Which Takes Precedence In A Building Contract: A Performance Standard Or A Design Standard?

The United Kingdom Supreme Court recently considered the question of whether the performance standard or the design standard prescribed in the contract took precedence. In MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59, the court held that the performance requirement took precedence and that the contractor was liable when the structure failed soon after erection although the structure was built according to the design standard which had an error in it.

This decision generally follows the principle adopted by Canadian courts in holding contractors liable for the structure’s failure to perform as required by the contract even though the structure was built according to specifications issued by the owner.

Background

The contractor MT agreed with the owner E.ON to build the foundations for proposed offshore wind turbines. The technical requirements (“TR”) issued by the owner to bidders stated that “[t]he Works elements shall be designed for a minimum site specific ‘design life’ of twenty (20) years without major retrofits or refurbishments; all elements shall be designed to operate safely and reliably in the environmental conditions that exist on the site for at least this lifetime.”

The TR stated that they were minimum requirements and that the contractor was “to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters” and that “[t]he design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly.”

The TR required the contractor to prepare the detailed design of the foundations in accordance with an international standard for the design of offshore wind turbines published by an independent classification and certification agency. An equation in that standard was later shown to be erroneous by a factor of 10, leading to the subsequent failure.

The contract between the parties incorporated the TR, which were attached to the contract. The contract required MT “in accordance with this Agreement, [to] design, manufacture, test, deliver and install and complete the Works” in accordance with a number of requirements, including

“(iv)    in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices and in accordance with internationally recognised standards and Good Industry Practice; …

(viii)   so that the Works, when completed, comply with the requirements of this Agreement …;

(ix)      so that [MT] shall comply at all times with all Legal Requirements and the standards of Good Industry Practice;

(x)       so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice; …

(xv)     so that the design of the Works and the Works when Completed by [Mt] shall be wholly in accordance with this Agreement and shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement. …”

The contract provided that MT was responsible for making good any defects arising for defective materials, workmanship or design which appeared within 24 months of E.ON taking over the works from MT. E.ON was required to produce a Defects Liability Certificate once the Defects Liability Period has expired and MT had satisfied all its obligations. Within 28 days of the issue of a Defects Liability Certificate, MT was entitled to apply for a Final Certificate of Payment, and to accompany the application with a final account. A Final Certificate of Payment was then to be issued which was conclusive. This regime is referred to as the “Defect Liability regime” in this article.

MT proceeded with the design and construction of the two wind farms. The international certifying authority evaluated and approved MT’s foundation designs. MT began the installation of the foundations in December 2007, and completed the Works in February 2009. During 2009 a serious problem came to light at another wind farm. The certifying authority carried out an internal review during late summer 2009, and discovered the error in the equation in the international design standard that had been prescribed by the owner. The foundations were re-built and litigation was commenced to determine which party was responsible for the additional costs.

The trial judge found in favour of E.ON on the grounds that: the contract required the foundations to be fit for purpose; fitness for purpose was to be determined by reference to the TR; and the TR also required the foundations to be designed so that they would have a lifetime of 20 years.

The Court of Appeal reversed the trial judgment. It held that the contract stipulated that the foundations must be constructed in accordance with the international design standard prescribed by the owner, and the other elements of the contract did not render MT liable for an error in that standard.

Decision of the U.K. Supreme Court

The U.K. Supreme Court reversed the decision of the Court of Appeal and re-instated the decision of the trial judge. The elements of its decision may be divided as follows:

  1. The effect of the Defects Liability regime was that “any claim by E.ON in respect of a defect appearing thereafter was barred, and….. there was no room for claims outside the 24-month period….. In my opinion, there is no answer to that analysis so far as it is directed to the effect of [the Defects Liability regime]….Clause 42.3 makes it clear that the provisions of clause 30 (and any other contractual term which provides for remedies after the Works have been handed over to E.ON) are intended to operate as an exclusive regime. And that conclusion appears to…. tie in very well with the notion that there should be no claims after the Final Certificate, which is to be issued very shortly after the 24-month period.”
  2. This reading of the Defects Liability regime helped to resolve the tension between the 20 year performance standard and other parts of the contract:

“In the light of the normal give and take of negotiations, and the complex, diffuse and multi-authored nature of this contract, it is by no means improbable that [MT] could have agreed to a 20-year warranty provided that it could have the benefit of a two-year limitation period, save where misconduct was involved. It would simply mean that the rights given to E.ON by paras 3.2.2.2(ii) were significantly less valuable than at first sight they may appear, because any claim based on an alleged failure in the foundations which only became apparent more than two years after the handover of the Works would normally be barred by clause 42.3. In this case, of course, there is no problem, because the foundations failed well within the 24-month period.”

  1. The true meaning of the 20-year performance term was, not that the structures would last for 20 years, but that they would be designed to last for 20 years:

“….there is a powerful case for saying that, rather than warranting that the foundations would have a lifetime of 20 years, para 3.2.2.2(ii) amounted to an agreement that the design of the foundations was such that they would have a lifetime of 20 years. In other words, read together with clauses 30 and 42.3 of the Contract, para 3.2.2.2(ii) did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last for 20 years without replacement. …… Rather than the 20-year warranty being cut off after 24 months, E.ON had 24 months to discover that the foundations were not, in fact, designed to last for 20 years. On the basis of that interpretation, E.ON’s ability to invoke its rights under para 3.2.2.2(ii) would not depend on E.ON appreciating that the foundations were failing (within 24 months of handover), but on E.ON appreciating (within 24 months of handover) that the design of the foundations was such that they will not last for 20 years.”

   It is unnecessary to decide whether para 3.2.2.2(ii) is a warranty that the foundations will have a lifetime of 20 years or a contractual term that the foundations will be designed to have such a lifetime. The former meaning has been taken as correct by the parties and by the courts below, but, for the reasons given in paras 28 to 31 above, I am currently inclined to favour the latter meaning…… However, it is clear that, if para 3.2.2.2(ii) is an effective term of the Contract, it was breached by [MT] whichever meaning it has, and therefore the issue need not be resolved.

  1. The legal resolution of the tension between the prescribed performance (which the court called the “prescribed criteria”) and the prescribed design may be resolved as follows:

“Where a contract contains terms which require an item (i) which is to be produced in accordance with a prescribed design, and (ii) which, when provided, will comply with prescribed criteria, and literal conformity with the prescribed design will inevitably result in the product falling short of one or more of the prescribed criteria, it by no means follows that the two terms are mutually inconsistent. That may be the right analysis in some cases…… However, in many contracts, the proper analysis may well be that the contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria, and in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design which are not prescribed. While each case must turn on its own facts, the message from decisions and observations of judges in the United Kingdom and Canada is that the courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employer has specified or approved the design, it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed.” (underlining added)

In arriving at its conclusion, the U.K. Supreme Court relied upon two Canadian decisions, The Steel Company of Canada Ltd v Willand Management Ltd., [1966] S.C.R. 746 and Vancouver Water District v North American Pipe & Steel Ltd., 2012 BCCA 337. In both those cases, the contractor was held liable when the work failed to live up to the performance standard in the contract even though the contractor used the specifications provided by the owner.

  1. In applying this principle in the present case and in finding in favour of the owner, the Court of Appeal concluded as follows:

“The opening provision of Section 3, para 3.1, (i) “stresse[s]” that “the requirements contained in this section … are the MINIMUM requirements of [E.ON] to be taken into account in the design”, and (ii) goes on to provide that it is “the responsibility of [MT] to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters”. In those circumstances, in my judgment, where two provisions of Section 3 impose different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the correct analysis by virtue of para 3.1(i) is that the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement. Further, if there is an inconsistency between a design requirement and the required criteria, it appears to me that the effect of para 3.1(ii) would be to make it clear that, although it may have complied with the design requirement, [MT] would be liable for the failure to comply with the required criteria, as it was [MT’s] duty to identify the need to improve on the design accordingly.” (underlining added

  1. Having arrived at this interpretation of the contract as being the proper one, the Court of Appeal did not accept a number of submissions of the contractor as to why that interpretation should not be accepted, including:
    1. The “diffuse and unsatisfactorily drafted nature of the contractual arrangements, with their ambiguities and inconsistencies, [which] should be “recognised and taken into account”;
    2. The fact that the “onerous obligation” upon which the court’s interpretation rested “is found only in a part of a paragraph of the TR, essentially a technical document, rather than spelled out in the Contract.”
    3. This interpretation would or would not render the requirements in the TR redundant having regard to the terms of the contract itself.

Discussion

The MT Hojgaard decision contains a fascinating and important analysis of the factors which may assist a court to resolve the apparent conflict between a prescribed criteria (which I have called a performance standard) and a design criteria in a contract, or in the event of conflict, to determine which standard should takes precedence. The court stated the principle that, and the reasons why, the prescribed criteria will generally be given precedence over a design criteria, even a design criteria by the owner.

In the course of its decision, the U.K. Supreme Court considered almost all the conceivable factors relating to the interpretation of these sorts of contractual provisions. The decision provides, therefore, a good check-list for persons drafting or litigating these provisions.

The fact that the U.K. Supreme Court relied upon two Canadian decisions is significant. However, the court did not refer to any Canadian decisions on the other side of the ledger. There are many cases in which the owner’s claim against the contractor has been dismissed on the basis that the contractor had not given a warranty of the life or other criteria of the structure, or that the owner had not relied upon the contractor’s skill and judgment for the design of the structure. One of the leading Canadian decisions to this effect is CCH Canadian Ltd. v. Mollenhauer Contracting Co., [1976] 1 S.C.R. 49.

The debate in Canadian cases often turns on whether the owner relied upon the contractor’s skill and judgment, and whether the agreement of the contractor truly represents a warranty of performance. These elements of the usual Canadian analysis are not evident in the MT Hojgaard decision of the U.K. Supreme Court. Perhaps they were inherent in the court’s interpretation of the performance standard. But if reliance on the contractor’s skill and judgment is something that can be shown objectively from the parties’ conduct, and not merely from the words of the contract, it may be doubtful in this case that the owner really relied upon the contractor’s skill and judgment in relation to the international design standard contained in the TR issued by the owner.

In addition to resolving the tension between the design and performance standards in the contract, there are two other interesting aspects of the MT Hojgaard decision.

The first is the court’s interpretation of the term relating to “20 years without replacement” and its finding that this term “did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last for 20 years without replacement.”

The second is the court’s interpretation and use of the Defect Liability regime. The court held that this regime meant that, while the “20 years without replacement” term existed in the contract, it could only be enforced during the 2 years after the owner took over the project after which the owner’s rights terminated. The court relied upon this interpretation to resolve the tension between the performance and design criteria.

It can be predicted that Canadian courts will pay close attention to both these approaches.

Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 4, sections 3(i) and 5 and Chapter 7, section 7(c)(ii).

MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59

Building Contracts –performance and design standards and defects – warranty period

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                   August 24, 2017

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

A Subcontractor Recovers Against The Owner In Unjust Enrichment

A subcontractor who fails to register a construction lien faces an uphill battle in asserting a claim in unjust enrichment against the owner. That is because the owner will rely upon its contract with the contractor for any benefit that the owner has obtained from the subcontractor’s work. The owner will also assert that there is no equitable reason to grant an unjust enrichment remedy to a subcontractor who could have asserted a construction lien remedy but failed to do so.

