When The Contractor Plays Hard-Ball What Does A Sub-Contractor Do; Peter Kiewit Redux?

An age-old problem arising from a tender on a construction project is:   what does a sub-contractor do when it is the successful bidder but believes that the work is different than shown in the tender documents and the contractor says:  Those are the conditions: Take ‘em or leave ‘em.   But if you back out of your bid, I am going to sue you!

Should the sub-contractor perform the work and sue later, or leave the job?  That is the issue that, once again, the Superior Court of Ontario faced in Asco Construction ltd. v. Epoxy Solutions Inc.

Asco was the general contractor and Epoxy was the successful bidder for the concrete floor subcontract on a theatre construction project.  As part of the tender process, the subcontractors were provided with a sketch of the floor levels.  After signing a letter of intent, Epoxy had a surveyor check the elevations on the site and found that the elevations were substantially different than represented in the sketches.

Asco demanded that Epoxy proceed with the job, asserting that Epoxy should have checked the levels before bidding. Epoxy asserted that Asco was in breach of the terms of the tender. In the result, Epoxy refused to sign the formal subcontract or proceed with the job.  Asco retained a new subcontractor and sued Epoxy for the higher cost of that subcontract, and Epoxy counterclaimed for damages for breach of the tender.

The trial judge quoted from the harsh and oft-cited judgment of the Supreme Court of Canada in Peter Kiewit Sons’ Co. v. Eakins Construction Ltd, [1960] S.C.R. 361.  Showing little sympathy for the predicament of the subcontractor in this situation, the Supreme Court said:

“Nothing could be clearer. One party says that it is being told to do more than the contract calls for. The engineer insists that the work is according to contract and no more, and that what is asserted to be extra work is not extra work and will not be paid for.  The main contractor tells the sub-contractor that it will have to follow the orders of the engineer and makes no promise of additional remuneration. In these circumstances the subcontractor continues with the work.  It must be working under the contract. How can this contract be abrogated and another substituted in its place?… Whatever Eakins recovers in this case is under the terms of the original sub-contract and the provisions of the main contract relating to extras.

…The work was not done as an extra and there can be no recovery for it on that basis. When this position became clear, and it became clear before any work was done, the remedy of the Eakins company was to refuse further performance except on its own interpretation of the contract and, if this performance was rejected, to elect to treat the contract as repudiated and to sue for damages.”

Following that approach, the trial judge in the present case held that Epoxy had only two options.

One was to sign the formal contract, and renounce any claim for additional payment or damages.

The other was to renounce its bid and refuse to proceed with the sub-contract.

The trial judge found that the elevation conditions were materially different than represented in the invitation to tender, and therefore the contractor had repudiated Contract A arising from the tender process.  The sub-contractor was entitled to accept that repudiation, terminate that contract and recover damages.

In arriving at that conclusion, the trial judge relied upon Goldsmith & Heintzman on Canadian Building Contract (4thed) at pages 1-60, 4-19 to 21, 5-8 and 7-4.

The decision of the subcontractor to terminate the contract was a gutsy one.  After all, the subcontractor is exposing itself to a claim by the contractor for substantial damages.  But the other choice was to proceed with the sub-contract under apparently changed circumstances, which might have been equally onerous.  Is there no better solution?

Surely there should be a better solution than these two stark alternatives.  One would think that, in the 50 years since the Peter Kiewit decision, Canadian construction law would have come up with one.

At least three solutions are apparent.

One solution would be to permit the subcontractor to deliver a notice stating that it was performing the work under protest, and asserting that the claim for extra payment is to be resolved later.  That notice would contradict the suggestion that the subcontractor was agreeing to perform the work in accordance with the contract.  In other fields of business, performance or acceptance under protest has been held effective to contradict the assertion that the party giving the notice had agreed to perform under or accept the terms of the contract.

But to date, there is no evidence that Canadian courts will give effect to such a notice in the field of construction law.  Some might say that allowing the dispute to remain open under such a notice does not fit in with the need for consensus on the job site during the project. But this objection seems unreasonable since the parties would still accept that the project was proceeding under the terms of the contract, and they would only be reserving their financial position until later.  Moreover, this sort of solution might encourage the parties to settle their differences immediately.

