Who Is A Successor To A Contract?

Most commercial agreements contain a clause stating that the contract is binding upon and for the benefit of “successors.”  For example, Article 10.1 of the CCDC Cost Plus Contract states that the contract “shall enure to the benefit of and be binding on…successors”.

What does the word “successors” mean?  Who are “successors”?  Do those who enter into the contract know who the successors are?

Recently, the Ontario Court of Appeal considered this issue in Brown v. Belleville (City).  I dealt with that case in an article last week. In that article I was concerned with whether inaction could amount to acceptance of a repudiation of a contract.

Factual Background

 Let’s remind ourselves of the facts in Brown v. Belleville. In 1953, a municipality signed an agreement with a farmer under which the municipality agreed to maintain and repair a storm sewer drainage system that it had constructed on and near the farmer’s lands. Six years later, the municipality stopped maintaining and repairing the drainage system.  Over the next 50 years, the original municipality and successor municipality clearly and repeatedly repudiated the agreement.

The lands were sold from owner to owner and each owner unsuccessfully sought to have the municipality repair and maintain the drainage system.  Finally, in 2011 the then owners of the lands, the Browns, sued the municipality for breach of contract. The municipality, the Town of Belleville, defended the action on a number of grounds.  It said that the limitation period had expired because the Browns or their predecessors had long ago accepted the municipalities’ repudiation of contract. The trial judge and the Court of Appeal rejected that position. I dealt with that issue last week.

Belleville also said that the Browns had no standing to sue because they were third parties to the 1953 agreement, and that contract law does not entitle third parties to enforce agreements. Belleville also said that the Browns were not “successors” of the original farmer who entered into the agreement.  That agreement said:

“THIS INDENTURE Shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns.”

The agreement was never registered against the title to the land.  The City said that the agreement was never assigned or otherwise transferred to the plaintiffs or the other owners of the land after the original farmer who entered into the agreement.  The City asserted that the Browns were third parties to the original agreement and did not fall within any of the accepted  category of persons who could enforce the agreement.

Court of Appeal Decision  

 The Court of Appeal held that, on its face, the contract created a category of persons who could enforce the contract as parties to the contract, namely, successors of the owner who entered into the agreement. In that sense, the Browns did not have to demonstrate the application of the “third party beneficiary rule”. They were effectively parties as much as the original party.

The court stated it this way:

“…the broad and unqualified language of the enurement clause constitutes an express stipulation by the contracting parties that they intended the benefit of the Agreement to be shared by future owners of Mr. Sills’s lands, as his successors or assigns or by way of inheritance.  The  language  of  the  enurement  clause  unequivocally  confirms  that  the contracting parties intended and agreed that the benefit of the Agreement would extend to an aggregation or class of persons that includes successor  landowner of Mr. Sills.   On the admitted findings of the motion judge, the Browns are Mr. Sills’s successors.   In this sense, the Browns are not strangers or ‘third parties’ to the Agreement.   Rather, they step into Mr. Sills’s shoes and have standing to enfore the Agreement as against the City as if they were the original covantee(s) to the Agreement…given the intention of the contracting parties stipulated in the Agreement under the enurement clause, I conclude that ‘relaxing’ the doctrine of privity in this  case  does  not frustrate  the  reasonable expectations of  the  parties  at the  time the Agreement was formed.  To the contrary, it gives effect to them.”

Belleville relied upon a 1980 decision of the Supreme Court of Canada in Greenwood Shopping Plaza. It said that that decision precluded the Browns from relying on the 1953 agreement to which they were not a party. The Court of Appeal held that, in light of more recent decisions of the Supreme Court, the Greenwood case had been largely over-ruled. In any event, having regard to the enurement clause, the prohibition against third party enforcement of the agreement had little or no application.  If necessary, the court said that it would apply the exceptions to the rule prohibiting third party enforcement of a contract and allow the Browns to enforce the drainage agreement when they so clearly fell within the category of persons who were intended to have its benefit.

The Court of Appeal considered one further objection of Belleville, namely, that the Browns were using the 1953 agreement as a sword – to bring an action and positively enforce rights – rather than as a shield – or as a defence. In the modern cases in the Supreme Court recognizing the rights of third parties to rely on contract they had not signed, those third parties were asserting the contract as a defence.

The Court of Appeal held that this distinction made no difference in the presence of the enurement clause:

 “I recognize  that London Drugs and Fraser River were cases where the third-party beneficiaries sought to rely, by way of defence, on the benefit of the contractual provisions at issue  to resist  claims  brought  against them – they  were not  seeking to  enforce  the affirmative benefit of the relevant contractual provisions….. Nonetheless, it is my view that the Browns’ status as the successors of the original covenantee under  the Agreement affords  them the  right  to seek to  enforce  the original covenantor’s contractual obligations, as against the original covenantor.   In effect, for the purpose of enforcement of the Agreement, the Browns are Mr. Sills and the City is Thurlow.  Further, insofar  as  the performance  of  the  City’s  obligations under  the Agreement are concerned, there is a clear identity of interest between Mr. Sills and the Browns.   As Mr. Sills’s successors, the Browns stood ready to comply with the activity required of them under the Agreement- the provision of access  to their lands.    In all these circumstances, the application of the principled exception to the privity rule advances the interests of justice.” (emphasis added

Analysis

 The Brown v. Belleville decision answers one of the issues arising from “successor” clauses. Based on that decision, a person falling within the clause does not have to worry about the old rule that contract law does not recognize the rights of third parties.  If the contact has an enurement clause in favour of or binding on successors, then successors are parties to the contract as much as the original parties.

The next issue is:  who are successors? Clearly, based on Brown v. Belleville, a later owner of the same land that is affected by the agreement is a successor. But what about a tenant, or subtenant, of that later owner? If that tenant has exclusive possession of the affected property, and is the person who is really affected by a breach of the agreement, is that person a successor? What about the owner of other interests in the land such as owners of easements or mortgagees?

The issue becomes even more complicated when one considers building contracts.  If the main contract between the owner and the contractor states that it is binding on the “successors” of the contractor, does that word include a subcontractor?  What if the owner has given a covenant in the main contract that affects the electrical work and the contractor subcontracts the entire electrical work to an electrical subcontractor?  Is the electrical subcontractor the “successor” of the contractor?  Why not?

If the contractor assigned the electrical part of the main contract to the electrical subcontractor (if it were permitted to do so), then the enurement clause would likely apply because that clause would likely be expressed to include assignees. If the clause includes both successors and assigns, then the word “successors” must be given a wider meaning than “assisgns”, but who does it include?

A further issue is this:  if the enurement clause is also expressed to be binding on successors, then third parties may find themselves bound by obligations under the contract even though they never signed the contract. In fact, a good test as to whether the contract enures to the benefit of a third party may be whether it should be binding on that party.  Clearly, the Browns were willing to be bound by the 1953 agreement and allow Belleville access to their land to repair and maintain the drainage system, so it was not difficult to find that the Browns were successors. Similarly, a subtenant or mortgagee of the Brown’s property would be willing to grant such access, so they may well be successors.

But what parties would be willing to be bound by the contractor’s building contract with an owner?  Would a subcontractor or supplier?  Likely not, especially if that includes the payment obligations. Often the subcontract will state that the main contract is incorporated into the subcontract, but at least one line of authority holds that some of the terms of the main contract (such as arbitration, insurance and guarantee clauses) are not incorporated into the subcontract unless that intention is specifically set forth in the subcontract.

Now that the Ontario Court of Appeal has held that successors may enforce a contract if there is an enurement clause in the contract to that effect, the clause may be more powerful and dangerous than it was previously.  This may be a good reason for the meaning of “successors” to be defined in the contract. The parties may mean that it includes only the successors by virtue of corporate or bankruptcy law. If so, they can say that. But they may mean it to have a broader meaning, such as a successor in title. Again, they can say that.  If they do not, then they will leave it up to the court to decide who is bound by or may rely upon the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 1, part 2

Brown v. Belleville (City), 2013 ONCA 148  

Construction law  –  Enforcement  –  Third Parties  –  Breach of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         March 29, 2013

 www..heintzmanadr.com

www.constructionlawcanada.com

 

Does Inaction Amount To Acceptance Of A Repudiation Of Contract?

Can inaction by a party to a contract amount to an acceptance of the repudiation of the contract by the other party?  That was the issue in the very recent decision of the Ontario Court of Appeal in Brown v. Belleville (City).

This is an important issue in construction law because of the critical effect of the acceptance or non-acceptance of contractual repudiation.  The acceptance of repudiation brings the entire contract to an end.  But if repudiation is not accepted then the contract continues.  So whether there has been an acceptance of repudiation can be of pivotal importance.

If the contract has come to an end by acceptance of repudiation, then contractual performance obligation may terminate, warranty periods and limitation periods may start running, and insurance rights may start or end.  So it is vital for a builder or owner to know whether the contract has been terminated.

Yet, a builder or owner may not have the time or inclination to respond to wrongful conduct by the other side.  But if an owner or contractor doesn’t respond, can they be taken, by inference, to have accepted the wrongful conduct and brought the contract to an end?  Does an owner or contractor in effect have an obligation to respond?  Can they leave matters up in the air without specifically dealing with a repudiation by the other side?  That was the issue in Brown v. Belleville (City).

 The Factual Background

In 1953 a municipality entered into an agreement with a farmer under which the municipality agreed to maintain and repair a storm sewer drainage system that it had constructed on and near the farmer’s lands.  Six years later, the municipality stopped maintaining and repairing the drainage system.  The lands affected by the drainage system were sold by the farmer’s heirs to a third party.