Sometimes, however, the subcontractor’s unjust enrichment claim fits within the narrow opening between the owner’s contractual and construction lien defences, and N.K.P. Painting Inc. v. Boyko 2016 CarswellOnt 7332, 2016 ONSC 3016 was such a claim.

Background

The owner contracted with the prime contractor for the refurbishment of the corridors of the building. The prime contractor retained NKP as the subcontractor to supply painting and wallpapering material. During the project, the owner issued progress payments to the general contractor, less the applicable statutory holdback. NKP completed its work and invoiced the prime contractor. A total of $28,928.00 was not paid by the prime contractor to NKP, and the prime contractor became insolvent. Neither NKP nor the prime contractor registered liens. The owner held back a total of $23,893.74 under the prime contract.

Decision

The Superior Court judge held that there “is no reason to deny the appellant access to the common law remedy of unjust enrichment because it did not avail itself of potential statutory remedies,” as long as the ingredients of the unjust enrichment remedy were satisfied.

The court found that the owner had retained the 10 percent holdback, and that there was no claim against that holdback for deficiencies. While there was evidence of a claim by another subcontractor, there was no evidence about the status or disposition of that claim and no evidence to suggest that anything other than the full amount of the holdback remained available and under the control of the owner.

The court therefore concluded that “it would appear clear that [the owner] has been enriched in the sense that it has received 100% of the benefit of the invoiced renovation work performed but has only paid 90% of the invoiced amounts” and that “the enrichment corresponds to the efforts of NKP through the renovation work performed for which it has received no compensation.”

The court then considered the third element in the claim for unjust enrichment, namely whether there was a juristic reason for the benefit and corresponding deprivation. While that juristic reason may be a contract, that reason could only apply:

“where the party advancing the claim for unjust enrichment is a party to the contract, as is the party against whom the claim is advanced. On the facts of the case before me, that would require a contract between NKP and [the owner]. There is no such contract. In other words [the owner’s] enrichment and NKP’s deprivation did not arise in the context of a contract between these two parties…I therefore conclude that there is no established category of juristic reason to deny recovery to the Appellant.”

The court then considered the reasonable expectations of the parties and public policy and found that neither factor should deprive NKP from a remedy in unjust enrichment:

“In my view it cannot have been within the reasonable expectation of the parties that [the owner] would receive a 100% benefit of renovation work invoiced, including NKP’s efforts, while paying only 90% of the cost of those efforts. [The owner’s] statutory obligation to retain the holdback has expired and had expired at the time of trial. There was no legal requirement at trial for [the owner] to retain the funds by way of holdback, nor did [the owner] retain any legal entitlement to those funds….The purpose of the holdback funds is to represent a potential source of funds from which to compensate unpaid providers of service and materials to the improvement of a property. It is remedial in nature….Thus [the owner] could not reasonably have expected to retain the funds and indeed were it to do so it would represent a windfall.”

The court held that the owner’s enrichment was the amount of the holdback held by the owner, and granted judgment for that amount in unjust enrichment in favour of the subcontractor.

Comment

The court arrived at a fair result but, it is submitted, the court’s conclusion is incorrect that a contract must be between the claimant and the defendant before it can be a defence to a claim in unjust enrichment.

There are many cases in which a contract has been held to be a defence to an unjust enrichment claim even though the contract was not between the unjust enrichment claimant and defendant. In most cases, the contract was between the defendant and a third party. For example, if an owner enters into a prime contract with a contractor and pays the contractor in full, including the holdback, then that prime contract is a juristic reason why the owner should not have to pay the subcontractor, which has been unpaid by the contractor but has not filed a construction lien. Requiring the owner to pay twice is not fair, either from a contract or construction lien perspective.

There are even some cases in which the contract between the claimant and a third party has been held to be a juristic reason for the claimant being denied an unjust enrichment remedy against the defendant. For example, a subcontractor has been denied an unjust enrichment remedy against an owner due to the subcontract between the subcontractor and contractor. However, unless the claimant has been paid in full under the subcontract, it is harder to justify that conclusion since there seems to be no good reason why the owner should be entitled to rely upon a subcontract to which it is not a party as a juristic reason for not paying the unpaid subcontractor.

However, the present case fits within the crack between the owner’s juristic reason defences, both based upon its prime contract with the contractor and upon the construction lien regime. The work under the prime contract had been entirely completed but the owner had not paid out the holdback under that contract. So there was no juristic reason under that contract why it should not be compelled to pay the holdback to the subcontractor.

And under section 8 of the Construction Lien Act, the holdback was held in trust “for the benefit of subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor…”. Therefore, even though the subcontractor had not filed a lien, there was a good juristic reason why the owner should pay to the subcontractor the monies in its hands that were due under the prime contract.

The validity of the subcontractor’s unjust enrichment claim extended to the amount held back by the owner, not the amount which the subcontractor had not been paid by the contractor. Payment of the former amount did not penalize the owner under the prime contract nor over-stretch the statutory trust fund remedies, while payment of the latter amount would have.

Another fact to note in this case is that the prime contractor’s trustee in bankruptcy did not assert a claim to the holdback. Accordingly, whether such a claim could have been asserted, in view of the trust fund provisions of the Construction Lien Act, was not considered.        

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 4.

N.K.P. Painting Inc. v. Boyko 2016 CarswellOnt 7332, 2016 ONSC 3016

Building contracts – construction and builders’ liens – unjust enrichment – juristic reason defence

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                                   August 20, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

How Does The Loss Of A Chance Apply To Damages For Breach Of A Building Contract?

Construction law practitioners must keep their eyes and ears open to the evolving case law in other areas of the law. That case law may have direct application to building contract issues.

This fact is especially true for the assessment of damages. Because of the numerous contracts involved in a building project, a breach of one contract may cause the innocent party to lose a chance to recover, or avoid a loss, on another contract. But is the loss of a chance to negotiate a better deal on another contract sufficient?

This is the issue that the recently Ontario Court of Appeal addressed in Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544. While the facts arose from a franchise relationship, the principles set forth by the Ontario Court of Appeal are directly applicable to construction law due to the intersecting contractual relations in both settings.

The Background

The facts arose from economic downturn in 2008-2009 and General Motors’ efforts to save itself from bankruptcy. GM wanted to avail itself of financial assistance from the U.S. and Canadian governments, but to do so it had to shed financial liabilities and put itself on a sounder financial footing. This involved terminating many franchises with its dealers.

In this case, the trial court found that by May 2009, the law firm Cassels Brock was acting for three of the parties to this tangled web: the Canadian government, certain specific GM Canada dealers and the GM Canada dealers association. GM offered a buy-out proposal to the dealers, including payment of a termination amount to the terminated dealers. Cassels Brock told the dealers they could not act for the dealers on that proposal. After many dealers accepted a buy-out from GM Canada, they sued Cassels asserting that it had been in conflict of interest. The trial judge and the Court of Appeal found that Cassels Brock had been in breach of its retainer contract with the dealers. The question then became: what is the amount of damages to which the dealers were entitled?

The dealers asserted that, had they had independent counsel, they would have been able to negotiate a much better financial settlement with GM Canada, and that by reasons of Cassels Brock’s conflict of interest, they had lost the chance of making a better settlement with GM Canada. Cassels Brock asserted that the dealers had to show that they had suffered a loss on a balance of probabilities, not just on the basis of a loss of a chance, and that in any event, the dealers’ assertion that they would have made a better settlement with GM Canada was purely speculative and not a sufficient basis to award damages.

Judgment of the Court of Appeal

Both the trial judge and the Court of Appeal held that the dealers’ damages were to be assessed based on the loss of a chance to make a gain or avoid a loss, not on the basis of the balance of probabilities of making a gain or avoiding a loss. That is because the dealers’ claims were in contract, not tort. In contract, the existence of damage is not an element in determining liability, while it is in tort. The dealers had satisfied the evidentiary test for contractual liability – on a balance of probabilities. When it came to damages, the courts held that the loss of a chance to negotiate a better deal was a sufficient basis to assess damages.

The Court of Appeal quoted from its previous decision in Folland v. Reardon (2005), 74 O.R. (3d) 688 (C.A.) to explain its reasoning:

“Whatever the scope of the lost chance analysis in fixing liability for tort claims based on personal injuries, lost chance is well recognized as a basis for assessing damages in contract. In contract, proof of damage is not part of the liability inquiry. If a defendant breaches his contract with the plaintiff and as a result a plaintiff loses the opportunity to gain a benefit or avoid harm, that lost opportunity may be compensable. As I read the contract cases, a plaintiff can recover damages for a lost chance if four criteria are met. First, the plaintiff must establish on the balance of probabilities that but for the defendant’s wrongful conduct, the plaintiff had a chance to obtain a benefit or avoid a loss. Second, the plaintiff must show that the chance lost was sufficiently real and significant to rise above mere speculation. Third, the plaintiff must demonstrate that the outcome, that is, whether the plaintiff would have avoided the loss or made the gain, depended on someone or something other than the plaintiff himself or herself. Fourth, the plaintiff must show that the lost chance had some practical value…..” (underlining added)

The Court of Appeal then said:

“Recently, in Berry v. Pulley, 2015 ONCA 449, 335 O.A.C. 176, at para. 70, this court described a “two-step framework” for the determination of a loss of chance claim. Associate Chief Justice Hoy explained, at para. 72, that the court must first determine if the four criteria set out in Folland are met. If they are, then the court proceeds to the second step and “will award damages equal to the probability of securing the lost benefit (or avoiding the loss) multiplied by the value of the lost benefit (or the loss sustained)”.”

Having held that the loss of a chance gave rise to compensable damages for breach of contract, the Court of Appeal referred to the following facts, among many others, in holding that the opportunity of negotiating a better deal with GM Canada fell within the realm of a compensable loss of a chance:

“GMCL had a GM-approved fund of $218 million to conclude the WDAs with 290 dealers. In the end, it offered $143.5 million to 240 dealers. This gave GMCL the financial flexibility to improve the compensation offered under the WDAs….The considerable and varied risks of a CCAA filing by GMCL to both GMCL and GM itself outweighed the benefits of such a filing and would have operated to make GMCL amenable to discussions with the dealers…These factual findings, which were available on the evidence, provide compelling support for the inference that it was likely, at the end of the day, that GMCL would have negotiated with the dealers about the WDAs had the negotiation option been put on the table and had the dealers acted as an organized bloc in opposition to the offers under the WDAs……The amount of the potential chance (to which the percentage of potential chance can be applied) is the difference between what the defendant offered and what the defendant internally had been authorized to offer.”

Discussion

These conclusions are important and readily applicable to a building contract dispute.

First, since that dispute is based on a breach of contract, not a tort, then the loss of a chance, and not the probability of loss, is a sufficient basis to award damages to the plaintiff.

And second, according to this decision, the loss of a chance to negotiate a better contract with a third party falls within the loss of a chance.

The first point – that contract damages can be awarded based on a loss of a chance – has already been applied in the building contract setting. In Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, the damages of the plaintiff, who was wrongly not chosen as the successful tenderer, were assessed based upon the chance of site conditions and related performance problems impacting the amount of damages. In Maritime Excavators (1994) Ltd. v. Nova Scotia (Attorney General) (2000), 183 N.S.R. (2d) 236 (N.S.S.C.), the trial judge assessed the loss of a chance of the plaintiff being awarded the tender, and awarded the plaintiff its full damages, finding that the plaintiff would have been 100% likely to have been awarded the tender if it had been properly conducted. In Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town) (2008), 262 N.S.R. (2d) 163, the Nova Scotia Court of Appeal applied a 35 percent reduction to the plaintiff’s damage for the possibility that it would not have been awarded the tender even if properly conducted.