Another solution is to have the parties agree that the subcontractor will proceed with the job on the basis that its claim for further payment will be dealt with later.  This solution could only be implemented with the consent of both parties and would have the same effect as performance under protest in terms of delaying the resolution of the dispute to later.

The third solution is to have the dispute resolved immediately by a process in which the parties have confidence.  It may be unlikely that the parties would have confidence in the consultant chosen by the owner.  But other means of immediate resolution of the dispute are certainly available.  However, parties to most construction projects seem unwilling to put this sort of an interim dispute resolution regime in place during the project.

Whatever the solution, it certainly seems that the hard-ball approach of Peter Kiewit is out of step with the modern approach to dispute resolution and the efficient performance of building contracts.

Building Contract  –  Tender  –  Repudiation  

Asco Construction ltd. v. Epoxy Solutions Inc., 2011 ONSC 2454.

Thomas G. Heintzman, O.C., Q.C.                                                                               September 4, 2011

www.constructionlawcanada.com

www.heintzmanadr.com

Does The Competence-Competence Principle Apply To Third Parties To An Arbitration Agreement?

The competence of an arbitral tribunal to determine its own competence has become firmly rooted in Canadian law.  But what happens when the tribunal has to decide issues which directly affect third parties?

In Ontario v. Imperial Tobacco Canada Limited, the Court of Appeal for Ontario recently held that, in that circumstance, the principle does not require the court to allow the arbitral tribunal to first rule on its competence. This decision is of considerable importance because it involved the disputed confrontation of multiple court actions.  It may signal the future attitude of Canadian courts in favour of the resolution by courts, and not arbitrators, if jurisdictional disputes arise out of court proceedings.

The governments of Canada and the provinces brought an action against Imperial Tobacco as a result of cross-border smuggling.  That action was settled by a Comprehensive Settlement Agreement (“CSA”).  Under the CSA, Imperial Tobacco agreed to pay $350 million to the governments over 15 years in exchange for a release relating to any claims arising out of the smuggling of tobacco or Imperial Tobacco’s failure to pay taxes on smuggled or imported tobacco.

The release in the CSA contained two protections for Imperial Tobacco.  

First,  in the event of a claim by a one of the releasing entities, the release could be relied upon as a complete defence (the “release issue”).

Second, if Imperial Tobacco incurred any liabilities in any way connected to or arising out of the released claims, then the payments by Imperial Tobacco to the governments were to be proportionately reduced, and in the event of dispute, were to be paid into an escrow fund (the “escrow fund issue”).

The CSA stated that any disputes between the parties were to be arbitrated under the federal Commercial Arbitration Act.  The notice of arbitration was to be given by either the government of Canada or Imperial Tobacco, and not by the provinces, but the arbitration was to be between the parties to the CSA.

Imperial Tobacco was then sued in a class action by the Ontario Flue-Cured Tobacco Growers’ Marketing Board (the “Tobacco Board”).  The class action was on behalf of tobacco farmers.  The action alleged that Imperial Tobacco had unlawfully paid lower prices to the Tobacco Board for tobacco exported from Canada and smuggled back into Canada.  The action claimed $50 million as being the difference between what Imperial Tobacco paid and what it ought to have paid for exported tobacco.

Imperial Tobacco then gave notice under the CSA that it would pay the amounts claimed in the class action into the escrow fund. Imperial Tobacco took the position that the Tobacco Board was an entity claiming through a releasing entity and that the Tobacco Board’s claim was a claim relating to or arising from the released claims.  If Imperial Tobacco was correct, and if the Tobacco Board was bound by the CSA, then the release might well be effective against the Tobacco Board as well as the governments.

In response, the government of Ontario brought an application in the Ontario Superior Court for a declaration that Imperial Tobacco was not entitled to withhold annual payments to Ontario, taking the diametrically opposed view as to the effect of the release in relation to the Tobacco Board’s claim.