In the 1980’s, that third party tried to have the municipality maintain the drainage system.  The municipality refused to do so, clearly repudiating the agreement.  In 2003, the affected lands were sold to the Browns who asked the successor municipality, Belleville, to maintain and repair the drainage system.  Belleville refused to do so and repudiated the agreement.

The Browns then sued Belleville.  Belleville defended the action and one of the positions it asserted was that the Brown’s claim was barred by the limitation period.  Belleville asserted that the repudiation by it and its predecessor municipalities had long ago been accepted by the Browns and their predecessors, in effect by inaction.  Accordingly, Belleville said that the agreement had long since terminated and the limitation period had run.

 The Court of Appeal’s decision

 The Court of Appeal started its analysis by noting that a repudiation of a contract does not, in itself, bring the contract to an end.  Only if the innocent party elects to accept the repudiation does the contract come to an end.  The innocent party is not obliged to accept the repudiation, and if he or she does not so accept then the contract continues in effect.

The Court of Appeal then stated the test to determine whether there has been an acceptance of a repudiation.  The court said that the acceptance:

“must be clearly and unequivocally communicated to the repudiating party within a reasonable time.   Communication of the election to disaffirm or terminate the contract may be accomplished directly, by either oral or written words, or may be inferred from  the  conduct  of  the  innocent  party   in  the  particular  circumstances of  the  case.”(emphasis added)

The Court of Appeal quoted from another decision in which it was said that:

“mere inactivity or acquiescence will generally not be regarded as acceptance for this purpose.  But there may be circumstances in  which  a  continuing  failure  to  perform  will  be  sufficiently unequivocal to constitute acceptance of  a repudiation.”

The Court of Appeal agreed with the trial judge that the third party’s “silence or inaction in the face of [the municipality’s] repudiation of the Agreement falls short of satisfying the requirement of clear and unequivocal communication to the repudiating party of the adoption of a repudiatory breach or anticipatory repudiation of contract.”

The mere fact that the municipality did not exercise its rights did not mean that it could not have done so, nor did it mean that the Browns or their predecessors had precluded the municipality from doing so.  The Court noted:

“the municipality did not seek access to the affected lands to carry out maintenance or repair activities does not mean that such access was unavailable.”

The Court of Appeal stated that the burden of proving an acceptance of repudiation was on the municipality and there was no evidence of such acceptance by the Browns or their predecessors in title.

Comments

This decision is another example of appellate courts in Canada sticking to the fundamental principles of contract law.  The requirement that an acceptance of repudiation must be clearly made and clearly proven means that the wrongful party cannot benefit from its own wrongful conduct and induce a termination by its own repudiation.

It may have taken a fair bit of chutzpah for the municipality to say: “we repudiated the contract, and you accepted it, didn’t you know!”   But that is the situation in which every exasperated contracting party finds itself when stuck with a contract that it has long since repudiated and wants to be rid of.  Unfortunately, it can’t unilaterally get rid of it, and the contract can go on, and on, and on, until the repudiation is accepted by the innocent party, if it ever is.

Besides being favourable to the innocent party, this state of the law protects the inactive party, the party that doesn’t have the time, inclination or resources to take the time to determine if it will accept the repudiation of the wrongful party, or simply doesn’t want to.

So, on a construction project, a serious wrong by one party does not mean that the contract comes to an end.  The law’s choice is that, in those circumstances, it is better that the contract continues and not come to an end.  It only comes to an end if the other party wants it to.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 1, part 4(c)

Brown v. Belleville (City), 2013 ONCA 148

Construction Contract  –  Termination  –  Repudiation  –  Acceptance  –  Limitations

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         March 22, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Who Decides If There Is An Appeal From A Court Order Requiring Arbitration: The Parties Or The Court?

One of the first issues that can arise in a dispute is whether arbitration or court proceedings must be pursued. The issue will often arise from a motion by a defendant in the action.  The defendant will bring a motion to stay or dismiss the action on the basis that the dispute must be arbitrated.

What happens when one party wants to appeal the decision which grants the motion to stay or dismiss? Can the parties to the arbitration agreement agree beforehand that there shall, or shall not be, a right of appeal?  That was the issue that Federal Court of Appeal recently considered in Murphy v. Amway Canada Corporation.

Interestingly, the Federal Court of Appeal held that, while the applicable arbitration legislation can preclude an appeal from that decision, the parties cannot, and that the court’s own statutory powers relating to appeals apply despite what the parties have agreed to. This decision could have wider ramifications relating to the parties’ ability to limit or expand the powers of courts relating to arbitration proceedings. According to this decision, the parties may have no right to do so.

Background

Amway is in the business of distributing home, personal care, beauty and health products. It does so through individual distributors who sell the products in their homes or through other persons they recruit. Mr Murphy was an Amway representative in British Columbia.

The agreement between Amway and Mr Murphy was called the Registration Agreement. The Registration Agreement contained a clause requiring any dispute between the parties to be arbitrated. The arbitration clause contained conflicting provisions relating to the arbitration. On the one hand it said that the Ontario Arbitration Act, 1991 was to govern the “interpretation, enforcement, and any proceedings in any federal or provincial court in Canada.”  On the other hand, it said that Michigan law applied to the arbitration and that the “United States Arbitration Act shall govern the interpretation and enforcement of the arbitration rules and the arbitration proceedings.”  The Rules of Conduct incorporated into the arbitration clause stated that the arbitration would be conducted under the procedures of JAMS (an American-based dispute resolution service) or the American Arbitration Association.

The Murphy v Amway decision:

The Murphy v. Amway decision is most famous for the ruling that a party to an arbitration agreement who asserts a claim under the Competition Act must bring the claim by way of arbitration, and cannot bring the claim in court. Accordingly, Mr. Murphy was precluded from bringing a class action asserting remedies under the Competition Act against Amway.

A judge of the Federal Court stayed Mr. Murphy’s action based upon the arbitration agreement contained in the agreement between Mr Murphy and Amway. Mr. Murphy appealed. A preliminary issue in the Federal Court of Appeal was whether Mr. Murphy had any right to appeal.

Amway argued that Mr. Murphy had no right of appeal from the decision of the Federal Court because, by virtue of the parties’ agreement, the Ontario Arbitration Act, 1991 applied. Section 7 of that Act provides for a party to an action bringing a motion to stay an action based upon an arbitration agreement. Sub-section 7(6) states that “there is no appeal from the court’s decision.”  Accordingly, Amway argued that the parties had incorporated sub-section 7(6) into their agreement and that subsection precluded Mr. Murphy from appealing.

The Federal Court of Appeal rejected Amway’s submission and held that Mr. Murphy was entitled to appeal.  It held that the Ontario Arbitration Act, 1991 did not apply to the Registration Agreement as a matter of statute law. It said: “Simply put, we are not bound by the term of that statute.” It so held presumably because the Registration Agreement related to an Amway representative located in British Columbia and a distribution agreement to be performed in British Columbia, and not agreements made in Ontario.  The Federal Court of Appeal accordingly held that the Ontario Arbitration Act, 1991 only applied by way of agreement, that is, by being incorporated into the Registration Agreement.

The Federal Court of Appeal further held that, simply as an agreement, the arbitration clause in Registration Agreement could not over-ride the Federal Courts Act. That Act provides for an appeal to the Federal Court of Appeal from decisions of the Federal Court. In that situation, the Federal Court of Appeal held that the Federal Courts Act applied and was not ousted by the parties.

The Federal Court of Appeal distinguished the present situation from that found in a number of provincial trial and appellate courts decisions in which the court had applied sub-section 7(6), or the comparable section in other provinces. In those cases, sub-section 7(6) applied directly to the proceedings because the arbitration was governed by that provincial law. Here, the Ontario Arbitration Act, 1991 apparently had no application qua statute.

The Federal Court of Appeal also distinguished the decision in Halterm Ltd v. Canada, [1984] F.C.J. No 541. In that case the parties had effectively appointed the Federal Court trial division as the arbitrator of their dispute. In that situation, they were permitted to make a binding and effective agreement that there would be no appeal.

In the result, the Federal Court of Appeal held that the parties had not and could not agree there was no appeal from the judge’s order granting the stay. The Court proceeded to hear the appeal, but dismissed the appeal on the ground that the Federal Court had properly held that the dispute must be determined by arbitration.

Discussion

This decision raises the very interesting public policy issue of where the limits of agreement are in respect of court procedures generally and specifically in relation to arbitration proceedings.

There are a number of sections in the Ontario Arbitration Act, 1991 that state that there is “no appeal” or limited rights of appeal:

section 7(6) – no appeals with respect to a court decision to stay the action in favour of arbitration;

section 10(2) – no appeals with respect to the court’s appointment of the arbitral tribunal;

section 15(6) – right of appeal only by a removed arbitrator or party with respect to a court decision to remove an arbitrator;

section 16(4) – no appeal from court order appointing a replacement arbitrator; section 17(9) – no appeal from a court order dealing with a jurisdictional objection.

None of these prohibitions on appeals (and particularly the one found in sub-section 7(6) of the Ontario Act) are found in the British Columbia Commercial Arbitration Act. This may be the reason why Amway relied upon the Ontario Act.