Now, based upon the Trillium Motor decision, the opportunity to use the “loss of a chance” approach to the assessment of damages in building contract cases is, arguably, much broader. The loss of a chance of negotiating a better contract with a third party now falls within the scope of assessable damages.

There may be many contracts in a building project. A breach of any of those contracts may give rise to the opportunity to claim a loss of an opportunity to negotiate a better contract with another party to the building project. For example, a breach of contract by the owner may cause the contractor a loss of a chance to negotiate a better contract with a subcontractor or supplier. A breach of contract by a contractor may cause the loss of a subcontractor’s opportunity to negotiate a better deal, or a better settlement agreement, with a supplier or other subcontractor. The combination of factors that may give rise to a claim for recoverable loss of a chance of negotiating a better deal seems only limited by the number of contracts or potential contracts involved in the project.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 9, section 6(d)

Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544

Building contract – assessment of damages – loss of a chance – negotiation of contract

Thomas G. Heintzman O.C., Q.C. LL.D (Hon.), FCIArb                                         August 2, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

What Does A “Right To Appeal In Accordance With The Provisions Of The Arbitration Act” Mean?

This question seems very straightforward, but when the Arbitration Act provides several rights of appeal, depending on what the parties have or have not agreed upon, then which of those rights of appeal apply? Only the right to appeal that applies if the parties have not agreed to further rights of appeal? Or, all the rights of appeal as if the parties had agreed to them?

In 6524443 Canada Inc. v. Toronto (City), 2017 CarswellOnt 9006, 2017 ONCA 486, the Ontario Court of Appeal has held that it is the former, and that by these words the parties do not engage the appeal rights that they could have engaged by specific agreement.

The Ontario Arbitration Act, 1991 (the present Act)

Section 45(1) of the Ontario Arbitration Act, 1991 provides that, if the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant only if it is satisfied that (a) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and (b) determination of the question of law at issue will significantly affect the rights of the parties.

In addition, the present Act allows the parties to agree to appeals on questions of law, fact or mixed fact and law: sections 45(2) and (3). The lead-in to both those sub-sections states: “If the arbitration agreement so provides….”

To which rights of appeal did the parties agree to: the 45(1) rights (that is, on questions of law with leave); or the section 45(2) and (3) rights (that is, on questions of law, fact or mixed fact and law, without the necessity of leave)?

This question becomes more important since the decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., (2014), 2014 SCC 53, 2014 CarswellBC 2267. In that decision, the Supreme Court held that, except in the exceptional case where a question of pure law arises, the interpretation of a contract is a question of mixed fact and law. Therefore, if section 45(1) applies, and if no pure question of law arises, an appeal cannot be taken from an arbitral award interpreting a contact.

Interestingly, the Arbitrations Act, R.S.O 1970 contained broad rights of appeal.  As the motion judge noted:

  “The 1970 Act provided for full rights of appeal. It did not differentiate between appeals on questions of law, fact or mixed fact and law. Section 16(1) of the 1970 Act reads: Where it is agreed by the terms of the submission that there may be an appeal from the award, an appeal lies to the Divisional Court.”

The Appeal Rights In The Agreements

The present case arose from a lease under which the renewal rent was to be set by arbitration if the parties could not agree on the amount of the renewal rent. The parties entered into two contracts affecting the rights of appeal. In the lease the appeal rights were described as follows:

“The decision of the arbitrators shall be subject to appeal in accordance with the provisions of The Arbitrations Act, R.S.O. 1970, as amended, or any successor Act.”

Then, after the arbitration had been launched, and for the purposes of the arbitration itself, they entered into another agreement which stated:

“The decision of the arbitrators shall be subject to appeal in accordance with the provisions of the Arbitration Act, 1991, S.O. 1991, c. 17 as amended, or any successor Act.”

The Decision Of The Superior Court Of Justice

After the arbitrator’s award, the numbered company (referred to in the judgments as Brookfield) appealed the award to the Ontario Superior Court of Justice. Brookfield filed affidavit evidence to argue that broader rights of appeal had been agreed between the parties, and the City filed evidence in response. The motion judge refused to consider the affidavit evidence, and held that: the arbitration agreement was a stand-alone agreement that provided only for appeals on questions of law, with leave; even if the lease were considered, it did not provide for broader rights of appeal; and that Brookfield’s notice of appeal raised only questions of fact or mixed fact and law. The appeal was accordingly quashed.

The Decision Of The Ontario Court Of Appeal

The Ontario Court of Appeal dismissed the appeal. It held as follows:

  1. The motion judge’s decision was reviewable on a standard of reasonableness. It involved the interpretation of the relevant arbitration statutes, which did not involve an “extricable” legal issue to be reviewed on a standard of correctness.
  1. The motion judge correctly refused to consider the affidavit evidence. That evidence really concerned the parties’ respective negotiation stances, not their mutual commercial objectives. The subjective intentions or objectives of each party were not helpful in interpreting the appeal provisions.
  1. The motion judge reasonably concluded that the second arbitration agreement was intended to be a stand-alone agreement governing the arbitration and the appeal rights from the award. The Court of Appeal said:

“The Lease provisions concerning arbitration are very brief, consisting of four clauses. The parties chose to enter into a detailed Arbitration Agreement, which included a comprehensive procedure for the arbitration, that in certain respects differs from what was provided for under the Lease (for example, in the manner of appointment of the arbitrators). There is no reason to conclude that, having set out in some detail the procedure for the arbitration, including addressing an appeal from the Award, the parties assumed that any provision of the Lease respecting the arbitration would continue to apply, especially where inconsistent with the Arbitration Agreement. And there is no merit to the appellant’s argument that, because the Arbitration Agreement referred to article 1(d) of the Lease, it must have intended the arbitration to be governed by the terms of the Lease. This is simply a recital of the circumstances in which the arbitration is taking place — “for the determination of Fair Market Rental for the Second Rental Period as those terms are defined in the Lease”. We agree with the motion judge that “there is no need to refer back to the Lease in order to interpret any of the terms of the Arbitration Agreement”.” (underlining added)

  1. Even if the arbitration provisions of the lease were considered, the motion judge conclusion was reasonable. The lease referred to the arbitral award being “subject to appeal in accordance with the provisions of [the 1970 Act], or any successor Act” ). As the Court of Appeal said:

“By its terms the Lease anticipated an appeal would be governed by the arbitration legislation in force at the time of the arbitration. We see no merit in the appellant’s argument that the reference to the 1970 Act addressed substantive rights to appeal an arbitrator’s award, while “any successor Act” would only apply to the arbitration procedure. Both the Lease and the Arbitration Agreement provide for the parties’ appeal rights to be governed by the 1991 Act.”

  1. The wording of both appeal provisions did not include any further rights of appeal than an appeal on a question of law with leave. For any further rights of appeal to exist:

“requires the agreement to specify whether the parties have the right to appeal questions of law, fact or mixed fact and law, failing which they are entitled to appeal only on questions of law, with leave”. The parties chose to enter into the Arbitration Agreement which included a specific appeal provision that referenced the 1991 Act, without saying anything more.” (underlining added)

Discussion

This decision raises a number of interesting issues:

  1. The Court of Appeal’s interpretation of section 45 of the present Act seems logical, but it also seems to contravene one rule of contractual interpretation.

One fundamental rule of contractual interpretation is the rule against tautology. Every provision in a contract is intended to be effective. Here, the appeal provision in each of the agreements is rendered ineffective by the courts’ interpretation. If those provisions did not exist, the parties would have the right to seek leave to appeal on a question of law, the very right that the parties have been found to have agreed to by those provisions. In the result, the appeal provisions are of no use or effect.

  1. The Court of Appeal discounted the fact that the lease referred to the 1970 version of the arbitral statute. The Court of Appeal has held that the parties intended that the wording of the arbitral statute from time to time in force would apply to any arbitration under the lease. That is obviously so, but one might have thought that in interpreting the wording of appeal provisions in both the lease and the arbitration agreement, one should have regard to the fact that under the original lease and the arbitral statute then applicable, there were full rights of appeal.

The combined effect of a rule of contractual interpretation (the rule against tautology) and the history of the Arbitration(s) Act were not sufficient to overcome what the Court of Appeal found to be the plain meaning of the arbitration agreements.

In the result, the Court of Appeal has decided that, under the present Act the parties must specifically state that there is to be a right of appeal (not just an appeal with leave) and specifically state that the right of appeal is on questions of fact, law and mixed fact and law, if that is what the parties intend.

Again, there is a lesson to be learned. When an arbitral agreement refers to the arbitral statute “or successor statute” or words to that effect, any time the arbitral statute is changed, so is the arbitral agreement. With impending amendments to the Arbitration Act, 1991 on the horizon, practitioners should be examining arbitral agreements carefully, as they may be about to be amended by statute.

  1. When an arbitration appointment agreement is entered into for the purpose of a specific arbitration, the parties do not usually intend to amend the arbitral rights under their original commercial agreement. They think that they are just making specific arrangements between themselves and with the arbitrator respecting that arbitral appointment and that arbitration. In that arbitration appointment agreement, they may insert a reference to the contemporary arbitral statute as a matter of rote. But this case tells us that, by inserting that reference, the parties are over-ruling and replacing the arbitration agreement in that commercial agreement.

So the parties should be very careful to consider how that arbitral appointment agreement may later be seen to affect the arbitral appeal rights, and indeed all other rights, in the original commercial agreement.

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

6524443 Canada Inc. v. Toronto (City), 2017 CarswellOnt 9006, 2017 ONCA 486

Arbitration – appeal – arbitral appointment agreements – appeals on questions of law, fact, and mixed fact and law

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

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

When Does An Arbitral Award Contain An Appealable Question Of Law?

The Supreme Court of Canada has recently re-examined the issue of whether a statutory and contractual interpretation by an arbitral tribunal may be appealed. The court re-iterated the principle that arbitral awards are not appealable on a question of law when in reality the question is one of mixed fact and law. On this basis, in Teal Cedar Products Ltd. v. British Columbia, 2017 CarswellBC 1648, 2017 SCC 32, the Supreme Court re-instated an arbitral award which had been set aside in whole or in part, by the courts of British Columbia.

In doing so, the court re-affirmed its previous decision in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633 to the effect that, unless a discrete question of law arises, the interpretation of a contract is a question of mixed fact and law, not a question of law, and that an arbitral award interpreting a contract cannot be appealed to the courts if the right of appeal is only on a question of law.

I reviewed the Sattva decision in an article dated August 10, 2014 and the decision of the British Columbia Court of Appeal in Teal in an article dated July 7, 2015

The Issues

Teal held a license to harvest timber on provincial Crown land. The province then reduced the amount of Teal’s allowable harvest. The parties were able to settle the amount of Teal’s compensation for its loss of harvesting rights (the Rights Compensation) but were unable to agree on the compensation for the improvements Teal had allegedly made to Crown land (the Improvements Compensation). The parties agreed to arbitrate the amount of Improvement Compensation to which Teal was entitled. The arbitrator made an award in Teal’s favour and the province appealed.