Imperial Tobacco then brought a motion to dismiss Ontario’s application on the ground that Ontario’s claim was required to be determined by arbitration.  The Superior Court judge granted the motion and dismissed Ontario’s application, holding that Ontario’s claim must be determined by arbitration.

By a majority, the Court of Appeal for Ontario allowed the appeal in part, and directed that Ontario’s application with respect to the escrow fund issue proceed to a hearing.  However, the reasons of the majority and minority are not necessarily on the same waive length so far as the reasons for doing so are concerned.

The minority judge, Justice Juriansz, held that the principle of competence-competence applied to all elements of the jurisdictional dispute. Whether or not Ontario or the Tobacco Board were parties to the CSA and the arbitration agreement in the CSA, and whether or not the Tobacco Board’s claim fell within that agreement, were not pure questions of law.  Accordingly, he held that the jurisdictional issues raised by those questions should first be determined by the arbitral tribunal in accordance with the principle of competence-competence..

The majority agreed that the competence-competence principle was at issue.  The majority also agreed that, so far as the escrow fund issue, that dispute directly affected Ontario and did not affect the Tobacco Board.  In its view, this issue only involved the question of whether Ontario was bound by the CSA, and did not involve any question of whether the Tobacco Board was bound by the CSA.  Accordingly, the challenge to the arbitrator’s jurisdiction concerning the right of Imperial Tobacco to pay the monies into the escrow fund was required to be first dealt with by the arbitral tribunal.

However, the majority arrived at a different conclusion relating to the release issue, namely the right of Imperial Tobacco to rely upon the release in relation to the Tobacco Board’s action.  In the majority’s view, that issue raised the question of whether the Tobacco Board was a party to the CSA and its arbitration provisions, and therefore bound by the arbitral proceedings and result.  In the majority’s view, that was a jurisdictional issue of a pure legal nature which, under the competence-competence principle, the court could resolve itself without referring it to the arbitral tribunal.

The majority arrived at this conclusion as follows:

“Here, no one contends that the Tobacco Board is a party to the Agreement and its arbitration provisions….There is equally no doubt that the Tobacco Board has a vital interest in the question raised by the application…The answer could provide [Imperial Tobacco] with a  complete defence to its action, or could eliminate that possibility. The arbitrator cannot resolve that question posed by the application because the Tobacco Board is not a party to the Agreement or its arbitration provisions.  The arbitrator has no jurisdiction to determine the Tobacco Board’s rights. The question asked of the court must… be determined in a forum in which the Tobacco Board has the right to participate.  Hence the application should not be stayed in preference to arbitration.”

Here, the majority concluded that the jurisdictional issue was so clear and indeed admitted that it need not be determined by the arbitral tribunal at all.  However, this conclusion seems odd in the circumstances.  The majority seems to have disposed of the issue by the assumption made in raising it.

First , if it was so clear that the Tobacco Board was not a party to the CSA, then one wonders what the jurisdictional dispute was all about in the first place.  In his decision, Justice Juriansz squarely raises the issue as to whether the Tobacco Board was a party to or bound by the CSA.  If the Tobacco Board was so clearly not a party to or bound by the CSA, and if Imperial Tobacco had admitted that fact, then one could be confident that the arbitral tribunal would so hold, and that any decision of that tribunal would not be binding on the Tobacco Board in any event.

Second, it would seem better to have one tribunal deal with both the release and escrow fund issues at the same time.  It is not clear how those two rights could be separated, and how a court or arbitral tribunal could find that the Tobacco Board’s claim falls within the CSA for one of those rights and not for the other.  Indeed, having arrived at its conclusion, one wonders why the majority did not direct both issues to be determined by the court, to save time and money and avoid conflicting decisions.

Whatever the merits of the jurisdictional dispute may be, this decision of the Ontario Court of Appeal is just the next chapter in the evolving Canadian story about the principle of competence-competence.