These prohibitions on appeal exist alongside the provisions in the Courts of Justice Act and the Rules of Civil Procedure contemplating appeals from the same judges to courts of appeal.  Nevertheless, the latter provisions have been found to be inoperative in the face of the specific prohibition on appeals found in the Arbitration Act, 1991.

Section 3 of the Ontario Arbitration Act, 1991 says that “the parties to an arbitration agreement may agree, expressly or by implication, to vary or exclude any provision of this Act except” certain specific sections.  None of those non-waivable sections include any of the sections precluding appeals. In that situation may the parties agree that there is an appeal? Presumably the argument would be that the parties cannot create by an agreement an appeal to the courts; and that only the legislature can do that.

If that is so, and if the parties cannot contract in to an appeal, then should the parties be able to contract out of an appeal? Should they be able to contract out of the right in section 45 to seek leave to appeal? Section 45 is not one of the sections that the parties are precluded from waiving and the case law appears to support the entitlement of the parties to contract out of this statutory right to seek leave to appeal. But if a party can do so, should it also be entitled to contract out of the prohibition against appeals in the other sections?

These sections are, of course, one step closer to the arbitration than the situation in Murphy v. Amway. There, the appeal concerned an appeal from one Federal Court judge to the Court of Appeal, that is, an appeal within the court system itself.  So the argument that the parties should not be able to contract out of the appeal rights found in the court statutes may have greater weight. Nevertheless, without citing any authority, the Federal Court of Appeal held that no such agreement can be made, even if the prohibition on appeal is exactly what is found in provincial arbitration statutes. Since the prohibition on appeals is found in provincial statutes, it is hard to say that such a prohibition is contrary to general public policy.  The argument must be made entirely on the basis that the parties cannot, in advance, contract into or out of the provisions of the court system. For example, just as they cannot contract about what are the grounds for appeal to the Federal Court of Appeal (or the Supreme Court of Canada) will be between them, they cannot contract that there will be no such appeal.

The Ontario International Commercial Arbitration Act (ICAA) and the Model Law attached to that statute do not contain any prohibitions on appeals or any right to contract out of the statute. It is interesting to speculate why this is so, in light of the contrasting provisions in the domestic statute.  So far as appeals are concerned, one might conclude that, being an international law intended to be adopted in many countries, the Model Law does not deal with rights of appeal, leaving each country to sort that matter out. In the case of Ontario, however, the effect is to leave wide open rights of appeal in many cases in which there would be no appeal under the domestic statute. So far as contracting out, ICAA and the Model Law are written in a fashion that makes it appear that they are public policy and that the parties cannot contract out of them.

All of the above, and the decision in Murphy v. Amway, may make us re-think the legal principles underlying the waiver or creation of rights relating to appeals and arbitration proceedings.  Is the right to waive or create such rights based on contract law, administrative law, public policy or what, and why?

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

Murphy v. Amway Canada Corporation, 2013 FCA 38

Arbitration – Stay of court proceedings – appeals – 

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

www.constructionlawcanada.com

www.heintzmanadr.com

Does A Mediation Agreement Suspend The Limitation Period Or The Period To Set Down A Lien For Trial?

An agreement to mediate is often found in arbitration and building contracts. Yet, the impact of mediation upon court or arbitral proceedings is uncertain. Does an agreement to mediate mean that, until the mediation occurs, there is no cause of action and therefore there is no entitlement to commence arbitration or an action?  In that case, the limitation period would be effectively extended. In L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133, 2011 ONCA 435, the Ontario Court of Appeal held that, until a contractual obligation to negotiate a compromise had been fulfilled or terminated, no cause of action arose and the limitation period was not running.   

Or is an agreement to mediate simply not enforceable because an agreement to negotiate is not enforceable? If this is the case, then the limitation period is running and either party can ignore the mediation agreement and go to court or commence arbitration. The Ontario Court of Appeal so held in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 ONCA 218.

The uncertainty about the enforceability of mediation agreements creates real dangers for those engaged in dispute resolution under arbitration and building contracts. Fortunately, in Ontario there may be at least a partial solution in section 11 (“section 11”) of the Limitations Act, 2002 of Ontario (“Limitations Act”). This solution is often forgotten but in the recent decision in Tribury v. Sandro, the court held that a mediation agreement, once made, does effectively stop the limitation period from running.

However, there are other dangers arising from mediation agreements and limitation and procedural periods.  The Tribury decision did not expressly determine whether the mediation agreement would suspend the limitation period even if it was not an enforceable agreement to mediate.  In addition, section 11 only applies to limitation periods prescribed under the Limitations Act.  Thus, in Tribury, the court did not apply section 11 to the two year period for setting a lien action down for trial under section 37 of the Construction Lien Act (“section 37”).  What is the effect of mediations on all the other procedural and limitation sections found in Ontario statutes?

Section 11(1) states as follows:

“ If a person with a claim and a person against whom a claim is made have agreed to have an independent third party resolve the claim or assist them in resolving it, the limitation periods established by sections 4 and 15 do not run from the date the agreement is made until,

(a) the date the claim is resolved;

(b) the date the attempted resolution process is terminated; or

(c) the date a party terminates or withdraws from the agreement.”

Background

Tribury was the general contractor on a construction project for Laurentian University.  Sandro was the structural steel subcontractor and Edward was Sandro’s structural steel consultant.  The project started in 2006 and ground to a halt in June 2007 due to the alleged failure of certain steel connections. Apparently, all parties accepted that the claims between the parties were “discovered” in June 2007 for the purposes of the Limitations Act. As will be seen later, one of the issues in the motions in question was whether some of the subsequent proceedings were brought within the basic two year limitation period set out in section 4 of the Ontario Limitations Act or, in effect, by June 2009.

In October 2008, Sandro commenced a construction lien claim against Tribury and Laurentian. The other issue in the motions in question was whether Sandro had set that lien claim down for trial within two years of that date as required by section 37 of the Construction Lien Act, or, in effect, by October 2010.

In December 2008, Tribury counterclaimed in Sandro’s lien action.  In April 2009, Tribury started its own action which was substantially the same as its counterclaim in Sandro’s lien action. While Tribury agreed to withdraw that counterclaim, the order dismissing the counterclaim was not made until November 2010.

The Mediation

In March 2009, Sandro suggested mediation to all parties. In April 2009, counsel for all the parties participated in a conference call and all the parties, with the exception of one party, agreed to participate in mediation. That agreement was confirmed by a letter from Tribury which suggested the names of mediators, proposed deadlines for the mediation briefs and confirmed the parties’ tentative consent to a cost sharing for the mediator’s fees. In July, 2009, Sandro delivered its mediation brief to Edward. In March, 2010 the parties chose a mediator. In August, 2010, a mediation date in November 2010, was scheduled.  On November 10, 2010, counsel for Edward advised the other parties that Edward was not prepared to mediate the “Sandro remediation costs”, namely the remediation costs which Sandro itself had incurred and was now claiming against Edward (as opposed to remediation claims being asserted by others against Sandro which Sandro claimed over against Edward). The mediation was cancelled.

The Impugned Proceedings

On December 3, 2010, Sandro issued a new Statement of Claim against Edward. On December 6, 2010, in Tribury’s 2009 action Sandro served a Statement of Defence, Crossclaim (against Edward) and Counterclaim (against Tribury).

The Motions

Edward then brought a motion to dismiss the December 2010 action and cross claim against it on the ground that the limitation period had expired.

Tribury bought a motion to dismiss Sandro’s lien action on the ground that it had not been set down within the two years period set forth in Section 37 of the Construction Lien Act. Section 37 requires that, within two years of the lien action that perfected the lien, an order must be made for the trial of an action in which the lien may be enforced, or an action in which the lien may be enforced must be set down for trial.  Otherwise, the lien action must be dismissed.

Tibury also sought an order dismissing Sandro’s December 2010 counterclaim on the basis that, by December 2010, the limitation period had expired for that counterclaim to be brought.

The Decision

1.      Section 11

So far as Sandro’s December 2010 claim and cross claim against Edward and its December 2010 counterclaim against Tribury, the Court held that the limitation period for commencing those claims was extended during the whole period from April 2009 to November 2010, and had not expired by the time that Sandro’s December 2010 claim, cross claim and counterclaim were commenced, by virtue of the mediation and the effect of section 11 of the Limitations Act.

First, the Court held that an agreement under section 11 did not have to specify that the limitation period was suspended until the conclusion of the mediation.  The suspension of the limitation period was effected by section 11 itself, without the parties having to say so. Their agreement to mediate, not any words agreeing to a suspension of the limitation period, caused the suspension.

The Court distinguished section 23(3) from section 11 of the Limitations Act. Sub-section 23(3) is the general provision allowing parties to agree to suspend or extend the limitation period.  That sub-section depends, for it to be activated, on the parties’ agreement to do exactly that, namely, suspend or extend the limitation period.  In contract, section 11 depends, for it to be activated, upon the parties’ agreement to mediate. If there is an agreement to mediate, it is section 11 which then suspends the limitation period. The Court said:

Edward has not convinced me that the agreement referred to in section 11 of the Limitations Act requires specific language suspending or extending applicable limitation periods for its efficacy. In my view, what is required is an agreement which is entered into after a dispute has arisen whereby the parties agree to have a third party assist in resolving the dispute, nothing more. In the case before the court, the parties entered into an agreement to mediate in response to a dispute which had arisen among them. They have therefore met the requisite test.