The issues upon which the arbitral award was appealed were as follows:

  1. Did the arbitrator err in selecting a valuation method that was allegedly inconsistent with the governing statute, the Revitalization Act?
  2. Did the arbitrator err in his interpretation of the contract between the parties, especially in resorting to the factual matrix to interpret an amended settlement agreement between the parties in light of the negotiations between the parties?
  3. Did the arbitrator err in denying compensation to Teal Cedar relating to the improvements associated with one of its licences because it never lost access to those improvements?

The Decision Of The Majority Of The Supreme Court Of Canada

The nine-member court was divided 5-4 in this appeal. The majority held as follows with respect to these questions:

  1. This question was a question of law. Accordingly it could be appealed under the British Columbia Arbitration Act. However, the arbitrator applied the plain meaning of the statute prescribing that valuation and reasonably selected a suitable valuation method. Accordingly, his award was valid and could not be set aside.
  2. This question was either a question of mixed fact and law, or was without reviewable error as it was based on the wording of the contract interpreted in light of the factual matrix. In either case it was not appealable to the courts since section 31 of the B.C. Arbitration Act limits appeals to questions of law.
  3. This question was one of mixed fact and law and not reviewable under the B.C. Arbitration Act.

The four judges who dissented held that the arbitrator erred on Question 1. They held that Teal was entitled to compensation only for its limited interest in the improvements.  Teal, as a licence holder, did not own the improvements, which belonged to the Crown. The arbitrator selected a valuation method — the cost savings approach —, which failed to consider that Teal had only a limited interest in the improvements as a licence holder and was therefore not entitled to compensation on that basis under the Act.

In arriving at its conclusions, the majority of the court provided some further explanations and clarifications of its historic decision in Sattva. Here are three addition principles that can be extracted from Teal and added to the principles arising from Sattva:

  1. Alteration Of A Legal Test Raises A Legal Question.

If, in the course of the application of a legal principle, the underlying legal test has been altered, then a legal question arises. “For example, if a party alleges that a judge (or arbitrator) while applying a legal test failed to consider a required element of that test,” –for example, if “the correct test requires him or her to consider A, B, C, and D, but in fact the decision-maker considers only A, B, and C” – then a question of law arises. “If the correct test requires him or her to consider D as well, then the decision-maker has in effect applied the wrong law, and so has made an error of law.”

This situation is an example of an “extricable question of law” which under Sattva is reviewable as a question of law, but the alleged error is hidden or “covert” in the arbitrator’s award. The legal issues or tests are “implicit to their application of the test rather than explicit in their description of the test.”

  1. Statutory interpretation is normally a legal question and contractual interpretation is normally a question of mixed fact and law.

As explained in Sattva, “contractual interpretation remains a mixed question, not a legal question, as it involves applying contractual law (principles of contract law) to contractual facts (the contract itself and its factual matrix)”. But statutory interpretation is a matter of law.

  1. An arbitrator’s legal decision should be reviewed on a standard of reasonableness.

While an appeal of a court’s decision on a question of law should be conducted on the basis of correctness, an appeal of an arbitrator’s award on a question of law – in this case, the interpretation of a statute – should be conducted on the basis of reasonableness, based upon the arbitrator’s presumed special expertise. To do otherwise, and “to weigh an arbitrator’s actual (as opposed to presumed) expertise in every arbitration would require some sort of preliminary assessment of the arbitrator’s level of expertise with a view to establishing the standard of review for every particular hearing — which would be antithetical to the efficiencies meant to be gained through the arbitration process.” Moreover, “in a commercial arbitration context…..from a policy perspective, the deliberate aim is to maximize efficiency and finality.” All of these factors merit deferential review of the arbitrator’s decision.

The arbitrator is presumed to be an expert even though the arbitration process in this case was mandated by statute, not voluntary. If an issue arises in the course of an arbitration that is outside the subject matter of the arbitration, then in that case the presumed expertise of the arbitrator –and the review of the award on a reasonableness basis- might not apply.

This part of the Supreme Court’s decision may come as a surprise. In previous lower court decisions, it has been assumed that errors of law by an arbitral tribunal should be reviewed on a standard of correctness: see, for instance, Denali Construction Inc. v. Tremore Contracting Ltd.,2013 CarswellAlta 898, 2013 ABQB 321, 25 C.L.R. (4th) 54 at paras. 14-16 (Alta Q.B.). The Supreme Court has now said that the standard of reasonableness applies to the review of arbitral awards, even if the question is one of law.

Discussion

The legal principles stated in Teal have clear application to arbitrations arising under building contracts. For example, if the arbitrator is considering a statute such as the Construction Lien Act, his or her interpretation involves a question of law. If the relevant provincial arbitration statute permits an appeal on a question of law, then the arbitrator’s decision on this point is appealable. But in the appeal, the arbitral award will be reviewed on a standard of reasonableness and only set aside if it is unreasonable.

If, on the other hand, the arbitrator is interpreting a building contract, his or her interpretation will usually amount to a question of mixed fact and law, and will not be appealable as a question of law. However if there are several elements involved in a particular issue, and if the arbitrator fails to consider, or mis-applies one of the elements, then according to Teal that failure may give rise to a discrete question of law and be appealable.

Exactly how this element of the Teal and Sattva decisions will work out may be a matter of contention. For example, under GC 10.2.6 of CCDC 2 Stipulated Price Contract, the contractor is required to advise the consultant and obtain direction as required by GC 10.2.5 before performing work which is contrary to law, and if it does not, the contractor is obliged to bear the expense of correcting the work. If, in the absence of some other justification (such as waiver or estoppel), the arbitrator holds that the contractor satisfies this condition by reason of advising the consultant without considering the absence of written directions (or vice versa), is this an error of law, or just an error of mixed fact and law due to the involvement of the surrounding facts?

In any event, all construction law practitioners dealing with arbitrations under building contracts must be familiar with the trilogy of Supreme Court decisions: Sattva, and Teal and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37 which apply Sattva.

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

Teal Cedar Products Ltd. v. British Columbia, 2017 CarswellBC 1648, 2017 SCC 32

Building contracts – arbitration – appeal of arbitral awards – questions of law and mixed fact and law

Thomas G. Heintzman O.C., Q.C., LL.D (Hon.), FCIArb                       July 16, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

What Amounts To An Effective Claim Under A Building Contract?

The Ontario Court of Appeal has recently allowed the appeal in the case of Ledore Investments Limited (Ross Steel Fabricators & Contractors) v. Ellis-Don Construction Ltd., 2017 ONCA 518. In doing so, it held that the arbitrator committed no reviewable error in deciding that the correspondence sent by Ellis-Don to its subcontractor did not amount to a claim under the building contract in question.

This is an important decision from a construction law standpoint. Building contracts often contain a clause which provides that claims are released if they are not made during the building project. In the Ellis-Don subcontract, that provision stated that unless a party had made “claims” within a specific number of days from the final completion of the contract, then the right to assert claims under the contract was lost. The arbitrator held that the proper elements of a “claim” were missing in the letter sent by Ellis-Don to the subcontractor. The Court of Appeal held that this decision was not unreasonable and should not be overturned.

Accordingly, parties to building contracts who wish to ensure that they have given a valid “claim” must pay attention to this decision.

The Contract

Article 15 of the subcontract between Ellis-Don and the subcontractor Ross Steel read as follows:

“15.1   As of the date of the final certificate for payment of the prime contract, the contractor expressly waives and releases the subcontractor from all claims against the subcontractor, including without limitation those that might arise from the negligence or breach of this agreement by the subcontractor, except one or more of the following:

(a) those made in writing prior to the date of the final certificate for payment of the prime contract and still unsettled;” [Emphasis added by the court, underlining added by me.]

The Claim Made By Ellis-Don

The letter written by Ellis-Don, upon which it relied as being its claim, read as follows:

“In addition to impacting the schedule, Ross Steel also forced Ellis-Don to expend substantial monies to accelerate the work in an effort to recover the schedule. We are currently assessing the financial impact that Ross Steel’s slippages have had on Ellis-Don and we intend to recover the costs from you.” (underlining added)

The Arbitrator’s Decision

The arbitrator held that this letter did not amount to a “claim’:

“I find that while Ellis-Don may have contemplated a delay claim in January 1999 and may have discussed amongst its own representatives a possible strategy to assert a claim for delay costs in the amount of $400,000, there is no proof that it actually did so. As stated earlier, the intention to claim is not the same as a claim. Further, the failure to advance the delay claim in the August 4, 1999 meeting supports my view that Ellis-Don did not assert a delay claim “in-writing” before the final certificate of completion.” [Emphasis added by the court.]

Appeal Judge’s Decision

Ellis-Don appealed the arbitrator’s decision to the Ontario Superior Court of Justice. That court set aside the arbitrator’s decision, holding that Ellis-Don’s letter was a sufficient “notice of claim” and that all that was required under Article 15.1 was a notice of claim, not a claim:

“…..provisions requiring claims to be made in writing should be treated as provisions requiring written notice of claims, contrary to the approach taken by the arbitrator….In this court’s view, the arbitrator erred in finding that “claims made in writing” should not be treated as provisions requiring written notice of a claim…..the arbitrator misapplied the general principles and considerations established in Doyle to reach his conclusion that Article 15.1(a) had been satisfied but instead fashioned and applied his own test in that regard, contrary to the applied legal principles established. (underlining added)

I reviewed this decision in an article dated December 3, 2016.

The Court Of Appeal’s Decision

First, the Court of Appeal held that the standard of review to be applied to the arbitrator’s decision was reasonableness. Only if the arbitrator’s award was unreasonable should it be set aside.

In a very pithy decision, the Court of Appeal then held that the arbitrator’s decision was reasonable:

“In our view, [the arbitrator’s] interpretation of Article 15.1(a) of the subcontract at paragraphs 52-68 of the award is eminently reasonable. The question of whether Ellis-Don advanced a “claim” for delay in writing within the time permitted under the subcontract is, by its very nature, a question of mixed law and fact. The question required the arbitrator to not only interpret Article 15.1(a), but also to decide whether the language contained in Ellis Don’s January 18, 1999 (or any other letters) was sufficient to constitute a “claim”. This is precisely what the arbitrator did.

The arbitrator was aware of the cases the respondent relies on in this appeal (Ellis-Don put them before him and relied on them in argument). In our view, the arbitrator did not ignore or misperceive them. Indeed, in terms of the principal case relied on by the respondent, Doyle, the arbitrator’s decision is not inconsistent with it; his dichotomy between “intention to make a claim” and “an actual claim” is similar to the distinction in Doyle, at para. 71, between “grumbling display[ing] an intention to claim” and an actual claim.”

Discussion

Where does this decision leave us with respect to whether a letter like Ellis-Don’s amounts to a valid “claim” under a construction contract?

Is the most that we can say that it is reasonable to conclude that such a letter is not a “claim”? If that is so, then another arbitrator might well find that such a letter is a “claim”. Could the reviewing court well find that that decision is not unreasonable?

That is the problem with the review of arbitral awards on the standard of reasonableness. After the court’s review, we know that the arbitral award is or is not unreasonable. We do not know that it is correct or the only conclusion that is possible.

The second issue is: what did the court and arbitrator decide about Ellis-Don’s letter? We know that the letter was held to be an insufficient claim, but do we really know why? Was it because the letter stated an intention to make a claim, not a claim stated in the present tense? Or was it because the letter did not contain sufficient particulars of a claim?