This chapter is about a jurisdictional dispute generated by one court action at the front end (the governments’ action against Imperial Tobacco) and another court action at the back end (the Tobacco Board’s class action).  This chapter tells us that when the dispute is so firmly rooted in court proceedings, and when the plaintiff in one action has no clear right to participate in the arbitration of the dispute, then a court will be concerned about due process and fairness.  The court will be reluctant to allow any jurisdictional disputes about the intersection of those two court cases to be dealt with by an arbitrator, even in the first instance.

Arbitration  –  Third Parties  –  Competence  –  Class Action 

Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525

Thomas G. Heintzman, O.C., Q.C.                                                                                August 28, 2011

www.constructionlawcanada.com

www.heintzmanadr.com

Should A Court Or An Arbitral Tribunal Resolve Domain Name Disputes?

The Court of Appeal for Ontario has just released its decision in Tucows.Com Co. v. Lojas Renner S.A.  This decision is a legal landmark in relation to Internet domain names. The Court held that domain names are personal property and may be the subject matter of an action which may be served on a defendant outside Ontario.

This aspect of the decision has been widely reported. But there is another aspect of the decision which is important to the law of arbitration. That issue relates to the proper response by courts when an arbitral tribunal decides not to hear a dispute.  Should the court nevertheless hold that arbitration is preferable to court proceedings and send the dispute back to arbitration?

Tucows is a Canadian company which purchased the domain name “renner.com” from Mailbank Inc., the registrant of that domain name, with the International Corporation for Assigned Names and Numbers (ICANN).  Renner is a Brazilian company which carries on business under that name in Brazil and owns the trade mark in that name in Brazil and other countries.

Renner commenced a claim against Tucows under the Uniform Names Dispute Resolution Policy (“UDRP”) maintained by ICANN.  Under the UDRP Rules, Renner selected arbitration through the World Intellectual Property Organization (”WIPO”).  Instead of responding to the arbitration, Tucows commenced an action in the Ontario Superior Court claiming a declaration of its rights in the domain name and that Renner was not entitled to a transfer of the domain name.

Tucows asked the WIPO Administrative Panel to suspend or terminate its proceedings in light of the Ontario action.  That Panel decided to do so.  It ruled that the issues in the Ontario action were substantially identical to the WIPO proceeding. The Panel cited prior decisions in which WIPO panels had deferred to courts.  It noted that there was some conflict in the decisions of past WIPO panels on the issues raised in the proceeding.  It held that a court could better deal with the factual issues and that an “authoritative court decision” on the legal issues would be of assistance.

Renner then brought a motion to stay the Ontario action.  The Superior Court stayed the action, holding that the WIPO proceeding was more suited to the resolution of the dispute and that if the Court accepted jurisdiction it would undermine the administrative process for resolving disputes over domain names.

The Court of Appeal allowed the appeal and permitted the Ontario action to proceed.  The Appeal Court observed that the UDRP Rules do not establish the UDRP procedures as the sole means to resolve disputes over domain names.  Those Rules expressly contemplate parties resolving their dispute in court proceedings.  The Court also noted that ICANN had stated that UDRP procedures are particularly suited to “abusive registration” cases, and not to legitimate trade mark or trade name disputes which are relegated by the UDRP Rules to the courts. The Court of Appeal held that the reasons of the WIPO Administrative panel for declining jurisdiction were reasonable and should be accorded deference.

The Court of Appeal held that Tucows’ claim for a declaration was a sufficient “cause of action” to fall within the Ontario Rules of Civil Procedure allowing service of the Statement of Claim outside Ontario.  The Court also held that the rights to a domain name are personal property because the rights holder “can enforce those rights against all others.”

Besides being a landmark decision relating to the Internet, this decision is also important for arbitration law.  It reminds us to ask two important questions:

First, what is the true nature and purpose of the jurisdiction of the arbitration regime?  Is that regime intended to be exclusive or not?  In the present case, the Court of Appeal was impressed by the ICANN policy that the UDRP Rules and procedures are not intended to be exclusive and are not intended to apply to legitimate trade mark disputes.

The same issue may arise under any contract, including a construction contract. The first question is not necessarily:  Does this dispute fall within the arbitration clause?  The first question may be:  Was this dispute intended to be within the exclusive jurisdiction of the arbitration tribunal?

