders lien legislation, but it will not discharge the bond, and the contractor may be liable a second time to recompense the bonding company.

Construction liens  –  bonds  –  priorities  –  subcontractors  –  interpretation

APM Construction Services Inc. v. Caribou Island Electric Ltd.,  2013 CarswellNS 291, 2013 NSCA 62, 21 C.L.R. (4th) 106

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                        September 9, 2013

 www.heintzmanadr.com

www.constructionlawcanada.com

Does The CCDC Dispute Resolution Clause Require Arbitration?

Most building contracts contain dispute resolution clauses which refer to arbitration.  A dispute resolution clause can be mandatory – it can require arbitration – or it can be permissive – it can permit arbitration if all parties agree to arbitration when the dispute arises. One would think that the most important thing to make clear in a dispute resolution clause is whether arbitration is mandatory or not.

Yet, there has been some doubt whether the dispute resolution clause in the CCDC standard form construction contract makes arbitration mandatory or permissive.  That is because the key wording in that clause contains the word “may”, which is typically a word that designates a permissive procedure, while the word “shall” designates a mandatory procedure.

The Ontario Superior Court of Justice recently addressed this issue in Bondfield Construction Co. v. London Police Services. The court held that the CCDC dispute resolution clause creates a mandatory obligation to arbitrate. The court accordingly stayed an action which had been bought in relation to the CCDC contract.

The Facts

In November 2007, Bondfield as general contractor entered into a contract with the London Police Services Board as owner for the renovation and expansion of the Board’s headquarters. The contract was in the standard form CCDC-2 Stipulated Price Contract.  Paragraph 8.2.6 of that contract reads as follows:

“By giving a notice in writing to the other party not later than 10 working days after the date of termination of the mediated negotiations under para. 8.2.5, either party may refer the dispute to be finally resolved by arbitration under the latest edition of the Rules of Arbitration of CCDC 2 Construction Disputes. The arbitration shall be conducted in the jurisdiction of the Place of the Work.”  (underlining added)

The work began in November 2007. Bondfield alleged that conduct of the Board delayed the completion of the project by 17 weeks. In May, 2008, Bondfield gave notice to the architectural consultant of its claim for delay.  In January, 2009, the consultant recommended that the dispute be resolved pursuant to the contracts’ dispute resolution process.

In June, 2010, Bondfield invited the Board to enter into a dispute resolution process involving an “independent third party” to avoid lengthy litigation. In July, 2010, the Board replied that it wanted to follow the contract’s dispute resolution clause and asked the consultant to deal with the Board’s deficiency claims, which the consultant did in October 2010.  In November 2010 Bondfield wrote a “dispute” to the consultant’s report and suggested that a project mediator be appointed, and the Board then suggested a person to be the mediator.

In June 2011, Bondfield delivered a claims brief to the Board which referred the brief to the consultant for a report. In July, 2011 the Board’s lawyers said that they hoped for an answer on the claim from the Board by the middle of that summer. On July 29, 2011, this action was commenced.  The Board delivered its defence in November 2011 and in that pleading alleged that the action was commenced outside the Ontario 2-year limitation period.   Bondfield then  brought a motion to stay its own action on the ground that arbitration was mandatory under the dispute resolution clause in the CCDC contract. The Board resisted the motion on the ground that the action commenced by Bondfield was the preferable procedure to resolve the dispute.

The Decision

The Ontario Superior Court held that arbitration was mandatory under the CCDC-2 contract and stayed the action by Bondfield.  The court referred to prior decision in Brock University v. Stucor Construction Ltd. (2002), 33 CLR (3d) 182 ( Ont. S.C.J.) as being on point on the same clause.  In that case, the owner sought a stay of a mechanics’ lien action brought by the contractor on the basis of the dispute resolution clause in the CCDC-2 contract between the parties, and the court granted the stay.  The court also referred to the decisions in Automatic Systems Inc. v. E.S. Fox Limited [1995] O.J. No. 461 [Gen. Div.];  Merit Sinclair Developments v. O.R. Haemet Sephardic School, [1998] O.J. No. 5225[Gen. Div.] and  Atyscope Richmond Corp. v. Vanbots Construction Corp., [2001] O.J. No. 638 (S.C.J.) as evidencing the same approach.

The court held that the arbitrator should deal with all the objections raised by the Board, with respect to whether the dispute fell within Article 8.2 of the CCDC contract, the alleged dilatory pursuit of its remedies by Bondfield and the limitation period, and otherwise.