Whether there was an agreement to mediate was disputed. After reviewing the evidence, The Court held there was an agreement to mediate and that it included the Sandro remediation costs.  The Court found as follows:

The correspondence between the parties confirms their mutual intention to mediate the issues which arose following the failure of the steel connectors and I find that all parties decided to mediate these issues on the understanding that all outstanding damages issues would be mediated. Although the confirming letter did not specify which issues were to comprise the subject of the mediation, the agreement was open ended and not restricted in scope. There was a stated requirement in the letter confirming the mediation that both Sandro and Tribury submit damages briefs and there is no evidence that the parties intended that only some of the issues resulting from the failure of the steel connectors were to be mediated.

2.       Section 37

So far as Sandro’s lien claim, the Ontario Superior Court exercised its discretion to permit that claim to proceed as an ordinary contract claim, and struck out the lien itself on the ground that the action had not been set down within the two year period set forth in section 37. In so deciding, it did not consider whether the mediation, and section 11 of the Limitations Act, could extend the time set forth in section 37. Since section 11 only refers to limitation periods in the Limitation Act, the Court presumably thought that it was self-evident that section 11 did not apply to section 37.

Discussion

There is good news (with a condition), bad news and two warnings arising from this decision.

First the conditional good news.  If parties who are involved in a dispute agree to mediate, they thereby suspend the limitation period under section 11.  This is a power that is often forgotten. The parties are not necessarily faced with a “do or die” alternative between commencing the proceeding on the one hand, or mediating and potentially letting the limitation period run out on the other hand.  By reason of section 11, they are protected against the running of the limitation period by a proper mediation agreement.

The condition to the good news is this. In Tribury the Court held that the mediation agreement suspended the limitation period without inquiring whether the mediation agreement was an enforceable mediation agreement, so far as the obligation to mediate is concerned. That is, the Court did not consider whether the mediation agreement contained enough details to make it an enforceable agreement to mediate. There are many recent cases, particularly in the United Kingdom, holding that an agreement to mediate is not enforceable unless that agreement contains sufficient procedural details.

One explanation of the Tribury decision could be that it is not essential that mediation agreement be enforceable as such for it to activate section 11: a           mediation agreement is enforceable to suspend the limitation period by virtue of section 11, even if it does not compel the parties to mediate.

Another explanation is that this issue was simply not considered, and that it is open for another court to conclude that, unless the mediation agreement contains sufficient details, it does not activate section 11.

Second, the bad news. Sections 11 and 23 only refer to limitation periods contained in the Limitations Act. They do not refer to limitation periods in any other Act, including the Construction Lien Act.  For this reason, the parties cannot rely on sections 11 or 23 to extend by agreement the limitation periods for the commencement of a lien action or the statutory period for setting a lien action down for trial.

Nor do sections 11 or 23 apply to limitation periods, or periods for taking steps, in other statutes.  For example, the Arbitration Act, 1991 of Ontario contains a number of limitation periods. Section 52(1) of that Act says that limitation period for an arbitral claim is the same limitation period as for an action. So presumably, sections 11 and 23 should apply to arbitral claims.  Section 47of the Arbitration Act, 1991 establishes a 30 day period for commencing an appeal from an award or an application to set aside an award. Section 52(3) establishes a 2 year period for enforcing an award. Section 3 says that the contracting parties may agree to vary or exclude any provision of the Act, except certain specific mandatory sections.  Sections 47, 52 and 53 are not among the mandatory sections.  So the parties should be able to vary the limitation periods set forth in those sections.

Article 34(3) of the Model Law attached to the Ontario International Commercial Arbitration Act (“ICAA”) establishes a three month period for bringing an application to set aside an international commercial arbitral award.  Article 52(3) establishes a two year limitation period for commencing an application to enforce the award. The ICAA and the Model Law do not contain any express power to grant relief from, or contract out of, those articles.  While the two year enforcement period seems to be based on the two year general limitation period in the Limitations Act, it appears that the parties can vary the latter but not the former, unless a court were to find that parties can generally contract out of the ICAA .

Third –  two warnings:

First, the mediation agreement should be carefully documented. An exchange of correspondence should not be relied upon as that exchange may be subject to dispute and interpretation.  The dispute or disputes that fall within the mediation agreement should be specified. In the present case, Sandro was fortunate that the exchange of correspondence was interpreted by the Court to include all the issues between all the parties.

Second, in a construction lien action, attention should be paid to intersecting limitation and procedural periods, some of which may not be suspended by a mediation agreement. The same warning applies to any action or arbitration involving statutory limitation periods or periods for taking steps which could result in the proceeding being dismissed if not taken. In the present case, Sandro may have thought that the mediation agreement suspended all periods for taking procedural steps.  But it didn’t. It didn’t suspend the two year period for setting the lien action down for trial.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 6, introduction, and Chapter 10, part 6.

Tribury v. Sandro, 2013 ONSC 658

Construction Law  –   Building Contracts   –   Construction and Builders Liens  – Arbitration  –  Mediation  –  Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                     February 24, 2013

www.heintzmanadr.com

www.constructionlawcanada.com    

Is An Agreement To Mediate Enforceable?

A recurring issue in arbitration and construction law is whether an agreement to mediate is enforceable. That is because an arbitration or building contract may contain a clause imposing an obligation to mediate before arbitrating. If the agreement to mediate is enforceable, that likely has certain consequences.  The limitation period is likely not running and the arbitration cannot be commenced until the mediation is finished. The reverse is true if the mediation agreement is not enforceable.  And if it is uncertain which is the correct position, then the parties may be in a real quandary about whether they may or must commence the arbitration and ignore negotiation.

The English High Court recently considered this issue in Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors. The court upheld an arbitral decision that a clause requiring mediation was not enforceable.  Therefore, the arbitration was not premature.

What is interesting about the decision is that the court did not hold that mediation clauses are per se unenforceable. Rather the court held that such a clause must have one of two qualities to be enforceable.

Either the mediation clause must provide reasonable certainty as to the beginning, the ingredients and the end of the mediation process;

Or the subject matter of the mediation must be determinable by fairness or reasonableness so that the court can infer the necessary procedural ingredients.

Finding that the mediation clause in the Grant Thornton case satisfied neither criteria, the court upheld the arbitrator’s decision that the mediation clause was ineffective.

In the alternative, the court found that the period for the mediation had expired by the time that the arbitration started. Therefore, the arbitration was validly commenced.

Background

The claimants were two partners in a Hong Kong partnership, JBPB.  That partnership was a member of the international Grant Thornton organization.  JBPB was removed as a member of the international Grant Thornton organization. The claimants sought to invoke the mediation provisions of the international Grant Thornton agreement before going to arbitration. The partnership agreement contained a two stage mediation procedure involving the Chief Executive Officer and Executive committee.   The English High Court summarized those procedures as follows:

Section 14.3(a) requires that the dispute or difference should be referred to the Chief  Executive with a view to him attempting amicably to resolve that dispute or difference by amicable conciliation of an informal nature;

Section 14.3(b) prescribes that the Chief Executive shall attempt to resolve the dispute or difference in an amicable fashion within one month after receipt of a request that he should do so;

Section 14.3(c) prescribes that if the dispute or difference is not by then resolved it should be referred to a three-person Panel selected by the Board (none of whom is associated with or in any other way related to the member Firm(s) who are parties to the dispute), it being provided that the Panel is to have up to one further month to resolve the dispute or difference.

The international agreement stated that, until the Panel determined that it could not resolve the dispute or one month passed after the reference of the dispute to that Panel, “no party may commence any arbitration procedures in accordance with this Agreement.”

It is interesting to note that the CEO recused himself from the mediation process on the ground that he had been involved in the decision to remove JBPB. In addition, nobody volunteered to be members of the three member board. These facts did not expressly figure in the decisions of the  arbitral tribunal or court. The Grant Thornton international organization and the other partners of JBPB did not object to the arbitral tribunal proceeding with the arbitration without the mediation procedures in the partnership agreement being utilized.

Arbitral and Court Decisions

The claimants took the position before the arbitral tribunal and the court that participating in the mediation process was a condition precedent to arbitration and that, since there had been no mediation, the arbitration was premature and the arbitral tribunal had no jurisdiction to proceed with it. The arbitral tribunal held that the mediation clause did not preclude the tribunal from proceeding with the arbitration.  That decision was upheld by the court.

The court held that an agreement to negotiate in good faith, without more, is unenforceable, even if that agreement is contained within an agreement that is otherwise enforceable. But this is the beginning, not the end of the debate.  The court will “strain to give effect” to a mediation agreement.

The court outlines two ways in which a mediation agreement may be effective.

First, the subject matter of the mediation may be one that can be objectively determined, and if it is, then the mediation agreement may be enforceable:

“For that purpose it may imply criteria or supply machinery sufficient to enable the Court to determine both what process is to be followed and when and how, without the necessity for further agreement, the process is to be treated as successful, exhausted or properly terminated. The Court will especially readily imply criteria or machinery in the context of a stipulation for agreement of a fair and reasonable price.”

The court found that the decision in Petromec Inc and others v Petroleo Brasileiro SA Petrobras and others, [2005] EWCA Civ 891 could be explained on that basis. There, the English Court of Appeal stated that a provision requiring negotiation in good faith with respect to the cost of equipment was enforceable.  In Grant Thornton, the court said that a mediation agreement dealing with that sort of matter may be enforceable, but that was not the nature of the mediation agreement and dispute in the present case.