These are very different issues. By way of example, the Court of Appeal recently held that a claim under a construction contract was invalid, despite the finding by the judge of first instance that the claim was valid, because it did not contain sufficient particulars of the claim: Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205. I reviewed that decision in an article dated July 10, 2016. In that case, the claim provision required the claimant to provide a “sufficient description of the facts and circumstances of the occurrence that is the subject of the claim to enable the Engineer to determine whether or not the claim is justified.”

A third issue is whether these cases apply to “notice of claim” provisions. Thus, GC 12.2 of the CCDC 2 Stipulated Price Contract states that the contractor and owner waive and release “claims” against each other unless (subject to various exceptions) “Notice in Writing [of the claims] has been received ….no later than the sixth calendar day before the expiry of the lien period…” Does this provision make a distinction between a “Notice” of a claim and a “claim”? Does it do so in order that the claimant be put to a lesser standard of particularity or intention to give notice of, and thereby preserve, a claim? Would the views of the Superior Court judge in the Ellis-Don case be more applicable to a “notice of claim” provision rather than a “claim” provision?

In any event, these two decisions of the Ontario Court of Appeal appear to express a judicial and arbitral tendency toward requiring greater precision, and an express statement of a present claim, in the making of claims under building contracts. Arbitrators and the courts seem to be departing from their previous more laissez faire attitude to those claims, under which if the owner was generally aware of the impending claim, it couldn’t avoid the claim on technical grounds. Now the courts and arbitrators seem to be demanding that the claim be present and clear, and if the wording of the dispute resolution clause demands it, that sufficient particulars of the claim be provided.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 4 part 3(c), chapter 6 part 9(b)-(e), chapter 7 part 5 and chapter 9 part 4.

Ledore Investments Limited (Ross Steel Fabricators & Contractors) v. Ellis-Don Construction Ltd., 2017 ONCA 518

Building contracts – dispute resolution clauses – arbitration – claim

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                           July 9, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

May A Party Terminate A Contract For “Fundamental Breach”?

In the recent decision in R.P.M. Investment Corp. v. Lange, 2017 CarswellAlta 770, 2017 ABQB 305, the Alberta Court of Queen’s Bench held that a party to a contract may terminate a contract on the basis of a “fundamental breach” of the contract, in addition to the right to terminate the contract for repudiation. While on the facts of the case the court held that a fundamental breach had not occurred, the decision still raises the question: what is the role of fundamental breach in Canadian contract law?

It is submitted that the Alberta court erred in applying the doctrine of fundamental breach to the termination for breach of contract. If that doctrine exists at all in Canadian law, it applies to exclusion clauses. Canadian courts should apply the doctrine of repudiation, not fundamental breach, to issues relating to the termination of contract for breach.

This decision and this article do not deal with the role of fundamental breach in relation to exclusion clauses. The law on that subject is somewhat tortured. The last word from the Supreme Court of Canada on that subject is probably found in the Tercon case: Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69.

The Background

The Langes engaged the plaintiff, (called “Mission” in the reasons) to build a home near Calgary. Mission did not complete the construction and the Langes hired a new contractor to complete the construction. Mission sued for the amount remaining due on its contract and the Langes counterclaimed for damage.

Each party accused the other of fundamental breach and repudiation of the contract.   The Langes allege that Mission committed fundamental breaches by not complying with the plans and specifications and by abandoning the project. The trial judge found that neither allegation was proven. While there were breaches of the contract, none of them rose to the level of fundamental breach, as they did not deprive the Langes of “substantially the whole benefit of the contract.” As to abandonment, while Mission removed certain property from the job site, that “was done for cost-savings purposes and did not constitute abandonment.” Moreover, Mission demonstrated its continuing intention to complete the project.

As to repudiation, the trial judge found that the Langes had not expressly accused Mission of repudiation, but that abandonment, had it been found, “might well have constituted a repudiation.”

Mission’s claim for fundamental breach was based on unreasonable delay on the part of the Langes, on the basis that “the Langes had an obligation to act in good faith in moving the project forward.” The trial judge dismissed this claim on the ground that “the delays on the part of the Langes did not constitute fundamental breach as they were not sufficient to deprive Mission of the whole benefit of the Construction Agreement.” The trial judge also held that a finding concerning the allegation of fundamental breach was unnecessary “in light of my finding below in respect of Mission’s repudiation allegation.”

The trial judge found that the Langes had repudiated the contract by writing an email stating that ” …we are hereby giving notice of our intent to terminate effective November 8, 2010.” The trial judge said:

“In my view, Mr. Lange’s email would lead a reasonable person in the position of Mission to that conclusion. It is possible that Mr. Lange’s email was merely a tactic intended to force a favourable response from Mission. However, the law is clear that the test is what a reasonable person would conclude, not what was subjectively intended. Therefore, Mr. Lange’s strategy, if that is what it was, is irrelevant to the outcome.”

Accordingly, Mission had the right to accept the Lange`s repudiation and terminate the contract.

The Trial Judge`S Legal Framework

The trial judge held that a party to a contract has two rights to terminate the contract in the event of breach: for “fundamental breach” and for “repudiation”. In the case of fundamental breach, the wrongdoer`s conduct “deprives the non-breaching party of substantially the whole benefit of the agreement”. Repudiation occurs by the wrongdoer`s conduct “by words or conduct evincing an intention not to be bound by the contract”.

In this case, the trial judge conducted an analysis of both types of breach, and concluded that repudiation by the Langes had occurred, but that fundamental breach had not.

Discussion

This decision raises the question of whether fundamental breach is a separate ground for termination of a contract. Separate, that is, from repudiation.

It is submitted that it is not, and that the trial judge was not required to perform a separate analysis of fundamental breach in this case.

Fundamental breach is a doctrine developed to deal with exclusion clauses, not with the right to terminate the contract. Under the law developed in England, largely by Lord Denning, the idea came into being that if the wrong-doer’s conduct was so egregious that it removed the whole basis of the contract, then an exclusion clause could not be enforced. The law with respect to exclusion clauses – and fundamental breach – has been very contentious, and has largely been eliminated from the Canadian law relating to exclusion clauses. The history of the fundamental breach doctrine as it applies to exclusion clauses can be reviewed in the Tercon case.

In the present decision, the trial judge quoted from the decision of the Supreme Court of Canada in Guarantee Co. of North America v. Gordon Capital Corp., 1999 CarswellOnt 3171, [1999] 3 S.C.R. 423. However, that case was an exclusion clause case. The Supreme Court of Canada analogized a time limitation provision in a bond to an exclusion clause. The Supreme Court held that, under the principles then developed relating to fundamental breach, the time limitation clause was enforceable. But the Guarantee v. Gordon Capital case, on that issue, was not about whether a contract could be terminated for fundamental breach.

The other case cited by the trial judge was the decision in RIC New Brunswick Inc v Telecommunications Research Laboratories, 2010 ABCA 227, 487 AR 340. In that case, the Alberta Court of Appeal did perform a “fundamental breach” analysis to determine whether a contract could be terminated for breach. It did not perform a repudiation analysis.

In my respectful submission, the doctrine of fundamental breach has no place in the law relating to the termination of a contract due to the breach of the contract. The only doctrine that applies in that situation is repudiation. The wrongdoer`s conduct is either a repudiation of the contract or it is not. In that context, the question of whether the wrongdoer`s conduct amounts to a fundamental breach is irrelevant.

It is also confusing. Two tests cannot work as they will potentially lead to inconsistent results. One test for termination of the contract is sufficient. The repudiation test is well known and has a history of hundreds of years of judicial pronouncements. It is difficult enough to have to advise parties to a contract as to whether there has been a repudiation without having another test riding alongside to create confusion.

It is also duplicative and unnecessary, as the present case demonstrates. The parties argued both tests, although one half-heartedly because it is apparent that both cannot apply. The separate analysis proceeds for no good reason.

The suggestion that a fundamental breach may give rise to a right to terminate a contract appears to have arisen from language used by the Supreme Court of Canada in the Guarantee v. Gordon Capital decision. However, on the relevant point that case was about exclusions clauses, and whether a time limitation clause should be analysed in a fashion similar to exclusion clauses. It was not about whether a fundamental breach gives rise to a right to terminate the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. at chapter 8, section 8.

R.P.M. Investment Corp. v. Lange, 2017 CarswellAlta 770, 2017 ABQB 305

Building contracts – termination – repudiation – fundamental breach

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                       June 12, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

When May An Arbitral Tribunal Correct Its Award?

Arbitrators are mortal. They may make mistakes in issuing their awards. In what circumstances may they correct an award?

The scope of the authority of an arbitral tribunal to alter its award after the issuance of the award has been examined in a recent Scottish case – NKT Cables A/S v. SP Power Systems Limited, [2017] CSOH 38. The Scottish court held that the arbitrator did not have the authority to issue an amended award. This decision raises important issues about the authority of an arbitral tribunal to amend its award.

The Theory Behind The Authority To Amend An Arbitral Award

As we will see from the cases and the arbitration statutes, there are two basic theories or justifications underlying the authority of an arbitral tribunal to amend its award. One justification is a narrow one:

an arbitral tribunal should have power to amend patent mistakes in its award, such as an arithmetic or grammatical mistake.

The other theory is that the arbitral tribunal should have power to properly express its substantive intention, and if it has failed to do so in its award, it should be able to amend the award to make that intention clear.

The second theory is controversial because it might be used by the arbitral tribunal to change its award, and such a result is contrary to the finality of arbitral and judicial decisions, and the rule that after making his or her decision, a judge and arbitrator is functus officio, that is, his or her office and function is ended.

Statutory Authority In Ontario To Amend An Arbitral Award

Both section 44 of the Ontario Arbitration Act, 1991 (AA) and Article 33 of the Model Law attached to the Ontario International Commercial Arbitration Act (ICAA) contain a “slip or omission” type of power for the arbitral tribunal to amend its decision. The domestic Act contains three powers: in section 44(1), the power to correct typographical errors, errors of calculation and “similar errors” in the award; and in section 44(2), the power to amend the award so as to correct an “injustice caused by an oversight on the part of the arbitral tribunal”. In addition, under section 44(3), the tribunal may “make an additional award to deal with a claim that was presented in the arbitration but omitted from the earlier award.”

Article 33(1)(a) of the Model Law attached to ICAA contains the narrow power to amend the award contained in section 44(1) of the AA. The arbitral tribunal has no broader power without the involvement of one of the parties. Under Article 33(1)(b), if the parties agree, the tribunal may give an interpretation of a specific point or part of the award. Under Article 33(3), if one party applies to the tribunal for such a remedy, the tribunal may “make an additional award as to claims presented in the arbitral proceedings but omitted from the award.”

It should be noted that there may a “slip or omission” provision in the Rules of Civil Procedure governing court orders and judgments. In Ontario, that provision is found in Rule 59.06. One issue is whether the arbitral and judicial “slip or omission” provisions should be similarly interpreted, or whether the judicial rule should be interpreted differently because of the public nature of court proceedings, because of the way that judicial orders and judgments are pronounced, issued and entered, and because judicial orders and judgments are appealable.

The Decision In NKT Cables A/S V. SP Power Systems Limited

NKT applied to court to enforce an adjudication award made under the Housing Grants, Construction and Regeneration Act 1996 in the amount of about £2.1million.  That amount was specified in an amended decision of the Adjudicator.  In the alternative, NKT sought to enforce the Adjudicator’s original decision in the amount of about £1.8 million.

In his Award, the Adjudicator inserted the wrong number for the gross value of the Contract, namely of £9,376,220.72.  In the court proceedings, the parties agreed that this number was a “rogue” figure and could not be derived from any part of the Adjudicator’s award.