The court also concluded that, in bringing the application to stay its own action, Bondfield was entitled to rely upon Article 8.2 of the contract and section 106 of the Courts of Justice Act . The normal route to a stay an action brought in the face of an arbitration clause is Section 7 of the Arbitration Act, but that section was unavailable to Bondfield since it only allowed “another party”, not the party bringing the action, to seek a stay of the action. However, section 106 of the Courts of Justice Act permitted the court to stay the action and it was available to Bondfield since it was available to “any person, whether or not a party” to the action.  The court also noted that the alleged dilatory pursuit of its remedies by Bondfield might be answered by Article 1.3.2 of the CCDC contract which states that “ No action or failure to act by the Owner, Consultant, or Contractor shall constitute a waiver of any right or duty afforded any of them under the Contract, nor shall any such action or failure to act constitute an approval of or acquiescence in any breach there under, except as may be specifically agreed in writing.”

Discussion

Reading this decision, one would conclude that the mandatory effect of the dispute resolution provision, Article 8, in the CCDC-2 contract has been definitively determined.  Perhaps it has, but not yet by an appellate court.  While the principle in this decision may well be upheld by an appellate court, there are several issues which are lurking under the surface which have not yet been addressed by the courts.

The first has to do with the words “may” and “shall” in Article 8.  As noted above, the pivotal clause in Article 8 is clause 8.2.6. That clause says that “either party may refer the dispute to be finally resolved by arbitration….”  Normally the word “may” means that arbitration is permissive, and there are many cases holding that “may” in an arbitration clause means that arbitration is not required.

Moreover, the word “may” in Article 8.2.6 stands in stark contrast to the word “shall” in virtually all the prior clauses within Article 8.2.  Thus, Article 8 8.2.1 says that “the parties shall appoint a project mediator…”. Article 8.2.2 says that a “party shall be conclusively deemed to have accepted a finding of the Consultant…” unless certain steps are taken.  Article 8.2.3 says  that the “parties shall make all reasonable efforts to resolve their dispute…”  Article 8.2.4 says that “the parties shall request the Project Mediator to assist the parties to reach agreement….”  Article 8.2.5 says that if the dispute is not resolved within 10 working says, then the “Project Mediator shall terminate the mediated negotiations….”  And then Article 8.2.6 uses the word “may”.

Normally one would think that by using a different word in Article 8.2.6, the parties intended a different meaning, and the normal difference between “shall” and “may” is that the latter is permissive.   One would think that some analysis or reasoning of the use of those words would be necessary to arrive at the conclusion that arbitration is mandatory.

It is true that Article 8.1.1 starts with mandatory wording:  “ Differences between the parties to the Contract as to the interpretation, application or administration of the Contract….shall be settled in accordance with the requirements of Part 8…” So there is a mandatory requirement to use the procedures in Article 8.2.  But that leaves open the questions: What are those procedures? And do they include mandatory or permissive mediation?

The second issue left open for discussion is the actual workings of Article 8.2.6.  It seems fairly clear that, even if Article 8.2.6 does permit one party to refer the dispute to arbitration, that party can only do so “within 10 days after the termination of mediated negotiations…”  If neither party does so, then Article 8.2.7 says that “the arbitration agreement under paragraph 8.2.6 is not binding on the parties… and the parties may refer the unresolved dispute to the courts…”

So Articles 8.2.6 and 8.2.7 appear to create an opt-in regime in which one party may force the other party to arbitrate, but must do so within 10 days of the termination of the mediated negotiations.  Exactly why the CCDC contract created an opt-in arbitration regime is unclear, but that is the regime that is apparently intended.  And the concept of an opt-in arbitration regime gives sense to the word “may” in Article 8.2.6, since it means that either party may, but need not, refer the matter to arbitration; if either party does then the arbitration agreement is binding;  but if either party does not, then the arbitration agreement is not binding.

But if that is the meaning of the arbitration regime in Article 8.2 of CCDC-2, then how does it apply to the facts in this case? The mediation procedures referred to in Article 8.2.1 to 8.2.5 have tight timeframes, none of which were observed in this instance.  Unless the consultant was the “project mediator” which does not seem to have been the case, the mediation procedures never occurred.  The “termination of the mediated negotiation” referred to in Article 8.2.6 never happened, so the 10 Working Days in which either party could refer the matter to arbitration never occurred.

What does all of this mean?  At least two results seem possible. The first could be that the procedures under Article 8.2 are mandatory and a precondition to any substantive rights to litigate arising.  If this is so, then the limitation period never started running and the parties have to “go back to GO” and start all over again, right back at mediation under Article 8.2.1. Article 8.2.1 says that if the parties neglect to appoint a project mediator within 20 days of signing the contract, then the mediator shall be appointed within 10 days of one of the parties making that request.  Are the parties back at that point in the process?  And does the court have the power to appoint a mediator if the parties do not agree on one?   Or is Article 8.2 an agreement “to have an independent third party resolve the claim…” within section 11(1) of the Ontario Limitations Act, 2002 so that the limitation period does not start running until the attempted resolution process is terminated or one party terminates or withdraws from the agreement? Or does that section only apply to agreements made after the dispute arises?