The second approach is to determine whether the mediation process is sufficiently clear to give rise to an enforceable agreement. But the court said that the issue is not just the clarity of the procedures, but the clarity of the end of those procedures:

The Court has been in the past, and will be, astute to consider each case on its own terms. The test is not whether a clause is a valid provision for a recognised process of ADR: it is whether the obligations and/or negative injunctions it imposes are sufficiently clear and certain to be given legal effect.

The Court set forth a three step process for making this determination:

“the test is whether the provision prescribes, without the need for further agreement, (a) a sufficiently certain and unequivocal commitment to commence a process (b) from which may be discerned what steps each party is required to take to put the process in place and which is (c) sufficiently clearly defined to enable the Court to determine objectively (i) what under that process is the minimum required of the parties to the dispute in terms of their participation in it and (ii) when or how the process will be exhausted or properly terminable without breach.”

The court concluded that the Grant Thornton partnership agreement did not satisfy these criteria:

“I have reached the clear conclusion that Section 14.3 is too equivocal in terms of the process required and too nebulous in terms of the content of the parties’ respective obligations to be given legal effect as an enforceable condition precedent to arbitration. In particular, I accept that the omission to give any guidance as to the quality or nature of the attempts to be made to resolve a dispute or difference renders the Court unable to determine or direct compliance with the provisions of Section 14.3(a), (b) and (c).”

The Court also rejected the suggestion that the mediation process could indefinitely postpone arbitration if the two steps in that process never occurred. The court said that it was not “realistic to suppose the parties to have intended that the Board or panel members could indefinitely postpone the right to arbitration.” Accordingly, the court held that, in the alternative, the mediation clause did not prevent a party to the partnership agreement from commencing any arbitration procedures after the time limits set for the in the mediation agreement. The arbitration in question started well after that time frame.

Discussion

The Grant Thornton decision holds that a mediation agreement is enforceable, if properly drafted. This decision is useful because it advances the debate on this issue to a further level. For the clause to be enforceable, Grant Thornton says that the clause must be one of two kinds.

Either the mediation agreement must set out a process that has a reasonably certain commencement, procedural ingredients and ending.  Or the mediation agreement must deal with a dispute over some matter of fairness or reasonableness which allows the court to infer reasonable procedural elements. Furthermore, in order to ensure that the mediation clause does not hold up dispute resolution in court or arbitration, the mediation clause should have a reasonably prompt “drop dead date.”

The court’s remarks about secondalternative, namely a mediation to determine a matter on the basis of fair and reasonableness, raise difficult issues. Must the mediation agreement itself state that it deals with the fairness of something, such as price? Or if the specific mediation is in fact about some matter of fairness or reasonableness, is that sufficient to infer the necessary procedural ingredients to validate the mediation agreement, or its application in the particular case? If it is the latter, then the validity of the mediation agreement will be determined on a case by case basis.  A mediation clause which may or may not be valid, depending on the issue being mediated, may be an unsatisfactory sort of mediation agreement.

In prior articles I have dealt with Ontario decisions dealing with the enforceability of the duty to mediate.  In an article on July 17, 2011, I reviewed the decision in L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133 in which the Ontario Court of Appeal held that, in that case, there was a legally enforceable duty to mediate.  In an article on May 5, 2012, I reviewed the same court’s decision in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada,, 2012 ONCA 218 in which it was held that the mediation clause in that case was not enforceable and that in the meantime the limitation period had expired.  Clearly, the law relating to the enforcement of mediation clauses remains a matter of considerable importance.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter10, part 6

Wah (Aka Alan Tang) & Anor v Grant Thornton International Ltd & Ors [2012] EWHC 3198

Mediation  –  Validity of Mediation Agreement  –  Uncertainty  –  Duty to Mediate  -Commencement of Arbitration

Is A Third Party Obliged To Bring Its Claim Under An Arbitration Agreement

A recurring issue in arbitration law is whether a third party is bound to assert his or her claims by way of arbitration, even though the third party is not a party to the arbitration agreement. In Yaworski v. Gowling Lafleur Henderson LLP, the Alberta Court of Appeal recently held that, where a limited partnership was a party to an agreement containing an arbitration clause, the owner of the limited partnership was obliged to arbitrate any disputes arising under the agreement.

Facts

Mr. Yaworski’s limited partnership was an income partner of the law firm Gowling Lafleur Henderson between 2004 and 2009, and Mr. Yaworski worked in the Gowling firm. The agreement between Yaworski LP and the firm terminated in 2009.   Mr. Yaworski then commenced an action for breach of contract.  The action was stayed by a judge of the Albert Court of Queen’s Bench on the ground that the claim must be arbitrated. That decision was upheld in the recent decision of the Alberta Court of Appeal.

Reasons of the Court of Appeal

The Alberta Court of Appeal held that Section 7(1) of the Alberta Arbitration Act and Section 18 of the Alberta Judicature Act authorized the judge of first instance to stay Mr. Yaworski’s action.

Section 7(1) states that “if a party to an arbitration agreement commences a proceeding in a  court  in  respect  of  a  matter  in  dispute  to  be  submitted  to arbitration under the agreement,” the court shall stay the action, subject to certain exceptions.  Section 18(1) contains the court’s equitable jurisdiction to stay any proceedings when the court deems it fit to do so.  In combination, the Court of Appeal held that the court was entitled to stay the action even though it was not brought by the party to the arbitration clause, Yaworski LP.

The Court of Appeal was not prepared to allow Mr. Yaworski to escape the arbitration clause which his limited partnership had entered into. It said:

“However, arbitrations cannot be avoided by simply having a related party commence a lawsuit claiming relief with respect to arbitrable subject matter. In this case Yaworski PC and Gowlings agreed that all disputes between them was to be arbitrated.  In fact the arbitration clause is so broad as to make the issue of whether something is subject to arbitration, arbitrable….

In our view the combination of section 7 of The Arbitration Act, section 18 of the Judicature Act, and  the  court’s  inherent jurisdiction  to  control  its  own  process  to  avoid  unnecessary and duplicitous  proceedings  provided the  chambers judge with jurisdiction to stay Yaworski’s suit pending the arbitration.”

Moreover, the Court of Appeal was of the view that the real claim belonged to Yaworski LP, not Mr. Yaworski.  Therefore, the judge at first instance had been right to stay the action brought by Mr. Yaworski. In this way the proper claim, brought by Yaworski LP, could be asserted by way of arbitration, and if there was any issue about the jurisdiction to hear various claims of Mr. Yaworski and his limited partnership, the arbitrator could address them:

“[22] Our conclusion regarding the continuation of Yaworski PC as a Gowlings partner strongly suggests that at least most of the cause of action against Gowlings advanced by Yaworski in his personal suit actually rests with Yaworski PC. Again if any part of that is outside the purview of the arbitration that question can be determined by the arbitrator.

Discussion

On its face, this is a relatively straightforward decision. It holds the parties to an arbitration clause to their agreement and refuses to allow one party to circumvent the agreement by allowing a person controlling that party from suing personally. The decision does, however, raise a number of issues.

It seems clear that Section 7(1) of the 7(1) of the Arbitration Act would not have empowered the court to grant the stay order unless the party bringing the action can somehow be brought under that subsection. In this circumstance it seems wise to state in arbitration agreements that the parties are executing the agreement as principals, and also on behalf of, and so as to bind, the shareholders, assignees and any other persons asserting facts or issues dealt with in the agreement.

In the absence of such a provision, the party seeking the stay must rely on the general equitable powers under Section 18 of the Judicature Act. One wonders what exactly is the limit of the court’s power under this section. Is the power totally wide open?  Or was the court’s finding that the claim was really one which could only be asserted by Yaworski LP an essential ingredient to the court’s decision to stay the action?

If that is so, then there may be two results.

First, Mr. Yaworski’s action should have been dismissed on the ground that it was brought by a party which had no claim.   This is the effective decision of the Court of Appeal, as it said: “On the record Yaworski cannot make out a proper claim for summary judgment because the cause of action or at least most of it rests with Yaworski PC.”  The rest of the decision may be obiter.

Second, the Court of Appeal is effectively saying that the words “to an arbitration agreement” in Section 7(1) should not be in the subsection. The important words are “in  respect  of  a  matter  in  dispute  to  be  submitted  to arbitration”.  The Court of Appeal appears to be saying that, if the dispute falls within the arbitration agreement, then it should be arbitrated, no matter who brings the claim. That may well be a sensible reading of the subparagraph even though it eliminates four words.

See Heintzman and Goldsmith, Canadian Building Contracts (4th ed.), Chapter 10, Parts 1 and 4

Yaworski v. Gowling Lafleur Henderson LLP, 2013 ABCA 21

Arbitration   –   Stay of Court Proceedings  –  Third parties

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                           February 11, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Can Silence Amount To A Fraudulent Misrepresentation?

The Ontario Court of Appeal recently dealt with the issue of what sort of representations amount to fraud, and what representations survive an “entire agreements” clause. In Iatomasi v. Conciatori, the Court of Appeal held that when, during the pre-contractual negotiations for the sale of a building , a vendor delivers plans to a purchaser, there is no implied representation that the building was built according to the plans.  The court held, however, that the vendor is liable in fraudulent misrepresentation for statements that there had never been problems with the basement of the house, notwithstanding  the “entire agreements” clause. The court awarded damages.

Factual Background

During the negotiations for the purchase of a home, the vendor represented to the purchasers that there had never been a problem with respect to water leaking in the basement. The trial judge found that the vendor knew that there had been a history of water problems in the basement. During the negotiations, the owner gave the purchasers the plans for the house.  The trial judge found that, in doing so, the vendor effectively represented that the building had been built in accordance with those drawings, and that this representation was untrue.  The contract of purchase and sale of the home contained a provision stating that the contract was the entire agreement between the parties.