After the award was issue, NKT then wrote the Adjudicator, copying SP, pointing out this error and also referring to other amounts which it said were relevant, being amounts for variations and claims (the “Agreed Claims”), and interest (the “Agreed Interest”). In its letter, NKT requested that the Adjudicator issue an amended award “to correct the apparent slip.”

That night, the Adjudicator sent an email to the parties correcting his award, adopting the numbers set forth in NKT’s letter.

In this process, the Adjudicator did not ask for or receive any submissions from SP, which thereafter complained about an absence of natural justice.

The Adjudication regime applicable to this Adjudication contained a “slip or omission” provision, which enabled the Adjudicator to “correct his decision so as to remove a clerical or typographical error arising by accident or omission.” However, the court held that this provision did not, for timing reasons, apply to this Adjudication. Nevertheless the court found that this provision was incorporated into the Adjudication agreement as an implied term.

The court held that, while the Adjudicator had the authority to correct the gross value of the Contract, since both parties agreed that there was an error in its calculation, he had no authority to insert the amounts for the Agreed Claims or Agreed Interest. Those amounts were in contention, were not dealt with in the original award, and the Adjudicator had no jurisdiction to insert them into the award by way of a correction.

The court said:

“In considering whether the amendment to include the Agreed Interest and the Agreed Claims was within the scope of the slip rule, I proceed on the basis that the Agreed Claims and the Agreed Interest were matters that were before the Adjudicator and had been referred to in the submissions or documentation considered by him.  Neither party suggested otherwise.  It would appear that parties expected him to take these two matters into account in any award.  However, neither of these items was referred to in terms in the Original Decision or in the Adjudicator’s calculation of the sum due to the pursuer.  Accordingly, while the Adjudicator accepted that there was an apparent error in omitting these from his calculation, and when reminded of these sought to include them in the Amended Decision, he was not giving effect to his first thought and intention.  The fact that there was no intention to do so that may be discerned from the Original Decision.  The omission was clearly an intra vires error but, in my view, that does not mean it falls within the slip rule.  In other words, in his purported correction to include the Agreed Claims and the Agreed Interest, the Adjudicator was not bearing to be giving effect to his first thoughts and intention, as it was put in Bloor (at page 319).  Rather, he was seeking to correct an error which was a true omission, in the sense that on the face of his Decision he had given no thought to these two matters at the time of undertaking his calculation or promulgating his Decision, and, therefore, treatment of these figures did not form part of his first intention when making the Original Decision.  In my view, what the Adjudicator purported to do in redoing his calculation to include the figures for Agreed Claims and Agreed Interest in the Amended Decision was outwith the scope of the slip rule, whether as formulated in regulation 22A or as might be implied in like terms at common law.“ (underlining added)

Discussion

The decision in NKT Cables A/S v. SP Power Systems Limited may be contrasted with a 100 year old decision of the Saskatchewan court in Debret v. Debret, 1917 CarswellSask 123, 10 Sask. L.R. 366.

The parties referred to the Master by way of arbitration certain issues in dispute between them. The parties agreed that the plaintiff was entitled to a 1/6th share of the crop grown in 1916 on the half section in question. The arbitrator’s award did not mention this 1/6th share. After his award was filed the Master issued a statement saying that “On consulting my notes at the time of filing this award I find that I omitted to include in the award a direction that the defendant Lawrence Debret is to deliver to the plaintiff, Mathias Debret, 1-6th of the grain in his possession from the crop of 1916, which appears to be 1,464 bushels of wheat and 1,947 bushels of oats. This was agreed on at the hearing.”

The Saskatchewan court held that, while the functus rule used to be the law, now section 8 of the Saskatchewan Arbitration Act states that the arbitrator has the authority to “correct in an award any clerical mistake or error arising from any accidental slip or omission.” The court stated:

“In my opinion, the failure of the arbitrator to include in his award the 1/6th share of the crop for 1916 was a clerical mistake or error arising from an accidental slip or omission within the meaning of the statute. The subsequent addition of this share to the written award did not necessitate any new determination or judgment on his part as in In re Stringer and Riley Brothers, [1901] 1 Q.B. 105, 70 L.J.K.B. 19, and in those cases where the arbitrator misapprehended the facts and subsequently sought to make a new award upon the true facts. The finding in this case had already been made by the agreement of the parties, but that finding was omitted from the report….I think the arbitrator was entitled to supply the omission.”

Both of these decisions dealt with the attempted correction by the arbitrator/adjudicator of something that did not appear on the face of the original award, that is, to correct an omission. In NKT v. SP, the correction was not allowed, whereas in Debret it was allowed. What is the difference?

It seems that, in NKT v. SP, the Agreed Clams and Agreed Interest, while referred to as ‘Agreed’ were still in substantial dispute as to whether they should be allowed in the award. Moreover, these amounts were necessary ingredients in arriving at the final award. The Adjudicator did not, in his original award, make an explicit decision about how these items should be taken into account, even though the parties expected him to do so. Therefore, his subsequent award was not a correction of his original award but a new award.

In Debret, the fact referred to in the amended award had been agreed to by the parties, both as a fact and that it would be part of the award. Moreover, it appears to have been a discrete item that was not necessary for the calculation of the other elements of the award. Unlike in NKT v SP, there was no decision-making function that the arbitrator had to exercise in relation to this fact. Accordingly, its omission from the award was a true “slip or omission.”

The fact that, in NKT v. SP, the Adjudicator had not referred to the Agreed Claims and Agreed Interest in his original award should not, it is submitted, be dispositive of the issue. Otherwise, an “omission” could never fall within the “slip or omission” provision; and the decision in Debret could not be correct. Rather, the issue is whether the omitted item was in fact disputed or undisputed. Even if agreed upon as to amount, a claim may still be contentious for any number of reasons. But if it is truly undisputed as to fact and as to its proper inclusion in the award, then the “slip or omission” provision should apply to it if the arbitrator fails to refer to it in the award. The decision in NKT v SP seems to be justifiable only on the basis that the Agreed Claims and Agreed Interest were disputed so far as their inclusion in the award.

It is possible to conceive of situations in which even an omission of a disputed issue from the award should be correctible, even under the narrow form of the “slip or omission” provision. If the arbitral tribunal accidentally left out a page of its award on which it dealt with that issue – and can positively demonstrate that this has occurred – it seems that the tribunal should be able to issue a corrected award with that page in it.

A number of issues arise from an Ontario perspective in relation to the NKT decision. Would the “omission” in NKT fall within section 44(2) of the AA as amounting to “an injustice caused by an oversight on the part of the arbitral tribunal” or within section 44(3) as “an additional award to deal with a claim that was presented in the arbitration but omitted from the earlier award”? Or would the omission fall within Article 33(3) of the Model Law, if that Law had applied and NKY had applied to the tribunal for “an additional award as to claims presented in the arbitral proceedings but omitted from the award”?

There are a number of other decisions in Canada dealing with the “slip or omission” section in arbitration statutes. Perhaps the leading case is the decision of the British Columbia Court of Appeal in Westnav Container Services Ltd. v. Freeport Properties Ltd., 2010 CarswellBC 124, 315 D.L.R. (4th) 649, from which leave to appeal to the Supreme Court of Canada was denied. The factual situation in Westnav decision is opposite to that in the NKT v. SP. Instead of remedying an omission, the arbitrator deleted something from the original award.

Freeport subleased land to Westnav. Westnav exercised a right to renew the sublease. The parties agreed to submit the fair market rent to arbitration. In his award, the arbitrator accepted the direct comparison method. In his analysis of the direct comparison approach, the arbitrator mistakenly said the rent for a particular property (the Ewan property) was $4.38 per square foot for the building, whereas that rent represented the rent for both the building and the land.

Westnav applied to the arbitrator for correction of “what appears to be an accidental or arithmetical error” or alternatively for clarification pursuant to s. 27 of the Act. Freeport contended the award should remain as it was. The arbitrator released a corrected award, acknowledged the error, but stated that the decision as to rent was the same. The corrected award deleted the mention of the particular property from the analysis and included fresh passages explaining the original conclusion.

Under section 27(1) of the Commercial Arbitration Act of British Columbia, the arbitrator had the authority to correct: a clerical or typographical error, an accidental error, slip, omission or other similar mistake or an arithmetical error made in a computation.

The British Columbia Court of Appeal held that the arbitrator had done none of these things and had acted without authority. It said:

“The arbitrator deleted, in the discussion as to valuation in his corrected ruling, all reference to one of only two properties he had originally specifically referred to in his comparative analysis….It must be taken by the reference to the Ewen property in para. 90 of the original award that the evidence of this property was material to the decision. It was not open to the arbitrator, in my view, to simply delete all reference to evidence which was sufficiently cogent to him as to comparability that he made prominent mention of it in the original award…Objectively, the appearance is that the arbitrator has changed his mind as to the comparability of the subject property to the Ewen property. I do not understand the arbitrator to deny that he originally considered the Ewen property comparable to the property in issue. If the Ewen property was reasonably comparable, the fact that the rent was for both land and buildings would be relevant to valuation. Nevertheless, it was ignored entirely in the analysis in the corrected award…..I recognize in this unfortunate situation the arbitrator has sought to rescue the arbitration process through his correction ruling. However, and with respect, I have come to the view that in doing so he has stepped outside his jurisdiction. The matter is one of the integrity of the arbitration process. Viewed objectively one may ask whether an objective bystander, reading these awards, could have confidence in the outcome in light of the arbitrator’s silence in the corrected award on the effect of the Ewen property as a comparable on his analysis, given its prominence in the analysis in the original award. I conclude the answer is in the negative. I consider an objective review of the award reveals a correction in reasoning through exclusion from the reasons of a factor previously considered material, creating objectively an impression the corrected award was an alternate explanation for the result rather than clarification of the original reasoning.” (underlining added)

In its decision, the B.C. Court of Appeal referred to the judgment of Sir John Donaldson M.R. in Mutual Shipping Corp. v. Bayshore Shipping Co., [1985] 1 All E.R. 520:

“It is the distinction between having second thoughts or intentions and correcting an award of judgment to give true effect to first thoughts or intentions, which creates the problem. Neither an arbitrator nor a judge can make any claim to infallibility. If he assesses the evidence wrongly or misconstrues or misappreciates the law, the resulting award or judgment will be erroneous, but it cannot be corrected either under s 17 or under Ord 20, r 11. It cannot normally even be corrected under s. 22. The remedy is to appeal, if a right of appeal exists. The skilled arbitrator or judge may be tempted to describe this as an accidental slip, but this is a natural form of self-exculpation. It is not an accidental slip. It is an intended decision which the arbitrator or judge later accepts as having been erroneous.”

A decision which demonstrates a much broader approach to the power to correct the arbitral award is the decision of the Ontario Divisional Court in Canadian Broadcasting Corp. v. Joyce, 1997 CarswellOnt 2861, 34 O.R. (3d) 493. In that case, the arbitrator had held, in his interim decision, that the employee had been terminated for just cause. Then in his final award, the arbitrator found that he had been incorrect, that the job was incapable of performance, and that the employer was 75 percent at fault.