The other result could be that, since the mediation procedures weren’t used, then the normal procedural and limitation rules are applicable.  In this case, it would seem that the opt-in arbitration regime has not been used and therefore recourse to the courts is permissible. Does this mean that the limitation period is running in the meantime?  That result may have serious repercussions in terms of the limitation period and the lengthy time that had transpired since Bondfield first gave notice of its delay claim in 2008. This case highlights, once again, the limitation dangers inherent in mediation and arbitration clauses.

These questions may not be debated publicly in this proceeding since the court has ordered that the action be stayed and the dispute dealt with by arbitration.  But in some future case, an appellate court may have to address exactly what Article 8.2 of CCDC-2 means and what are the consequences of not following the regime set forth in that article.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10, parts 1, 4 and 6

Bondfield Construction Co. v. London Police Services, 2013 ONSC 4719

Arbitration – mediation – building contracts – obligation to arbitrate – limitations

Thomas G. Heintzman O.C., Q.C., FCIArb                                                      September 2, 2013

www.heintzmanadr.com

 

Does A Construction Lien Bond Satisfy A Trust Fund Claim?

There are several different remedies provided in construction and builders lien legislation that do not necessarily fit together well. Two remedies available to a subcontractor are the lien claim against the land and the trust fund claim against funds received or receivable by a contractor.

In the case of a lien claim, the payment of money into court or the provision of a bond discharges the lien against the land. But does it discharge the trust fund claim?  If it doesn’t, does that mean that a subcontractor can pursue a trust fund claim, so that it gets paid through that remedy while at the same time the monies remain in court or the lien bond remains in place? And if the subcontractor can do that, how does that affect the contractor’s counterclaim and set off for delay? Through its trust fund claim can the subcontractor force the owner to pay the full amount of the subcontractor’s claim before the trial of the contractor’s delay claim?

These were the issues addressed in the recent decision of the Manitoba Court of Queen’s Bench in Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel.

The Background

In December 2010 Stuart Olson entered into a contract with the owner BB Stadium Inc. for the construction of a new stadium in Winnipeg.  In April 2011, Stuart Olson entered into a subcontract with Structal for the structural steel and other facilities.  The deadlines in the subcontract were not met and the opening of the stadium was delayed for a year.

Claims and counterclaims were asserted between Stuart Olson and Structal.  Structal claimed over $8 million due to work scope changes and other factors. Stuart Olson asserted a delay claim against Structal in an amount over $9 million.

In September 2012, Structal demanded payment from Stuart Olson for its outstanding invoices in the amount of about $4.2 million.  Structal also asserted that the monies due to Stuart Olson from the owner were impressed with a trust fund claim in Stuructal’s favour and that Stuart Olson must use those monies to pay subcontractors and not itself.  Structal also filed a  lien against the land in the amount of about $15 million.

In October, 2012, Stuart Olson obtained a lien bond, approved by Structal, for the full amount of the lien on payment of a premium of $159,003.07 per year, and Structal discharged its lien against the land.

Structal continued to demand that Stuart Olson pay its outstanding invoices and claimed that the monies receivable by Stuart Olson from the owner were impressed with a trust in Structal’s favour.  Stuart Olson continued to maintain that it had a set-off against any claim asserted by Structal and maintained that Structal’s claim, whether in a trust fund form or otherwise, was fully secured by the lien bond that had been filed.

Structal then asked the owner to withhold funds from Stuart Olson failing which it would sue the owner under the trust provisions of the Manitoba Builders’ Liens Act. (the “Act”).   In response, Stuart Olson commenced an application to determine the legal position.

In the meantime, Stuart Olson commenced an action against Structal asserting its delay claim.

A certificate of substantial completion had been issued relating to the subcontract with Structal.  There were no lien or trust fund claimants other than Structal. There are no deficiencies in the work done by Structal and the owner was ready to make the remaining payment to Stuart Olson which had not paid because of Structal’s threat.  The real and remaining issue was the delay claim by Stuart Olson against Structal which would be dealt with in the separate action.

The Decision

The application judge held that the posting of the lien bond exhausted the contractor’s trust fund obligations in the particular circumstances of this case.

First, the judge held that prior judicial authority in Manitoba supported the principle that the filing of a lien bond discharges any trust fund obligations of the contractor.

Second, he held that prior judicial authority also supported the proposition that a set-off could apply to, and reduce, a trust fund claim.

Third, he held that it would be unfair to determine, at this stage, whether Stuart Olsson had or didn’t have a right of set-off. So the present issue could not be decided on the basis that Stuart Olson had no rights of set-off. It would not be fair to order payment of the trust funds to Sturctal in the presence of the delay claim by Stuart Olson.

In all the circumstances, the judge held that the filing of the lien bond by Stuart Olson satisfied its trust fund obligations and that upon receipt of the progress payments from the owner, Stuart Olson could disburse those funds without being in breach of the trust fund obligations under the Act.