Decision of the Court of Appeal

The Court of Appeal held that the vendor was liable to the purchasers for fraudulent misrepresentation arising from the first express statement, but not for the second implied representation and reversed the trial judge’s decision on the second point.

As to the first representation, that there were no basement water problems, the Court of Appeal made no mention of the “entire agreement” clause.  The court appears to assume that the clause would not apply to representations, or if it did, it would not apply to fraudulent misrepresentations.

As to the second representation, that the handing over of the plans effectively amounted an implied representation that the house was built in accordance with those plans, the Court of Appeal held that since the plans were provided to the purchaser in the “context of arm’s length negotiations”, a finding that this conduct amounted to an “implied representation as to the accuracy of those plans was unreasonable.”   Again, no mention was made by the court of the entire agreement clause in the part of its decision dealing with this issue.

Based on the first express misrepresentation, the Court of Appeal held the vendor liable for fraudulent misrepresentation.

The Court of Appeal upheld the approach to the award of damages adopted by the trial judge. The trial judge concluded that the purchasers’ damages were the difference between the price paid for the property and the actual value of the property at the time of the sale, and that that difference was equal to the cost of remedying the problems relating to the misrepresentations. Or, as the Court of Appeal said, “the difference between the actual value of a house with a leaking basement and the price paid was equal to the costs of the repairs needed to fix the existing leakage-related problems.”

Having found that the vendor was liable only for the express representation regarding the non-leaky basement, not the implied representation about the compliance with the plans, the Court of Appeal discounted the damages to award only the costs associated with repairing the first problem.

Comments

The most interesting aspect of this decision is the conclusion by the Court of Appeal that the handing over of plans does not amount to an implied representation that the building was built in accordance with those plans. The decision will likely be relied upon in the future for the proposition that silence does not amount to fraud,  and that when something like plans or specifications are delivered during the negotiation of  a contract, that conduct does not amount to a representation, or at least not a fraudulent representation.

There could, however, be a number of bases for this conclusion.  One basis could be the “entire agreements” clause, even though it was not mentioned in the court’s decision on this point. If this is so, then the Court of Appeal’s decision is only applicable if the contract in issue has an “entire agreements” clause.

If it was the “entire agreements” clause which led to this result, then the question is: Why? Would the clause apply because the implied representation was really a warranty –that is, an agreement – that the plans had been used to build the house, and the “entire agreements” clause eliminated the effect of such an agreement?

Or did the “entire agreements” clause apply to the implied statement as a representation, not an agreement.  If this is the case, then the further question would be: does the clause apply to innocent, negligent, or any (including fraudulent) misrepresentations?  This question is not answered by the Court of Appeal’s decision since the “entire agreement” clause was not part of its reasoning.

Another basis for the court’s decision may be that the delivery of plans during the negotiations for the purchase and sale of a property cannot, without more, amount in law to an implied representation that the plans were used to build the building. Indeed, the Court of Appeal said that the trial judge’s conclusion that the handing over of the plans did amount to such a representation was “unreasonable.” If this is so, then this decision opens up a wide scope for the delivery of all sorts of relevant materials during the negotiation of a contract without responsibility for the accuracy of those materials. If the Court of Appeal’s decision is strictly applied, then parties to the negotiation of a building contract must obtain specific representations about the accuracy and the past use of those materials.

This decision will also be relied upon by those asserting that entire agreement clauses can never apply to fraudulent misrepresentations, at least in Ontario. While that seems to be the necessary result of the decision, there is no reasoning in the decision to that effect and the issue may have to be addressed in subsequent decisions. It seems intuitively obvious that an entire agreements clause cannot apply to fraud.  But whether such a representation is a collateral warranty which must be treated as such and subject to the “entire agreements” clause, or is simply outside that clause on the grounds of fraud, is not entirely clear in law.

See Heintzman and Goldsmith, Canadian Building Contracts (4th ed.), Chapter 6 Part 4(b)(i) and Chapter 6 Part 2(b)(i)(c) and (ii)(c)

Iatomasi v. Conciatori, 2012 ONCA 913

Construction Law  –  Fraudulent Misrepresentation  –  Exclusion and Limitation Clauses  

Thomas G. Heintzman O.C., Q.C. FCIArb                                                                                                            February 3, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Ontario Court of Appeal Affirms Legal Principles For Agent’s Authority And Liquidated Damage

Two recurring issues in construction law are the authority of agents and liquidated damages.

The agency issue is this:  if the principal is to be made liable on a contract made by the agent, must the principal, and not the agent, be the one that promotes the agent’s authority?

The damage issue is this:  can a lease or other contract calling for periodic payments during the term require the acceleration of those payments upon default?

In Hav-A-Kar Leasing Ltd. v. Vekselshtein, the Ontario Court of Appeal recently answered Yes to both of these questions.

The Background Facts

Hav-A-Kar was a car leasing case but these two issues are very relevant to construction law.  Agency relationships commonly arise on construction projects because the parties involved in those projects contract and act through agents.  When that occurs, must the existence or scope of the agency be made known by the principal?  Or are the agent’s own statements about his agency sufficient to create the authority of the agent to bind the principal?

The damage issue is also important for construction law because building contracts often provide for liquidated damages. Contract law says that liquidated damages are valid but penalties are not.  But what is a penalty and what are liquidated damages?  May a contract lawfully provide for the acceleration and forfeiture of payments made under a contract? Is that a penalty clause or liquidated damages?

In Hav-A-Kar, the defendant went to a car dealership and arranged to lease a car.  He leased the vehicle from another company, Hav-A-Car, which was a leasing company which bought the car from the dealership.  The defendant said that the car dealership told him that if he didn’t like the car he could return it and would have no further obligations under the lease. He later decided he didn’t want the leased car and preferred another car, so he took the leased car back to the car dealership and bought the other car.  He failed to pay the remaining lease payment to Hav-A-Car, which repossessed the car and sued him for the accelerated lease payment due under the liquidated damages clause in the lease.  The accelerated payments were calculated inter alia as follows:

…the total proceeds of (i) [the re-sale of the car], less the value of the Vehicle at the end of the term …and… (ii) [the re-leasing of the car] with respect only to the balance of the term provided for herein, shall be subtracted from the total rentals provided for herein then remaining unpaid. The remainder shall be liquidated damages…

In effect, the liquidated damages were calculated on the basis of the accelerated lease payments minus the proceeds of sale (less the value of the car at the end of the term) or the proceeds of releasing for the balance of the term.

In defending Hav-A Car’s action, the defendant asserted that the representation by the car dealership – that he could return the car to it and have no further obligations under the lease  – was made as the agent of Hav-A-Car and binding upon it. He also asserted that the acceleration clause amounted to a penalty and was unenforceable. The Court of Appeal dismissed both aspect of his defence.

The Court of Appeal’s decision

The Court of Appeal held that the alleged principal, in this case, Hav-A Car, was not liable unless there was some representation or other act by it that supported the existence of the agency relationship:

“It is well-established that the actual authority of an agent requires a “manifestation of consent” by the principal to the agent that the agent should act for or represent the principal…Further, apparent or ostensible authority in favour of an agent only arises where the alleged principal has impliedly represented that another person has the authority to act on the principal’s behalf. The implied representation must be that of the principal, not that of the agent.” (emphasis added)

In the present case, Hav-A-Car had done nothing to represent that the car dealership had authority to do anything on its behalf.

The Court of Appeal held that the accelerated damage clause was a valid liquidated damages clause, for the following reasons:

..the accelerated amount provided for in the challenged provision of the Lease, clause 16, “is not excessive or unconscionable”… it “merely puts [HAK] in the position it would have been in if [ZV] had performed his obligations under the contract”…… These findings accord with the standard measure for compensatory damages in contract, under which the plaintiff is entitled to the value of the promised performance of the contract…. The accelerated rent provision in clause 16 of the Lease reflects the parties’ bargain at the time the Lease was entered into regarding the reasonably anticipated damages that HAK would probably suffer if ZV were to breach the terms of the Lease.”

This conclusion by the Court is based on two findings.

First, the accelerated lease payments, when diminished by the amount recovered for the car, represented what a court would have awarded to Hav-A-Car in the absence of a liquidated damage clause.

Second, the accelerated lease payments, so diminished, represented what the parties anticipated, and reasonably anticipated, would be suffered by Hav-A-Car in the event of a default by the lessee.

Reflections on the decision

While these conclusions are not surprising, they are worth remembering and emphasizing.

On the agency issue, there is a difference between the existence of agency and the ambit of the agency. If the principal does nothing to put the agent in motion, and does nothing to create the impression that the agent has any authority to act for it, then there is nothing to support the allegation of agency against the principal

This situation is different from two other agency principles.

First, there is a difference between the existence of the agency and the scope of the agency. The conduct or representations of the agent may not be able to create the basis or the existence of the agency.  But, if the principal does clothe the agent with some authority, the conduct or representations of the agent may affect the scope of the apparent authority of the agent. These two issues must be carefully distinguished.

Second, there is a difference between the enforcement of a contract by, and the enforcement against, an undisclosed principal. An agency contract can be enforced by a principal who did not disclose its existence during the negotiation of the contract. But it cannot be enforced against a principal who undertook no conduct which demonstrated, and made no representation, that the contracting party was his agent.  These consequences may seem contradictory but they are part of the law of agency.