The Divisional court refused to set aside the final award. It held that the fact that the first award was an interim award made no difference: “the mere fact that the award was entitled an interim award does not in itself create an opportunity to later change a finding contained in it.” However, the court adopted the following words of Sopinka J. in Chandler v. Assn. of Architects (Alberta), [1989] 2 S.C.R. 848:

“To this extent, the principle of functus officio applies. It is based, however, on the policy ground which favours finality of proceedings rather than the rule which was developed with respect to formal judgments of a court whose decision was subject to a full appeal. For this reason I am of the opinion that its application must be more flexible and less formalistic in respect to the decisions of Administrative Tribunals which are subject to appeal only on a point of law. Justice may require the reopening of administrative proceedings in order to provide relief which would otherwise be available on appeal.” (underlining added)

The Divisional Court concluded as follows:

“ In his final award, Arbitrator Joyce concluded that the employer was 75 percent at fault and the employee 25 percent at fault and at Pg.35 thereof says,…”I was wrong in my having fallen into the trap of neatly categorizing the dismissal in terms commonly employed when an employee is unable to perform a job in a satisfactory manner.”….I accept that statement of Arbitrator Joyce and conclude that the words relied on by the C.B.C., constituted an error in expressing the manifest intention of Arbitrator Joyce. His manifest intention was to see Mr. Rist compensated for something that was largely not his fault. That is made quite clear in his words both before and after the fateful passage, in his interim conclusion that Mr. Rist should not be reinstated, but should be compensated if he had jurisdiction to do so, and in the fact findings throughout the interim award which led him to that conclusion….I find that Arbitrator Joyce was correct in acknowledging his error, and find that such error falls within the quite narrow ambit of the exception of an error in expressing the manifest intention of the fact finder.” (underlining added)

This decision is a quite remarkable recognition of the arbitrator’s right to change his mind on a central ingredient in the arbitration. Even though the arbitrator had made a key finding – that the dismissal was for cause – the arbitrator was entitled to change that finding because it was incorrectly stated. That approach, clearly, is a different and broader one than that adopted in the previous decisions referred to in this article.

To minimize the chances that the arbitral tribunal may issue an award with a mistake in it, the tribunal may consider issuing the award in draft form. In doing so, it may advise the parties that it will not permit re-argument but will allow the parties to draw any slips or omissions in the draft award to the tribunal’s attention and allow an opportunity to settle the terms of the order contained in the award. This is my practice in issuing awards. This practice depends on the good faith of the parties and assumes that they will not abuse this process by taking ex parte or secret steps to frustrate the settlement, issuance and enforcement of the award.

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

NKT Cables A/S v. SP Power Systems Limited, [2017] CSOH 38

Arbitral awards – functus officio – jurisdiction to correct arbitral awards – slips and omissions            

 

Thomas G. Heintzman O.C., Q.C., LLD (Hon.), FCIArb                             June 5, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

Supreme Court Of Canada Grants Leave To Appeal In Bond Notification Case

On March 9, 2017, the Supreme Court of Canada granted leave to appeal from the decision of the Alberta Court of Appeal in Valard Construction Ltd. v. Bird Construction Co., 2016 CarswellAlta 1584, 57 C.L.R. (4th) 171.

This appeal will be of significance in determining the rights of contractors and subcontractors to receive, and the obligation of owners and contractors to give, notice of the existence of a payment bond.

The claim arose from a payment bond taken out by a subcontractor on a project on which Bird Construction was the contractor and Valard Construction was a sub-subcontractor. In the payment bond, Bird Construction was shown as the “obligee” and “trustee”. Valard said that it was not aware of the existence of the bond until after the time for filing a claim under the bond expired. Valard sued Bird for its failure to notify it of the existence of the bond.

The trial judge and the majority of the Alberta Court of Appeal held that Bird was not obliged to give notice to the sub-subcontractors of the existence of a payment bond applicable to the project. In a judgment of 183 paragraphs, the dissenting appellate judge held that because the contractor is designated in the bond as a trustee, the contractor owed a fiduciary duty to the sub-subcontractors which included the obligation to notify them of the existence of the bond.

The payment bond was in a CCDC format and provided, in part, as follows:

The Principal [the subcontractor] and the Surety, hereby jointly and severally agree with the Obligee, as Trustee, [Bird] that every Claimant who has not been paid as provided for under the terms of its contract with the Principal, before the expiration of a period of ninety (90) days after the date on which the last of such Claimant’s work or labour was done or performed or materials were furnished by such Claimant, may as a beneficiary of the trust herein provided for, sue on this Bond, prosecute the suit to final judgment for such sum or sums as may be justly due to such Claimant under the terms of its contract with the Principal and have execution thereon. Provided that the Obligee is not obliged to do or take any act, action or proceeding against the Surety on behalf of the Claimants, or any of them, to enforce the provisions of this Bond. If any act, action or proceeding is taken either in the name of the Obligee or by joining the Obligee as a party to such proceeding, then such act, action or proceeding, shall be taken on the understanding and basis that the Claimants, or any of them, who take such act, action or proceeding shall indemnify and save harmless the Obligee against all costs, charges and expenses or liabilities incurred thereon and any loss or damage resulting to the Obligee by reason thereof. Provided still further that, subject to the foregoing terms and conditions, the Claimants, or any of them may use the name of the Obligee to sue on and enforce the provisions of this Bond. (underlining and square bracketed added)

The majority of the Albert Court of Appeal held that the wording of the bond “is intended to create a limited trust, as is necessary to circumvent the third-party beneficiary rule that would otherwise preclude a non-party entity from claiming any rights under the bond….The bond’s wording is explicit that the respondent obligee/trustee is not obliged to do or take any act, action or proceeding against the surety on behalf of the claimants to enforce the provisions of the bond. And, the bond imposes no positive obligations of any other kind upon the respondent. Without more, the obligations of parties to a labour and material payment bond are established by the wording of the bond.”

The majority noted that the question of whether the Obligee under a payment has a duty to notify the beneficiaries had been answered in the negative by a judgment of an Ontario county court judge 45 years previously:  Dominion Bridge Co. v. Marla Construction Co. [1970] 3 O.R. 125.

The majority also noted that the Alberta’s Builders’ Lien Act “provides the method for a potential claimant — a lienholder — to make a demand for information, and imposes consequences upon those who fail to promptly comply with such a demand.”

In the lengthy judgment, the dissenting judgement reviewed the law of fiduciary duties and pointed to the judicial authorities establishing that one of the duties of a trustee is to give notice to beneficiaries of their rights under the trust. The dissenting judge held that Bird could not have it both ways: “A trustee cannot both assert that the bond features a trust and that the trustee has none of the duties of a trustee. A trust cannot function without a trustee. This is a blatant violation of the equitable principle against approbation and reprobation.”

The appeal to the Supreme Court may involve a number of fascinating questions.

Which result is best for the construction industry: should the Obligee have, or not have, a duty to advise the potential beneficiaries of the payment bond?

Which parties are best suited or able to take responsibility for the default by the bonded contractor or subcontractor?

These questions seem to involve industry and public policy considerations. Should only the parties to this dispute be heard? Should the CCDC – whose payment bond is involved –or contractor associations and surety bond associations, also be heard?

What is the proper role of the courts as opposed to the legislature in dealing with this issue? As the Alberta Court of Appeal noted, section 33(5) of the Alberta Builders’ Lien Act enables subcontractors, once they are lienholders, to apply to court to obtain information from owners, contractors and subcontractors about any “contract, agreement”. But section 33(5) does not refer to payment bonds and section 33(1) of the Alberta Act provides for the subcontractor or sub-subcontractor to obtain a copy of the construction contract, but (unlike the Ontario and Saskatchewan Act) does not contain a right to obtain the details of and a copy of a payment bond from the owner, contractor or subcontractor, and section 33(2) imposes no sanctions for the failure to produce such a bond.

Does this omissions indicate that the Alberta legislature intended that the right to this information would be dealt with at common law, or did it intend that the subcontractor would not have a statutory right to this information but only a right to bring an application to obtain the information? Is the latter approach a practical way for subcontractors to obtain this information in the ordinary course of business?

Interestingly, Chapter 10 of recent study of the Ontario Construction Lien Act (Striking the Balance: Expert Review of Ontario’s Construction Lien Act; April 30, 2016) dealt specifically with surety bonds, and with third party rights under those bonds. The Report states the following:

“A contractor’s obligation to obtain a payment bond is provided for in the underlying contract between the owner and the contractor. As a result, subcontractors may not always be aware that a payment bond was issued with respect to the project. This is addressed in the current section 39 of the Act, which provides that a lien claimant or trust claimant is entitled to request a copy of any payment bond issued in respect of the contract.

The Report makes no recommendation relating to the issue presented by the Valard v. Bird case. Does that indicate the view of the authors or those who made submissions to them that this issue is not one suitable for legislative attention, or that, having regard to the specific rights provided in section 39 of the Ontario Act, the present Ontario statute law need not be altered?

Whatever the Supreme Court decides, it seems that the CCDC will have the final word so far as the future use of this specific payment bond. It can alter the bond to expressly state that the Obligee has, or does not have, the obligation to notify potential beneficiaries of the payment bond. Should it do so?

The trial judgment in this case was reviewed by me in an article dated April 15, 2016.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 15

Building Contracts – Payment Bonds – Fiduciary Duties – Notice of Existence of Bond

Thomas G. Heintzman O.C., Q.C., LLD. (Hon.), FCIArb                         May 25, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Recommendations To Amend Ontario’s Construction Lien Act

On April 30, 2016, a Report was delivered to the Ontario Government proposing amendments to the Ontario Construction Lien Act. This report may, in whole or in part, soon be implemented by the Ontario Legislature. For this reason, those engaged in the construction industry or construction litigation in Ontario must immediately become familiar with the recommendations.

There are 100 Recommendations in the report. They can be divided into seven parts:

  1. Amendments to the general provisions relating to the existence, protection and preservation        of liens;
  2. Summary procedures in lien actions;
  3. Construction Trusts;
  4. Prompt Payment;
  5. The introduction of Interim Adjudication in construction projects;
  6. Sureties;
  7. Technical Amendments.

There are 30 recommendations in the report relating to Summary Procedures and Interim Adjudication. Those recommendations concern the dispute resolution mechanisms for construction claims. While those recommendations are important, this article will concentrate on the recommendations relating to the existence and enforcement of lien claims, that is, the recommendations which affect the actual project, short of dispute resolution.

Those involved in the construction projects should be aware of all the important recommendations. They are listed in the Summary in Chapter 13 of the Report. That chapter indicates the page of the report where each individual recommendation is discussed, so the reader can then go back and review the Context, Stakeholder’s Views and the Analysis and detailed Recommendations of the authors of the Report with respect to each Recommendation.

The following are the Recommendations for changes to the Construction Lien Act that I consider to be particularly important or contentious, other than those in the Summary Procedures, Interim Adjudication and some of the Technical Recommendations. I have not included any of the Recommendations that the present provisions of the statute remain unchanged, only those where a change is recommended. The numbers of the Recommendations shown below are the actual numbers of the Recommendations in the Report.

The full Report may be viewed by googling Striking the Balance: Expert Review of Ontario’s Construction Lien Act, or at: https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/

Lienability

            Improvement and Capital Repairs

1-2.The definition of “improvement” should be amended to refer to “any alteration or addition to the land and any capital repair to the land”.

“Capital repair” includes all repairs intended to extend the normal economic life or to improve the value and productivity of the land, or building, structure or works on the land, but not maintenance work performed in order to prevent the normal deterioration of the land or building, structure or works on the land and to maintain them in a normal functional state.