Discussion

Assuming that the contractor, Stuart Olson, was financially capable of paying the future lien bond premiums, this decision makes eminent business sense. But it does raise some practical concerns. What if Stuart Olson could not or did not pay the future premiums? Would the bond have remained in place? What protection for the subcontractor would there have been in this eventuality?

What if other subcontractors had liens or trust fund claims? In some provinces, a lienholder must share with other lienholders the amount of a lien bond posted to satisfy its lien.  In these circumstances, a lien bond may be an uncertain source of funds for a trust fund claim.  And why shouldn’t the remaining payments by the owner be paid into court, with the amount of the lien bond being reduced accordingly? Wouldn’t that be a better way of resolving the conflict between the purpose of a lien and the purpose of a trust fund claim?  Since the contractor had no other subcontractors or suppliers to pay, the real question was: whose litigation claim should be financed through the lien bond: the contractor’s delay claim or the subcontractor’s claim to payment under the subcontract? An argument could be made that the purpose of the Act is to give priority to the subcontractor’s claim for payment. If that is so, then that result could be achieved by paying the remaining monies due by the owner into court and reducing the amount of the lien bond.

The present decision highlights the different wording in the different provincial lien statutes. In Manitoba, sub-section 5(3) allows the owner to retain trust funds if “provision for the payment of other affected beneficiaries of the trust fund has been made.” The words “provision for payment” also appears in sub-sections 4(3) and 4(4) with respect to the trust fund obligations of contractors and subcontractors.  These words seem to contemplate a lien bond and may envisage that if a lien bond is in place then the owner, contractor or subcontractor can make payments from trust funds. In contrast, sub-sections 7(4), 8(2) and 9(2) of the Ontario Act state that the trust is in place until the contractors or subcontractors “are paid.”  In the Ontario Act, specific provision is made in section 12 for set-off by a trustee such as an owner, but not in respect of the amount of holdback.   No specific provision for setoff is made in the trust fund sections of the Manitoba Act. The judge did not comment on the presence or absence of these provisions in the Manitoba Act. It certainly seems odd that the trust fund sections of the provincial Acts do not specifically deal with the impact of lien bonds and other forms of security for the lien upon trust fund claims.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 11, parts 2(g) and 3.

 Stuart Olson Dominion Construction Ltd. v. Structal Heavy Steel, 2013 MBQB 48

Construction and builders liens   –   trust funds   –   discharging liens   –   lien bonds

Thomas G. Heintzman O.C., Q.C., FCIArb                                              August 26, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Does A “Pay When Paid” Clause Prevail Over The Construction Lien Act?

A pay when paid clause is one of the more contentious contractual provisions in the construction industry. That clause typically says that the subcontractor is not entitled to be paid until the contractor receives payment from the owner. Because of its perceived unfairness, the clause has been outlawed, or its effect has been substantially limited, in the United Kingdom and in many states of the United States.

In Canada, there is conflicting appellate authority about the effect of a “pay when paid” clause.  Aside from that controversy, another important issue is: What effect does a “pay when paid” clause have on construction or builders liens? Can the clause eliminate the subcontractor’s entitlement to a construction or builders lien on the ground that, since the owner owes nothing to the contractor, then the contractor owes nothing to the subcontractor and so the subcontractor has no lien?  That was the issue in the recent decision of the Ontario Superior Court in Bradhill Masonry Inc. v. Simcoe County District School Board.

Background

B.W.K was the general contractor on a project to renovate the Bradford District High School and Bradhill was the brick work subcontractor.  A claim for lien was registered by Bradhill and was vacated on the provision of security by B.W.K. The subcontract between B.W.K. and Bradhill appears to have been largely prepared or approved by the owner with little or no input from Bradhill. In the payment portion of the subcontract, that contract stated as follows:

“and the balance of the amount of said requisition, as approved by BWK and the Architects and Engineers, shall be due to the subcontractor  on or about the thirtieth day of the following month, and upon receipt by BWK of monthly payment by the owners.” (emphasis in the original)

The owner asserted that, based on this clause and the decision of the Ontario Court of Appeal in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. [1988] O.J. No. 448, there were no monies due to the subcontractor when the subcontractor’s lien was registered because the owner had not paid B.W.K. for any work which was the subject of the lien. For this reason B.W.K. asked for the lien claim to be dismissed.

The Decision

The court rejected B.W.K.’s argument in rather forceful language, calling it “antithetical to the law in the Construction Lien Act” and “a clever shell game.” The court noted that, while the owner had not paid B.W.K. when the subcontractor’s lien was filed, the owner later made full payment to B.W.K. when, as the court said, “BWK finally decided to put in its final invoice which it delayed.”