Finally, the accelerated payment clause would not have been valid if it had simply accelerated all contract payments and did nothing more. It was valid because the clause provided for the deduction of the amounts recovered upon the sale or lease of the vehicle.  In doing so, it provided a reasonable pre-estimation of what the lessor suffered from the breach. It may have somewhat over-compensated Hav-A-Car by not allowing for the time value of money on the lease payments over the period of the lease. But the court is willing to provide some reasonable leeway for the parties’ bargain.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 1, Part 1(a)(ii)

Hav-A-Kar Leasing Ltd. v. Vekselshtein, 2012 ONCA 826 

Agency –  Liquidated Damages Clause  –  Undisclosed Principal  –  Apparent Authority  

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

www.heintzmanadr.com

www.constructionlawcanada.com

ULCC Working Group Issues Discussion Paper On A New Uniform International Commercial Arbitration Act

In January 2013, a Working Group of the Uniform Law Conference of Canada (“ULCC”) issued a Discussion Paper with respect to proposals for a new Uniform International Commercial Arbitration Act. The Discussion Paper is intended to generate consultations by May 2013 and final approval by the ULCC in August 2013.

Background to the Discussion Paper

In 1985, The United Nations Commission on International Trade Law (UNCITRAL) adopted the UNCITRAL Model Law on International Commercial Arbitration.  The Model Law sets forth legislative provisions relating to the conduct, enforcement and recognition of arbitral awards in international commercial arbitrations. The Model law was developed so that it could be implemented by statute in each country adopting the Model Law, to provide a consistent approach among those countries to international commercial arbitrations.

The Uniform Law Conference of Canada was founded in 1918 to harmonize the laws of Canadian provinces and territories and, where, appropriate, federal laws.  The ULCC brings together government and private lawyers, analysts and law reformers to study areas in which provincial and territorial laws might benefit from harmonization. The history, study papers, discussion documents and many of the Uniform Laws which it has drafted, may be seen on the ULCC’s website: www.ulcc.ca.

In 1986, the ULCC issued a Uniform International Commercial Arbitration Act (the “Uniform ICAA” or the “existing” Act). The Uniform ICAA was intended to provide a template for the implementation of the UNCITRAL Model by Canadian provinces, territories and the federal Parliament.  In large measure, the ULCC’s Uniform ICAA was enacted across Canada. The Uniform ICAA may be seen at: https://www.ulcc.ca/en/uniform-acts-en-gb-1/462-international-commercial-arbitration-act.

The Model Law was amended by UNCITRAL in 2006. In response to these amendments to the Model Law, in August 2011 the ULCC established a Working Group to bring forward recommendations for a new Uniform ICAA (or “new Act”).  In August 2012, the ULCC authorized the preparation of a Discussion Paper for consideration by the ULCC at its meeting in August 2013.

Elements of the Discussion Paper

The Discussion Paper recently issued by the Working Group can be divided into two elements.

First, the Working Group has made recommendation on a wide ranging group of issues.

Second, the Working Group has identified further issues upon which it is seeking the view of others.

Recommendations of the Working Group

There are nine main recommendations of the Working Group:

1.      The form of the existing Act should be used in the new Act.

The existing Uniform ICAA is a relatively short statute of fifteen sections, to which the Model Law is attached as Schedule B. Also attached, as Schedule A, is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by United Nations Conference on International Commercial Arbitration in June 1958. The existing Uniform ICAA does not incorporate domestic arbitration legislation.

In other words, the ULCC’s recommended statute for international commercial arbitration does not itself set out the effective statutory provisions and does not deal with domestic arbitration, as do the statutes in some jurisdiction (such as Quebec and the U.K.).  Rather the ULCC’s existing Uniform ICAA leaves most of the substantive provisions in the attached Model Law, and few in the enacting statute itself, and deals only with international commercial arbitration.

The Working Group recommends that this approach be used in the new statute, on the ground that it more readily identifies the Model Law as the operative document and promotes uniformity among Canadian statutes.  The Working Group recommends that, if any legislature believes that departures from the Model Law are required, those changes should be made in the statute, not the attached Model Law, and that the new Act should only deal with international, not domestic arbitration.

2.    The Working Group has tentatively recommended that all the 2006 amendments to the Model Law be incorporated into the ULCC’s new Uniform ICAA.  This approach has not been taken in every country, as some countries have selected only those amendments they thought were appropriate to adopt.  In particular, some countries have not adopted the provisions in the 2006 amendments to the Model Law relating to the interim measures which may be granted by the arbitral tribunal, on the basis that those interim powers should only be exercised by courts.  The view of the Working Group is that the granting of interim powers to the arbitral tribunal allows the tribunal, but does not compel it, to exercise those powers, and that it is better that these powers be available to arbitral tribunals, only to be exercised if appropriate.

3.    The new Act should apply only to written arbitration agreements (as does the existing Uniform ICAA) but that a flexible approach to “writing” should be taken so that agreements arising from electronic communications would be included.  The Working Group did not recommend that oral arbitration agreements be included within the new Act.

4.    The new Act should not harmonize the limitation periods applicable under Canadian laws for the commencement of arbitration proceedings. Accordingly, the relevant limitation period would be determined by the parties in their agreement, or by the applicable substantive law.

5.    International arbitration awards made elsewhere in Canada should be enforceable under the new Act, to allay doubts that such awards are not “international” and not enforceable under that Act.

As a corollary, the Working Group recommended that domestic awards in other provinces should only be enforced through domestic arbitration statutes in other provinces or territories. Also, clearly being of the view that foreign domestic awards should not be enforceable through the new Act, the Working Group is seeking comments as to how this result can be best achieved.

6.    The words “Commercial Arbitration” and “Commercial Relationship” should be defined in the new Act.

7.    The Working Group considered that it might be helpful to clarify that an international commercial arbitration award may be raised by way of defence, set-off, or counterclaim in existing proceedings.  This would obviate the need to commence separate proceedings seeking recognition and enforcement.

8.    The new Act should clarify what is meant by “State”, in a similar fashion to that accomplished in Section 6 of Ontario’s International Commercial Arbitration Act.

9.    The new Act should emphasize the need to promote Canadian uniformity in the application of laws relating to international commercial arbitration.

Views Sought by the Working Group

 The Working Group is seeking input on a wide variety of other issues, including the following:

1.    Whether the new Act should clarify that the limitation periods for commencing arbitration proceedings under Canadian laws (if they apply) are the same for international commercial arbitrations as for court actions.

 2.    Whether there should  be a provision for interprovincial enforcement of Canadian judgments recognizing and enforcing international arbitration awards. The recent decision of the Supreme Court of Canada in Yugraneft Corp. v. Rexx Management Corp. raises the issue of whether an award in an international commercial arbitration can be enforced in one province, where the limitation period is longer, and then whether that judgment can be enforced in another province where the original award could not be enforced due to a shorter limitation period.

3.    Whether the new Act should say anything about the nationality of the chair or single arbitrator. British Columbia’s International Commercial Arbitration Act provides that the Court shall not, without the agreement of the parties appoint a sole or third arbitrator who is of the same nationality as that of any of the parties.

4.    Whether the new Act should preclude opting in or out of the Act, in whole or in part.

5.    Whether the new Act should deal with the confidentiality of arbitration proceedings.

6.    Whether the new Act should deal with retroactivity, that is, whether the new Act should apply to arbitration proceedings commenced before, or only after, the new Act comes into effect.

7.    Whether the mediation/conciliation provisions in the existing Act (section 6) should be included in the new Act.

8.    Whether an arbitration should be required to be re-commenced if the chair or one of the other arbitrators ceases to be an arbitrator (as the existing Act requires in section 7), or whether the arbitral tribunal should have the option of continuing the proceeding with the replacement arbitrator familiarizing himself or herself with the evidence already tendered.

9.    Whether any amendment needs to be made with respect to the law that governs the substance of the dispute if there is no specific choice of law by the parties.  The present Uniform Act enables the arbitral tribunal to select the law that is appropriate having regard to all the circumstances (section 8).

10.    Whether the court should have power to consolidate arbitration proceedings if the parties do not agree. Presently, the court has power only to consolidate if, at the time of the motion to consolidate, the parties agree to that consolidation (section 9 of the existing Act).

Conclusion

 Clearly, the issues which the Working Group and the ULCC are considering are of vital importance to international commercial arbitration in Canada. Canada must continue to modernize its arbitration regime, not only to ensure that cost effective justice is achieved in Canada but also to ensure that the world has continued confidence in Canada as a good place to do business.  For these reasons, any comments about the proposed new International Act should be forwarded to the ULCC as soon as possible. Comments can be delivered to the ULCC on the Contact form on its website: https://www.ulcc.ca/en/contact.

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                January 18, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Which Term Prevails In A Building Contract: The Specifications, Or A Warranty Of Fitness For Purpose?

A building contract usually includes a term requiring that the work or materials supplied adhere to the specifications. The contract may also contain implied or express warranties that the work will be fit for the intended purposes of the building project and free of defects. What happens when those terms result in inconsistent results? What happens when, by adhering to the specifications, the work is not fit for the purposes intended or contains a defect?

In two recent decisions, the courts have held the contractor was liable to the owner when the contractor followed the owner’s specifications and, in doing so, produced work which was not fit for the intended purpose. Is this a fair and proper result? Does this fairly account for the owner’s responsibility for the specifications?  Should there be a sharing of the blame if the specifications result in a defective work?