Owner

  1. The definition of “owner” should be amended to provide for multiple owners on public-private partnership projects (“AFP projects”) involving a project manager (“Project Co”) so that Project Co is included as an owner (along with the Crown) and Project Co is responsible for maintaining holdbacks.

Price

  1. The definition of “price” should be amended to include direct out-of-pocket costs of extended duration. However, “price” should exclude damages for delay.

Whether cost arising from delay may be part of a lien claim has been an issue in many cases. This recommendation is that they should not. It may be particularly contentious as it relates, not to clarifying the statute, but to a substantive issue upon which the views of owners and contractors may differ.

Municipalities

  1. Municipal lands should not be subject to a court-ordered sale. Lien claims against a municipality should be “given” by delivery of notice of the lien to the municipality, and not registered.

Preservation, Perfection and Expiry of Liens

  1. The time period for preservation of a lien under section 31 of the Act should be extended to 60 calendar days, commencing as currently stipulated by the Act.
  1. Termination should be added to the list of events that triggers the commencement of the time limit for preserving a lien.
  1. The Act should prescribe a mandatory form of Notice of Termination or Abandonment to be published specifying a date upon which a contract has been abandoned or terminated.

These two provisions may be contentious due to the legal nature of the “termination” of contracts. If the contract contains a termination clause and that clause is activated, there should be no difficulty, but a so-called “termination” may occur due to repudiation by one party. The report appears to proceed on the basis that the repudiation itself gives rise to termination, and that the termination is of the entire contract. However, under contract law the “termination” arising from repudiation is a termination of the obligation of continued performance, and that termination only occurs when the repudiation by one party is accepted by the other party. The factual existence of repudiation and acceptance may well be in dispute. In addition, the contract is not “terminated” in law, and remains in existence for dispute resolution purposes. All of these factors will require careful legislative drafting in the adoption of this recommendation.

  1. The time period for perfection under section 36(2) of the Act should be increased to 90 days from the last day upon which that lien could have been preserved.

Under this recommendation and Recommendation 9, the total time to preserve and perfect a lien would now be 150 days.

Exaggerated Claims

  1. Section 35 of the Act, which imposes penalties for exaggerated claims, should be amended to replace the concept of “grossly inflated” liens with the concept of “wilfully exaggerated” liens, refocussing the threshold at a more sensitive level. As well, the court should be given the discretion to discharge a claim for lien in whole or in part if on a balance of probabilities it is established that the claim is frivolous, vexatious, or an abuse of process.
  1. The court should be allowed to find, where there is wilful exaggeration, that the lien claimant is liable for any damages incurred as a result of the exaggerated claim, including bond premiums, costs, and, where the court considers it just, the lien amount should be reduced by an amount up to the amount of the difference between the wilfully exaggerated amount and the actual amount of the lien claim; provided that a defence of good faith should be available to the lien claimant.

Condominiums

  1. After registration, the common elements in condominium buildings should have a single PIN that is subject to a lien, and the interests of all owners should be subject to this lien.
  1. Notice of lien should be given to the condominium corporation and the unit owners by way of a prescribed form.
  1. Condominium unit owners should be able to post security proportionate to their share of the lien to have the lien vacated.

Subdivisions

20. Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis.

Landlord and Tenant

  1. For improvements to leasehold properties, lien claims should attach to the interests of the tenant named in the lease and to the interest of the landlord if the landlord funded the improvement through a cash allowance or otherwise required the improvement; provided that the landlord’s liability should be limited to any deficiency in the holdback.
  2. Section 39 of the Act should be amended to allow lien claimants to obtain from landlords, tenants, and secured lenders all relevant information about the lease, the lender’s security, the funding available from the landlord and lender, and the state of accounts.

Holdback and Substantial Performance

  1. Section 2(1) of the Act should be amended to provide that a contract is substantially performed when the improvement or a substantial part thereof is ready for use or is being used for the purposes intended and if it is capable of completion at a cost of no more than 3 percent of the first $1,000,000.00 of the contract price, 2 percent of the next $1,000,000.00 of the contract price, and 1 percent of the balance.
  1. Section 2(3) of the Act should be amended to provide that “a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of (a) 1 percent of the contract price; and (b) $5,000”.
  1. The Act should be amended to provide for the mandatory release of holdback, but not the mandatory early release of holdback; that is to say, “may” should be revised to “shall” in sections 26 and 27 of the Act. The owner should be required to publish a notice of non-payment/set-off to interdict the obligation to pay where the owner, in good faith, intends to assert a set-off in relation to the contract.
  1. The Act should be amended to permit partial release of holdback on either a phased or annual basis, if provided for in the construction contract entered into by the parties, subject to a significant monetary and time-based threshold in the case of annual release.
  1. The Act should be amended to allow for the segmentation of holdback for projects involving clearly separable improvements.
  1. There should be no provision for mandatory early release of holdback for design consultants in respect of services supplied up to the commencement of construction; but the Act should permit the designation of a design phase for the purposes of phased release of holdback.
  1. The Act should be amended to allow for deferral agreements to be entered into between owners and contractors provided that such agreements are for the purpose of allowing certification and publication of substantial performance, subject to an appropriate threshold.
  1. The current holdback scheme should be supplemented by allowing the replacement of cash holdback with a Letter of Credit or a demand-worded Holdback Repayment Bond.

Construction Trusts

43. The Act should be amended to require that a trustee must follow specific statutory requirements in relation to trust fund bookkeeping similar to that applied in the New York Lien Law, including the following:

  • If a trustee deposits trust funds they are to be deposited in the trustee’s name;
  • The trustee is not required to keep the funds of separate trusts in separate bank accounts or deposits provided that his books and records of account clearly show the allocation to each trust of the funds deposited in the general account;
  • The trustee must keep separate books for each trust for which it is trustee (and if funds of separate trusts are in the same bank account, the trustee is to keep a record of such account showing the allocation to each trust of deposits and withdrawals); and
  • The books and records of each trust must show specifically articulated particulars with respect to assets receivable, assets payable, trust funds received, trust payments made with trust assets and any transfers made for the purpose of the trust.

Promptness of Payment

47. A prompt payment regime should be legislated in Ontario and it should apply to both the public and private sectors. Prompt payment should be implemented by creating a statutory scheme to be implied into all construction contracts that do not contain equivalent terms.

The introduction of a prompt payment regime may be one of the most contentious Recommendations as the interests of owners and contractors are not necessarily aligned on this issue. In addition, a prompt payment regime is often intended to address a “pay when paid” clause, and such a clause and its effect and enforceability are themselves contentious issues.

48. The prompt payment regime should apply at the level of the owner-general contractor, general contractor-subcontractor, and downwards, and the legislation should provide a mechanism for general contractors to notify subcontractors of non-payment by owners, with reasonable particulars, and to undertake to commence or continue proceedings necessary to enforce payment so as to defer their payment obligations.

  1. The trigger for payment should be the delivery of a proper invoice; provided that certification for payment (if there is certification for payment provided in the contract) must follow submission.
  1. As between:
  • The owner and general contractor a 28 day payment period should be applied, that is triggered by the submission of a proper invoice.
  • The general contractor and subcontractor, a further 7 days from receipt of payment from the owner would be permitted.
  1. Parties should be free to contract in respect of payment terms, but that if they fail to do so, monthly payments should be implied.
  1. Payers should be permitted to deliver a notice of intention to withhold payment within 7 days following receipt of a purported proper invoice and that the notice of intention to withhold must set out the quantum of the amount withheld and adequate particulars as to why that amount is being held back. Undisputed amounts should be paid. Also, the right to withhold should relate only to the contract at issue.
  1. A payer should continue to be able to set off all outstanding debts, claims or damages but that the right of set off not extend to set-offs for debts, claims and damages in relation to other contracts.

The proposed exclusion of set-offs for debts, claims and damages relating to other contracts is a very material change from the present statute.

54. Mandatory non-waiveable interest should be required to be paid on late payments at a rate of the greater of the pre-judgment interest rate in the Court of Justice Act or the contractual rate of interest.

The removal of any discretion not to award interest is a departure from the usual authority that a court has to not award interest.

55.  A right of suspension of further work should arise after an adjudication determination has been rendered and a payer has refused or failed to comply with the adjudicator’s determination.

56. The Act should require disclosure to all subcontractors that they are bidding on a project with a milestone-based payment mechanism.

Surety Bonds

45, 46 and 79. The Act should be amended to require broad form surety bonds to be issued for all public sector projects. The form of such surety bonds should be developed in consultation with the Surety Association of Canada, and once finalized they should become Forms under the Act.

  1. The Act should be amended to require sureties to pay all undisputed amounts within a reasonable time from the receipt of a payment bond claim.
  1. A Regulation to the Act should be promulgated to embody a surety claims handling protocol, and that such surety claims handling protocol be developed in consultation with the Surety Association of Canada.

Technical Amendments

  1. The Act should be clarified to confirm that the following irregularities may be cured so long as no prejudice is caused to other parties.
    • Failure to correctly name the owner and or person to whom materials and services were supplied;
    • Minor errors in the legal description; and
    • Inserting an owner’s name in the wrong part of a statement.

This recommendation would permit the court to relieve against mistakes in the lien claim relating to the name of the owner or lien claimant which under present case law are not correctable under section 6 of the Act.

  1. Separate forms (available electronically and physically) should be implemented: one to release a lien, one to discharge a lien or certificate of action, and one to vacate the registration of a claim for lien or certificate of action.
  1. Modifications should be made to the requirements of section 32(2) of the Act to incorporate the legal description, including PINs and specific municipal address (es); and in the case of a lien to be given (i.e. where the lien does not attach to the land), the name and address of the person(s) to whom a claim for lien must be given.

Notice of Liens

  1. The definition of “written notice of a lien” should be amended to provide further particulars as to service and a form of written notice of lien should be added to the regulations.

This recommendation will clarify the present case law relating to what amounts to the delivery of notice of a lien.

  1. Section 44 should be amended to provide for the posting of security to vacate a written notice of lien. And the withdrawal of a “written notice of lien” should also be in a prescribed form.
  1. Section 39 should be amended to clarify what type of information the person making the request is entitled to and, in particular, what constitutes a “state of accounts” under section 39(1)1.iii, and should include: the value of the work done, the amount paid, the amount held back pursuant to the Act, the balance owed, and leasehold information.
  1. The amount of security that to be posted to vacate a lien under section 44(1) should be amended to include the total of the full amount claimed as owing in the claim for lien and the lesser of 25% or $250,000 of the amount of the lien claim as security for costs.
  1. Letters of Credit with reference to International Commercial Conventions should be accepted as security, provided the Letter of Credit is unconditional, the International Commercial Convention is written into the terms of the credit, and it is accepted by a bank listed under Schedule I of the Bank Act, S.C. 1991, c. 46. Sched. 1 operating in Ontario.

This recommendation should clear up the contentious case law about what security is acceptable under the International Commercial Conventions.

Mortgages

  1. When a mortgagee makes a loan for the purpose of financing both land acquisition and the construction of an improvement, the mortgagee should be required to identify the amount intended for the acquisition of land and the amount intended for the improvement(s) to and/or on the land in mortgage documents.

See Heintzman and Goldsmith on Canadian Building Contracts, (5th ed.), chapter 16

Building contracts –construction and builders liens –amendments to Ontario’s Construction Lien Act

Thomas G. Heintzman O.C., Q.C., LLD (Hon.), FCIArb                         May 1, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

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