The court noted that, if accepted, B.W.K.’s argument would be devastating for lien claimants:

“The defendant’s argument would mean that if the general contractor’s lawyer is sharp enough in drafting the contract, the Act’s remedy for subcontractors who have not been paid for the fair value of their work would be rendered worthless as the owner and/or general contractor would become entitled to the costs of the lien action and could cut off all future payments to the plaintiff to reimburse itself when a lien claim was made. And if a sub-trade filed a claim for lien at the wrong time, its lien is worthless because money was not due and payable at that particular time even though the tradesperson has not been fully paid for their work and materials supplied to the job.”

The court held that the subcontract could not eliminate the subcontractor’s lien because section 5 of the Construction Lien Act states that the Act is incorporated into every contract in a project covered by the Act and every such contract is deemed to be amended to be in conformity with the Act.

Moreover, the court noted that section 14(1) of the Act provides that a person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials, and that under section 15(1) a lien arises when the person first supplies those services or materials.

The court concluded on this issue as follows:

“…as to the argument of the defendant that there was no lienable amount owing unless and until an amount became due and payable under the contract’s accounting terms in the contract, I reject it. Contrary to the defendant’s submission, this contract, like all building contracts, is subject to The Construction Lien Act.  It is not the reverse, . . . . . . , that the Act be subject to the contract between the general contractor and the masonry sub-contractor Bradhill. When a sub-trade is owed money due to work that has improved the site, its claim is for the “price of those services or materials”, the value of the work and material supplied, not what is due and payable at any given time according to the contract. And money owed the contractor or received by BWK was trust money held for the sub-trades until they are paid. It is not for BWK to fail to pay money due the sub-trade just because that sub-trade filed a lien claim. This is a reading of the contract and the Act which would make the contract the superior instrument whereas, as I have shown, it is the law in Ontario that the contract is to conform to the Act. I reject the argument on behalf of BWK that would hold otherwise.

Discussion

The controversy about “pay when paid” clauses is heightened in Canada not just by the public policy debate about whether these clauses should be allowed. As mentioned above, in other countries these clauses have been eliminated by statute or severely restricted in their application. In Canada, there is further controversy about these clauses because there are contrary appellate decisions concerning the effect of a “pay when paid” clause.

On one approach, the clause bars any claim, even at the end of the job, if the contractor has not been paid by the owner. That was the conclusion of the majority of the Ontario Court of Appeal in the Timbro decision.

The other approach says that the clause is a timing mechanism only, that the clause provides for payment by the contractor to the subcontractor when the contractor is paid by the owner, but does not operate as a complete bar to the subcontractor’s claim at the end of the job. That was the approach taken by the Nova Scotia Court of Appeal in Arnoldin Construction & forms Ltd. v. Alta Surety Co. (1995), 19 C.L.R. (2d) 1. In that case, a bonding company relied upon the “pay when paid” clause to argue that it owed no monies on the bond since the contractor did not owe monies to the subcontractor due to that clause. The Nova Scotia Court of Appeal held that the clause, properly interpreted, only related to the timing of payment during the project and did not entirely bar the claim. The Court may have thought that it made no sense for the “pay when paid” clause to be interpreted as a bar to payment to the subcontractor when there was a bond in place, presumably to be called upon in the very circumstance of the owner not paying the contractor.

Smack in the middle of the heightened controversy about these clauses is the issue about whether they over-rule the construction and builders lien legislation. If they do, then the controversy would move to an even higher level. Those familiar with the “pay when paid” debate have been waiting for a decision to address this issue, and here it is in the Bradhill decision.

In Bradhill, the court held that the “pay when paid” clause did not over-rule the Construction Lien Act, for two reasons.

The first reason was that, by virtue of the Ontario Act, that Act was incorporated into the subcontract contract and the parties could not contract out of the Act.  That reasoning will not apply in all provinces. In some provinces, the construction or builders lien legislation effectively says that third parties and workers are not affected by any contract purporting to eliminate rights under the lien legislation, but does not prohibit other parties from entering into such contracts.  So if the decision in Bradhill depends on the wording of the Ontario Act, then in other provinces the “pay when paid” clause could still potentially over-rule the construction and builders lien regime.

The other reason given by the court in the Bradhill decision is based on the fundamental nature of a construction or builders lien.  The lien is not based upon the contract between the contractor and the subcontractor, or the contract between owner and the contractor. Rather, the lien is based on two ingredients: the price of the materials or services, and the supply of those services or materials to the improvement of the land.  The price or supply may be influenced by the contracts, but it is the price and supply which create the lien. The court in Bradhill effectively concluded that, based on those elements of a lien claim, the status of the accounts between the owner and the contractor are irrelevant, or could not impair the validity of the subcontractor’s lien.

This second line of reasoning should be applicable in all provinces. If adopted by other courts, this reasoning will ensure that, whatever may be the other impacts of “pay when paid” clauses, they will not over-ride the protections contained in construction and builders lien legislation.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., at Chapter 4 , part 2

Bradhill Masonry Inc. v. Simcoe County District School Board, 2013 ONSC 4708.