Double Dutch Construction Inc. v. Colwell    

Mr. and Mrs. Colwell wanted to build a new home. Their draftsman prepared construction plans (the “IFC plans”) based on concrete construction. The Colwells hired Double Dutch as the contractor.  Double Dutch recommended the use of wood construction, instead of concrete, and the Colwells agreed. The Colwells and Double Dutch signed a bare bones contract which the Colwells said resulted in Double Dutch being the general contractor.   Double Dutch said that it was not hired as the general contractor, but only to construct certain specific parts of the building.

During construction, the relationship between the Colwells and Double Dutch broke down, due to disputes over responsibility for work done by other contractors and to difficulties arising from the use of wood instead of concrete. The final inspection by the building inspector found numerous violations of the National Building Code.  In addition, the Colwells pointed out many other deficiencies.

Double Dutch said that the deficiencies were due to the use of the IFC plans prepared by the Colwells’s draftsman and that the Colwells were responsible for those deficiencies. The Colwells said that Double Dutch initiated the changes in the construction method and was obliged to raise any concerns if the changed construction methods raised any issues about using the IFC plans.  Based on the wording of the contract and the evidence about the pre-contract negotiations, the court found that Double Dutch was the general contractor.

The contract contained little in the way of specifications but did state that the building was to conform to the National Building Code.  The court held that “In the absence of any express term in the contract which specifies the manner in which work is to be done, there is an implied warranty in all contracts for work and labour that the work will be carried out in a good and workmanlike manner….”

Furthermore, the court held that Double Dutch had a duty to advise the owners of any inherent dangers in the design proposed by the owner to be used for the building.  The court quoted from the judgment of the Supreme Court of Canada in Nowlan v. Brunswick Construction Ltd., [1975] 2 S.C.R. 523 (SCC) as follows:

 “…[A] contractor of this experience should have recognized the defects in the plans which were so obvious to the architect…. and, knowing of the reliance which was being placed upon it, I think the appellant was under a duty to warn the respondents of the danger inherent in executing the architect’s plans, having particular regard to the absence therein of any adequate provision for ventilation…” (emphasis added)

 The  Brunswick court quoted the following words from the decision of the Supreme Court of Canada in Steel Co. of Canada v. Willand Management Ltd., [1966] 1 S.C.R. 746, which in turn quoted from Hudson’s Building and Engineering Contracts, 10th ed.:

 “….a contractor will sometimes expressly undertake to carry out work which will perform a certain duty or function, in conformity with plans and specifications, and it turns out that the works constructed in accordance with the plans and specifications will not perform that duty or function. It would appear that generally the express obligation to construct a work capable of carrying out the duty in question overrides the obligation to comply with the plans and specifications and the contractor will be liable for the failure of the work notwithstanding that it is carried out in accordance with the plans and specifications. Nor will he be entitled to extra payment for amending the work so that it will perform the stipulated duty. (emphasis added)

 Based upon these principles, the trial judge found that the contract between the parties contained terms that obliged Double Dutch to construct the home in accordance with the ICF plans and the National Building Code and that the work was to be completed in a good and workmanlike manner. Even if the plans were part of the contract, the duty to warn and the duty to build in a good and workmanlike manner over-rode the plans and required Double Dutch to build to that standard, and compensate the Colwells for not doing so.

Greater Vancouver Water District v. North American Pipe & Steel Ltd.

 North American contracted to supply the Water District with water pipes.  The specifications in the contract stated the type of coating for the pipes, being an Enamel Coal Tar Coating in accordance with a particular industry standard. The contract also contained the following warranties:

The Supply Contractor warrants … that the Goods … will conform to all applicable Specifications … and, unless otherwise specified, will be fit for the purpose for which they are to be used. …

The Supply Contractor warrants and guarantees that the Goods are free from all defects arising at any time from faulty design in any part of the Goods. (emphasis added)

The pipe was manufactured according to the Water Board’s specifications, but the pipe contained defects due to the application of a seal coat over an outer-wrapping as required by the Water Board’s specifications.

The trial judge dismissed the Water Board’s claim, and granted North American judgment on its counterclaim. She concluded that the conflict between the specifications and the warranties should be resolved as follows:

“The general rule is that defects caused by an owner’s specification are not the responsibility of the contractor, unless the contractor expressly guarantees that the construction would be fit for a specific purpose, or a warranty can be implied by the owner’s actual reliance on the contractor’s skill and judgment.”

The trial Judge concluded that the contractor had not expressly guaranteed that the coating would be fit for a particular purpose and that the Water Board had relied upon its own expertise for the coating and not that of North American.

The British Columbia Court of Appeal allowed the appeal, basically for two reasons.

First, it held that North American’s obligation to supply pipe in accordance with the specifications was not inconsistent with its warranty and guarantee that pipe so supplied would be free of defects arising from faulty design. The Court said: “These are separate contractual obligations. The fact that a conflict may arise in practice does not render them any the less so. The warranty and guarantee provisions reflect a distribution of risk.”

Second, the Court of Appeal found that the warranty and guarantee were unambiguous:

“Clause 4.4.4 is clear and unambiguous. Reference to authorities that deal with difficulties construing contractual provisions that may contain an implied warranty are of no assistance in this case. North American guaranteed that the pipes would not have defects arising from faulty design. The trial judge held that the pipes did have defects arising from faulty design. In my view, on the plain language of the contract, North American is liable for any damages that resulted from those defects. It does not matter whose design gave rise to the defects. There is no such qualification in clause 4.4.4”.  (emphasis added)

In these circumstances, the Court of Appeal concluded that the judgment of the Supreme Court of Canada in Steel Co. of Canada was a “complete answer.”  In the view of the Court of Appeal, the warranties and guarantees in the two cases were practically identical. The Court of Appeal quoted this passage from the Supreme Court’s judgment in Steel Co. of Canada:

“… [W]hatever the reason may have been, it appears to me that any risk involved in the undertaking was accepted by those who were prepared to tender in accordance with specifications that included the requirement of providing a written guarantee that all material employed in the work as first class and without defect, and that all work… specified would remain weather tight for a period of five years.” (emphasis added) …

The Court of Appeal graphically stated the dilemma for the contractor:

“ Clauses such as 4.4.4 distribute risk. Sometime they appear to do so unfairly, but that is a matter for the marketplace, not for the courts. There is a danger attached to such clauses. Contractors may refuse to bid or, if they do so, may build in costly contingencies. Those who do not protect themselves from unknown potential risk may pay dearly. Owners are unlikely to benefit from circumstances where suppliers and contractors are faced with the prospect of potentially disastrous consequences. Parties to construction or supply contracts may find it in their best interests to address more practically the assumption of design risk. To fail do to so merely creates the potential for protracted and costly litigation.”

The Court further underlined the contractor’s dilemma by pointing out that North American’s witness had testified that if it had submitted a bid with another coating specification, its bid would have been non-compliant, so instead it tendered as required by the specifications and then, having been awarded the contract, it proposed changes to the coating specifications which the Water Board refused to accept!

Discussion

These two decisions show how the express or implied warranties or guarantees in a building contract create a series of Catch-22s for the contractor.

First, as Double Dutch shows, if the contractor supplies work or materials which meet the specification and even if the contract contains no express warranties, the contractor may still be in breach of the implied warranties of fitness for purpose or good workmanship.  That result may not be obvious to the contractor.  The contractor may believe that satisfying the specification is sufficient since the owner set the specification and must surely know what is fit for use or good workmanship.  But if the contractor wants to be certain of that result, then it should insert a provision in the contract excluding all such warranties, whether express or implied, at least in respect of work or materials that meet the specifications.

Second, Double Dutch also shows that the contractor may have a duty to warn the owner if it is or ought to be aware that a specification is unsuitable.  And if the contractor suggests an alternative to the specifications proposed by the owner, then the contractor is even more likely to have a duty to warn about the unsuitability of the alternative,  besides running the risk that the contractor’s bid will thereby be rejected as non-compliant. Again, if the contractor wishes to exclude that duty to warn, it should insert a term in the contract excluding that duty, at least in respect of work or materials adhering to the agreed upon specifications.

Third, Greater Vancouver Water District shows that, if warranties of fitness for purpose and absence of defects are express, then the contractor takes on the entire risk of those warranties even if the contractor’s work or materials comply with the owner’s specifications.  If the contractor is to avoid that risk, then these express warranties should be excluded, again at least so far as the work or materials satisfy the specifications.

Contractors could argue that this result is unfair, and that the owner should be assigned at least some responsibility for having set a specification that authorized the delivery of what turned out to be defective work or materials. If the Negligence Act applied, then the court could apportion responsibility between the parties and allow only partial recovery by the owner against the contractor based on the degree of fault. But so far, the courts have been unwilling to adopt that approach and have placed the entire cost of remedying the defective work or materials on the contractor, even if specified by the owner, if the contractor gave a warranty of fitness for use or a warranty against defects.

See Heintzman and Goldsmith, Canadian Building Contracts, 4th ed. Chapter 5, part 2(b).

Double Dutch Construction Inc. v. Colwell, 2012 NBQB 317

Greater Vancouver Water District v. North American Pipe & Steel Ltd., 2012 BCCA 337

Building Contracts   –   Specifications   –   Implied Duty of Fitness for Purpose and Good Workmanship   –   Contractor’s Duty to Warn of Unfit Design

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         January 13, 2013

www.heintzmanadr.com

www.constructionlawcanada.com