The second question raised by this decision is:  What is the role of the arbitral tribunal in declining jurisdiction, and what is the appropriate response of the court to such a decision by an arbitral tribunal?

This case was not about whether one of the parties could decline to participate in the arbitration.  This case was about whether the arbitral tribunal could allow a party to do so.

The Supreme Court of Canada has recently adopted the competence-competence principle in relation to the determination of the jurisdiction of an arbitral tribunal: Seidel v. TELUS Communications Inc. 2011 SCC 15; Dell Computer Corp. v. Union des consummateurs (2007), 2 S.C.R. 801.  Under that principle, the arbitral tribunal is competent to rule on its own competence. Accordingly, that tribunal and not the court should first decide on the jurisdiction of the arbitral tribunal unless the jurisdictional issue is essentially a legal one.

In the present case the Court of Appeal held that the arbitral tribunal had the jurisdiction to make a decision to decline jurisdiction.  Having done so, the same competence-competence principle required the court to respect that decision and allow the Ontario action to proceed.

This decision raises two further questions:

First, if the arbitration agreement gives no discretion on the matter, can the arbitral tribunal nevertheless exercise a discretion to decline jurisdiction in favour of the court?  Likely not, since the arbitral tribunal’s declining of jurisdiction would itself amount to a jurisdictional error.

Second, if the WIPO tribunal had decided to the contrary, and insisted on dealing with the dispute, would the Ontario court have respected that decision or would it have allowed the action to proceed?  The likely answer is as follows:

If, after giving full deference to that arbitral decision, the Ontario court had concluded that the tribunal had acted within its jurisdiction, then the court would have upheld it and stayed the Ontario action.

If, on the other hand, the Ontario court had concluded that, having regard to the ICANN regime and the UDRP Rules, the WIPO tribunal had erred in jurisdiction by proceeding with the substantive dispute over trade names, then the Ontario court would likely have held that the Ontario action could proceed alongside the WIPO proceeding.

The same result could occur in any contractual dispute.  If a Canadian court concludes that the arbitral tribunal made a jurisdictional error in accepting jurisdiction over the dispute, then the court might well allow an action to proceed alongside the arbitration.

All of these issues are a consequence of the competence-competence policy adopted by Canadian courts.  Except in instances of pure legal controversy, that policy allows arbitrators, and not the courts, to initially decide the jurisdiction of the arbitral tribunal.  That policy also requires that the courts accord deference to the arbitrators’ jurisdictional decision, whether that decision is to accept or decline jurisdiction.  Implementing that policy, the Court of Appeal held that the decision of the WIPO tribunal to decline jurisdiction in favour of court proceedings should be respected and implemented.

Arbitration  –  Stay of court proceedings –  Exclusive jurisdiction   –  Competence-Competence

Tucows.Com Co. v. Lojas Renner S.A., 2011 ONCA 548

Thomas G. Heintzman, O.C., Q.C.                                                                                August 21, 2011

www.constructionlawcanada.com

www.heintzmanadr.com

How Does A Court Find And Interpret An Oral Construction Contract

Construction Contract  –  Interpretation – Oral Contract

A contract in the construction industry is usually in written form.  Often the contract will follow the CCDC form of contract.  But what principles should apply to the interpretation of oral contracts?  The British Columbia Court of Appeal recently addressed this issue in Copcan Contacting Ltd v. Ashlaur Trading Inc.

The alleged contract was for the logging of lands in British Columbia.  While the contract was not for the construction of a building, the principles that the court applied are the same that are applied to building contracts.

The parties did not agree that there was a contract, and if there was such a contract, what the terms of it were.  The plaintiff asserted that there was a contract and the defendant said that there was not.  The trial judge held that there was a contract.  An appeal was taken to the British Columbia Court of Appeal.

The parties acknowledged that the test to determine whether there was a contract was an objective test, that is, whether a reasonable bystander observing the parties would have concluded that they had made a contract.  In dealing with this question and with the question of what terms the contract (if made) contained, the Court of Appeal held that two principles applied.