Construction Liens  –   Pay when Paid Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                           August 15, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

When Is A Commercial Arbitration Decision Unreasonable?

Canadian courts will generally over-rule a decision of a domestic arbitral tribunal only if the decision is “unreasonable.”  What does this word mean? Is the standard of “unreasonableness” different in a commercial arbitration than, say, in a labour or employment arbitration?  If the arbitral award is found to fall within the bounds of reasonableness by the judge who hears the motion to over-rule it, how can an appellate court then say that the decision is “unreasonable”?

These questions are raised by the recent decision of the Newfoundland and Labrador Court of Appeal in St. John’s (City) v. Newfoundland Power Inc.  The Court of Appeal allowed an appeal and set aside the decision of the arbitral tribunal under a long term power lease, even though the judge who first heard the motion to set aside the arbitral decision upheld the decision as reasonable.  When one judge had found that the arbitral decision was reasonable, how did the Court of Appeal arrive at the decision that it was unreasonable?

Background

The arbitration arose under a long term lease between the City of St. John’s and Newfoundland Power. The lease was for the use of the Mobile River.  Clause 1 of the lease permitted the City to terminate the lease upon:

“payment to the Company of the value of all works and erections constructed or provided by the Company within and without the Mobile River watershed subsequent to the date of this Lease for the primary purpose of developing the waters of Mobile provided such works and erections are in use by the Company for that primary purpose at the time notice of termination of the Lease is given by the Council and also at the time of termination of the said Lease…” (emphasis added)

The meaning of the underlined words was the source of the contention. Newfoundland Power said that they meant that, on termination of the lease, the City was required to pay for the on-going value of its operating business in the Mobile River watershed as the time of the termination, including the value that it derived from the use of the river which it leased from the City.  The City said that, on termination of the lease, it was only required to pay for the physical works and erections which Newfoundland Power had constructed and nothing more.

The lease had been previously amended to delete the words “aggregate cost of works and erections … less depreciation” and replace them with the words “value of all works and erections … in use.”

The Arbitral Decision

The majority of the arbitral tribunal decided in favour of Newfoundland Power and held that the City was obliged to pay the full amount of the value of Newfoundland Power’s business in the Mobile River watershed.

The majority held that this interpretation followed from the concluding words of clause 1 of the Lease. Those words contained a proviso which referred to another right of the City under section 29 of the governing statute (the St. John’s Street Railway Act), namely, the right to purchase the assets and business of Newfoundland Power.  Under that right, the City was obliged to pay for the “value of the said undertaking, plant, property, assets and rights of the Company.”

The majority held that the reason for the reference to section 29 of the Act within clause 1 was to provide guidance to the appraisers in making valuation when the City terminated the lease.  The majority stated that “the wording of Clause 1 of the Lease as amended ties the termination process to the concepts expressed in Section 29 of the St. John’s Street Railway Act”.  Accordingly, the majority of the arbitral tribunal concluded that, upon termination of Newfoundland Power’s rights, (rather than the purchase of Newfoundland Power’s business),  the valuation of Newfoundland Power’s undertaking must take into account the “assets” and “rights” of the Company as they were explicitly referred to in section 29.

With respect to the meaning of the word “value” in the lease, the majority of the arbitral tribunal referred to dictionary meanings and concluded that the ordinary meaning of “value” did not mean “depreciated cost”.  The majority referred to the fact that clause 1 of the lease had been amended to remove the words “aggregate cost of works and erections… less depreciation” and had replaced those words with the words “value of all works and erections”.  From this amendment, the majority concluded that the appraisal process would be incorrectly conducted if it applied “cost less depreciation”.  Due to the amendment, the word “value” could not mean “cost less depreciation.”

Privative Clauses

In the present case, two privative clauses applied to the decision of the arbitral tribunal.  One was contained in clause 1 of the lease itself. That clause stated that “the award of any two such arbitrators shall be final and binding between the parties”.  The other was in section 36 of the Arbitration Act, RSNL 1990, c. A-14 which states that “the award made by arbitrators or an umpire is final and binding on the parties and persons claiming under them.”

Standard of Review 

 Newfoundland and Labrador has not adopted the Uniform Law Conference’s Uniform Arbitration Act.  That Uniform Act provides for a right of appeal if leave is granted by the provincial superior court from a decision of an arbitral tribunal.  The Uniform Act has been adopted in most of the Canadian provinces, but not in Newfoundland and Labrador.  Therefore, the only remedy to overturn the decision of an arbitral tribunal in Newfoundland and Labrador is an application for judicial review.

Both the judge hearing the original application and the Court of Appeal held that the proper standard of judicial review was set forth in the decision of the Supreme Court of Canada in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190.  Under Dunsmuir, there are only two standards of judicial review: correctness and reasonableness. There are two steps in determining which standard of review applies. The first step in the Dunsmuir analysis is to determine whether the courts have already established an appropriate standard of review for the particular tribunal whose decision was being reviewed. Both courts agreed that no appropriate standard of judicial review had been established for this arbitral tribunal.

The next step in the Dunsmuir analysis is the “contextual analysis” in which the following factors are considered:

(1) the presence or absence of a privative clause;

(2) the purposes of the tribunal;

(3) the nature of the question at issue; and

(4) the expertise of the tribunal.

The Court of Appeal agreed with the application judge that when these factors were applied to the arbitral tribunal in the present case, the proper standard of review was reasonableness. That is, the arbitral decision should only be set aside if it was unreasonable.

The Court of Appeal then considered how the reasonableness standard should be applied. It referred to the decision of the Supreme Court of Canada in Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708.  It held that this decision had clarified that the adequacy of reasons is not a “stand-alone basis for quashing a decision.”  Courts are not required, as it said, to “undertake two discrete analyses – one for the reasons and a separate one for the result.”  The Court of Appeal noted Justice Abella’s statement in the Newfoundland and Labrador Nurses’ Union decision that:

 “even if the reasons in fact given do not seem wholly adequate to support the decision, the court must first seek to supplement them before it seeks to subvert them. For if it is right that among the reasons for deference are the appointment of the tribunal and not the court as the front line adjudicator, the tribunal’s proximity to the dispute, its expertise, etc, then it is also the case that its decision should be presumed to be correct even if its reasons are in some respects defective.”

 The Newfoundland and Labrador Court of Appeal then stated its duty in applying the Dunsmuir test as follows:

 “This Court must therefore determine whether the reasons meet the standard of ‘justification, transparency and intelligibility’.  Even if the reasoning is in some respects flawed, this Court must determine whether the outcome is acceptable as being defensible in respect of the facts and the law by examining any alternative arguments which could have been made.” (emphasis added)

 Decision of the Court of Appeal

 The Court of Appeal said the following in starting its analysis:

 “In this case, however, I am satisfied that the majority made a number of errors in its reasoning process which led to a result that is not reasonable and supportable given the wording of the lease and the context in which it was negotiated.  The outcome is not defensible as a possible, acceptable outcome, given the commercial context in which the lease was to be interpreted and applied.”

 The Court of Appeal held that the majority of the arbitral tribunal had made two fundamental errors in the interpretation of clause 1 of the lease. The first error arose from the majority applying the valuation provision relating to the purchase of the business of Newfoundland Power.  That provision had no application when the valuation related to the termination of the lease.

The Court of Appeal said:

 “What was to be valued varied significantly depending on whether the City acquired the electrical generating plant by purchase pursuant to section 29 or by termination of the lease.  If the City terminated the lease after forty-seven years it had to pay the value of the “works and erections … in use”.  If the City exercised its right to purchase the Company as a going concern under section 29 of the St. John’s Street Railway Act, which it could do during the forty-seven year term of the Lease, it had to pay the value of the “undertaking, plant, property, assets and rights”….

 Intuitively, the different bases of valuation make sense.  If the City terminated the lease, Newfoundland Power would no longer have the right to use the water or the land on which the works and erections sat.  In other words, its franchise would be terminated….

 Here, Newfoundland Power and the City entered into a lease from the City with an express right of termination after forty-seven years upon three years notice with a compensation formula in favor of Newfoundland Power limited to the value of works and erections in use at the end of the lease to be valued by three arbitrators.  There would be no other compensation based on a going concern or otherwise because of the express language set out in the amended clause 1 of the lease dated, October 21, 1949…..

 The majority’s holding that the closing portion of clause 1 supported the contention that the valuation which occurs on the termination of the lease must be consistent with the valuation that occurs upon the City exercising its rights under section 29 was unsupportable and unreasonable and ignores the specific nature of the franchise rights granted by the City to Newfoundland Power.”

The Court of Appeal also held that the majority of the arbitral tribunal had erred in its interpretation of the word “value.”  It effectively said that the majority had ignored the fact that what was to be valued was “the works and erections in use”, not the business. It said:

 “The words “works and erections” generally refer to physical assets, a fact noted by the minority arbitrator.  While the addition of the words “in use” could connote an intention that the City would be taking over an operating facility, read in the context of the discussion above, it is clear that the words “in use” did not intend to transform the valuation from one including only physical assets into one including all associated rights and intangible property.  Their inclusion was meant only to identify which physical assets are to be valued, i.e. only those which are in use.

 This interpretation is commercially sensible.  Presumably, the words “in use” were added so that structures which were no longer necessary or functioning for the purpose of electrical power generation, would not be included in the assessment of value.  Newfoundland Power is to be paid for the value of only those physical assets which it was using to generate electrical power at the time of notice and termination. These are the only structures of value that it is losing upon termination of the lease.