 First, the Court must assume that the parties understand the business environment in which they were conducting their negotiations.  As the court said, the issue “must be viewed from the perspective of a reasonable person familiar with contracting practices in the British Columbia logging industry.”

Second, since the contract was an oral contract, the court would give a certain latitude or flexibility in determining what the terms of the contract were.  The court held that, having found there was an oral contract, the trial judge “was therefore entitled to exercise greater flexibility in the use of evidence in order to construe the contractual terms than can be utilized where the terms of the contract have been reduced to writing.”

In arriving at this latter conclusion, the Court of Appeal relied upon the reasoning in one of its prior decisions in which it had said that “this flexibility follows intuitively from the recognition that oral contracts must often be construed without the key interpretive tool used to understand written contracts – the words of the agreement.”

This decision demonstrates the inclination of a court to ensure that the reasonable expectations of the parties are not disappointed if, on the evidence, the court is satisfied that the parties made a contract.  Of course, the party asserting that a contract was made must demonstrate that fact on a balance of probabilities.  But if the court is satisfied that they did, then the court will be receptive to arguments about the contents of the contract in such a way that will give effect to the contract.

This decision is also a handy reference in relation to any dispute over an alleged oral contract.  It contains the three essential principles applicable to the existence and terms of the oral contract: the objective test to determine its existence; the industry perspective from which the parties must be assumed to be acting; and the flexibility with which the court will determine the terms of the contract.

See Goldsmith and Heintzman on Canadian Building Contracts, Chapter 1, Parts 1(b)-(c) and 3

Construction Contract  –  Interpretation  –  Oral Contract :

 Copcan Contracting Ltd v. Ashlaur Trading Inc., 2010 BCCA 597

Thomas G. Heintzman O.C., Q.C.                                                                           August 8, 2011

www.constructionlawcanada.com

www.heintzmanadr.com

The Equitable Doctrine of Marshalling Applies To Construction Liens

Construction Law  –  Construction liens  –  Marshalling

The Construction Lien Act seems to be a world unto itself, unaffected by the general principles of law.  But the recent decision of the Alberta Queen’s Bench in Gerrow v. Dorais reminds us that a construction lien is one form of secured interest.  The lien is therefore subject to the general principles of the law of mortgages and secured interests.  The court held that a construction lien is subject to the age-old equitable principle of marshalling.  This principle can be of great help to lien holders seeking to recover value from a highly mortgaged property.

The principle of marshalling applies if a creditor has security over two or more properties and there are creditors that have subsequent security over fewer properties.  The prior secured creditor is required to recover its debt in a fashion which is least injurious to the subsequent encumbrancers.  So, if the first mortgagee has security over two properties, and a subsequent mortgagee has security over only one of those properties, the first mortgagee is required to recover the debt, to the extent possible, from the property which does not have a second mortgage, leaving the other property, to the extent possible, available to satisfy the second mortgage.

In Gerrow v. Dorais, the Alberta Court of Queen’s Bench held that the principle of marshalling, developed long ago in relation to mortgages, applies to all secured indebtedness, not just mortgages.  Accordingly, the Court held that the principle applied to construction liens.  Lien holders are entitled to insist that a prior mortgagee must first satisfy the mortgage debt out of properties in which the lien holders hold no security.  Only to the extent that the mortgage debt cannot be paid out of other secured property can the mortgagee look to the property upon which the lien holders have registered liens.  In this fashion, value can be freed up for the lien holders even though the property is apparently highly mortgaged.

However, the Court held that the principle of apportionment must also be applied, in order to ensure fairness.  Under this principle, the marshalling of the prior mortgages must be effected according to the value of the properties, especially when there are several layers of mortgages and a competition between second mortgages and lien holders.  In this case, the lien holders objected to the application of the principle of apportionment as it meant that some of the recovery by the first mortgagee was apportioned to the land upon which they had registered liens.  However, the Court held that the principle of apportionment –and marshalling – applied, thereby apparently eliminating or diminishing the lien holders’ rights.