 The Court of Appeal held that the majority of the arbitral tribunal had erred by relying so heavily on the changed definition of “value” in the lease.  In the court’s view, the amendment inserted into the lease “one method of valuation with the broader concept of ‘value’, which included as a possible interpretation the original method of valuation….The effect of the amendment, from a stand point of reasonableness, would appear to be intended to give greater flexibility to the arbitrators in determining which method of valuation is appropriate upon termination of the lease of those works and erections that are in use and are to be valued.”

The Court of Appeal then considered what result flowed from its conclusions, particularly in light of the finding by the application judge to the contrary.  It said the following:

 “The errors identified in the reasoning process of the majority of the arbitrators led to a decision which is unreasonable and unsupportable based upon the wording of the lease and the context in which the agreement was made.  Therefore, the applications judge erred by finding that the decision of the majority was reasonable and within the range of possible outcomes.”

 The Court of Appeal accordingly allowed the appeal and referred the matter back to the arbitral tribunal to be determined in accordance with the analysis in the Court of Appeal’s decision.

Discussion

This decision appears to reflect a tendency by the courts to review commercial agreements on a stricter basis than other agreements.  In the case of commercial agreements, the courts have at their disposal long-standing and well known principles of contractual interpretation.  When the arbitral decision offends one or more of those principles, then a court can conclude that the decision is “unreasonable”.

Two of the best known principles of contractual interpretation are the rule prohibiting reference to irrelevant considerations and the parole evidence rule.  Once the Court of Appeal concluded that the valuation principles applicable to the purchase of Newfoundland Power’s business were irrelevant to the valuation arising from the termination of the lease, then it was almost inevitable that it would conclude that the arbitral decision was unreasonable.  When, in addition, the court concluded that the prior versions of clause 1 were not helpful in arriving at the proper  interpretation of that clause, then its inclination to interfere was likely greater.  The only expertise brought by the arbitral tribunal to the process of interpreting the lease was legal expertise, and the court, which is comfortable with interpreting commercial agreements and rightly considers itself expert in doing so, undoubtedly felt that it should have little reluctance in setting the tribunal’s award aside.

This decision will be of interest to those involved in disputes involving the interpretation of construction and procurement agreements.  Those disputes often involve loaded words such as “value” and the dispute may revolve around whether certain factors are relevant or irrelevant in the interpretation process, or whether the negotiations or prior drafts of the agreement should be looked at. If one party to a construction dispute believes that the arbitration tribunal got the interpretation wrong, then the decision in St. John’s v. Newfoundland Power will be a useful decision in support of an application for judicial review.

Another view of this decision may be that courts are far too ready to set aside arbitral decisions.  Those with this view will see this decision as exactly the kind of case in which the court improperly intervened on a valuation matter that was at the heart of what the arbitral tribunal was asked to decide.

As a footnote to this decision, one could consider how it would have been decided if the arbitration in question was an international commercial arbitration, not a domestic arbitration, and the Model Law attached to the International Commercial Arbitration Act of Newfoundland and Labrador had applied. That Act is similar to the many provincial statutes which adopt the UNCITRAL Model Law across Canada.  Article 34 of the Model Law states the grounds upon which there may be recourse against an arbitral decision. Those grounds include:

  • incapacity by a party
  • invalidity of the agreement
  • lack of notice
  • the arbitral tribunal deciding a dispute or matter falling outside the terms of the arbitration agreement
  • the wrong composition of the tribunal or
  • the determination by the tribunal of a matter which is incapable of being arbitrated, or contrary to public policy.

None of those grounds appear to include an error of law made by an international commercial arbitration tribunal within its prima facie jurisdiction. If that is so, then this decision highlights the wider authority that international commercial arbitration tribunals have than domestic tribunals.  It also highlights the broader supervisory authority that provincial superior courts have over domestic arbitrations than over international commercial arbitration tribunals.  The Model Law appears to contemplate that international commercial arbitration tribunals may make errors of law within their jurisdiction and that Law gives the courts no express authority to set aside such errors.  This being the case, it may be doubtful that the Dunsmuir analysis has any application to international commercial arbitration.

With respect to domestic arbitration tribunals, however, Canadian law contemplates that provincial superior courts have authority to set aside errors of law made by domestic arbitration tribunals based upon the standards of “correctness” and “reasonableness” stated in Dunsmuir. If the decision in St. John’s v. Newfoundland Power tends to show that the courts apply a higher degree of scrutiny to legal error by commercial than to other types of arbitration, then it may be ironical that that there is no judicial review for error of law made in international commercial arbitrations.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed, chapter 10

St. John’s (City) v. Newfoundland Power Inc., 2013 NLCA 21

Arbitration  –  Standard of Review  –  Error of Law  –  Reasonableness  –  Contracts  -Interpretation

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                         August 1, 2013

www.heintzmanadr.com

www.constructionlawcanada.com