These equitable principles may appear arcane and confusing, but they are extremely important in sorting out the rights of lien holders in relation to other secured claims.  The construction and building lien statutes do contain rules relating to priorities between liens and mortgages.  But those rules are not a closed universe.  There are other long-standing principles that may substantially affect priorities of lien holders.  Marshalling and apportionment are just two of those principles.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed.), Chapter 11, Part 2(h)

Construction Law – Construction liens-  Marshalling:    Gerrow v. Dorais, 2010 ABQB 560

Thomas G. Heintzman, O.C., Q.C.                                                                               August 1, 2011

www.constructionlawcanada.com
www.heintzmanadr.com

Can A Party Enforce An Arbitration Award In One Court And Litigate The Issue In Another Court?

Arbitration  –  Enforcement  –  Anti-Suit Injunction

The Ontario courts have recently considered two issues with respect to the enforcement of an arbitration award:

Should the court refuse to enforce an award because the party which seeks to enforce it is taking proceedings in another jurisdiction which contradict the award?

And should an anti-suit injunction be issued against that party to stop those other proceedings?

In Accentuate Ltd v. Asigra Inc, the Ontario courts answered No.  While this result occurred in the context of an international arbitration, the result would seem to be as applicable to arbitrations under domestic construction contracts.

Accentuate is a United Kingdom company and Asigra is an Ontario company.  They entered into a contract whereby Accentuate would act as a reseller of Asigra’s products in the UK.   The contract provided that the law of Ontario governed the contract and that all disputes would be resolved by arbitration in Toronto under the UNCITRAL Arbitration Rules.

In 2006, Asigra terminated the contract, first with six months notice and then peremptorily for cause.  Accentuate gave notice that it claimed damages for wrongful termination.  While it acknowledged that its claim was to be dealt with under the arbitration provisions of the contract, it also took the position that it was entitled to certain rights under the Commercial Agents Regulations of the UK and that those rights could not be excluded by the contract.

The arbitration occurred in Toronto.  The tribunal held that it had jurisdiction to deal with the claim under the UK Commercial Agents Regulations and to determine whether those Regulations applied.  It held that those Regulations did not apply as the parties had chosen the law of Ontario to apply to their arrangements.

The arbitration tribunal awarded $14,112.32 and interest to Accentuate.  Unhappy with the amount of this award, Accentuate commenced proceedings in the UK courts based on the Regulations.  The UK court held that Accentuate was entitled to bring its claim in the UK courts, but at the time of the enforcement proceedings in Ontario the UK court had not adjudicated upon the substantive issue.

At the same time Accentuate applied to the Ontario court to enforce the award.  Asigra submitted that the Ontario court should not enforce the award at the instance of Accentuate when Accentuate was pursuing a remedy, and effectively impugning the award, in the UK courts.  Asigra argued that Accentuate’s position amounted to an abuse of process.  Asigra also asked the Ontario court to issue an anti-suit injunction against Accentuate to prohibit Accentuate from continuing with its UK action.

The Ontario Superior Court of Justice disagreed.  It held that the arbitral award was final and would not be altered by the outcome of the English proceedings.  It decided that the conduct of Accentuate did not amount to a public policy consideration that precluded Accentuate from enforcing the award.

The Ontario court also refused to issue an anti-suit injunction.  It held that this case was not one in which one tribunal had been given jurisdiction by the parties under their contract and one of the parties, Accentuate, had gone off to another jurisdiction which had improperly accepted jurisdiction.  Here, the parties had gone through the very arbitration proceedings which they both agreed should apply.  Accentuate now asserted that it had additional rights not determinable under that arbitration proceeding. The Ontario court held that it should not preclude the arbitration decision from being enforced by Accentuate in Ontario merely because Accentuate was maintaining that other claim in the United Kingdom.

The Ontario Court of Appeal dismissed the appeal.  It agreed with the Superior Court that Accentuate’s “re-litigation” in the UK of issues between the parties did not warrant a refusal by the Ontario courts to enforce the arbitral award.  The arbitration award was a final award, and Accentuate’s conduct did not amount to a policy reason for not enforcing the award.

This decision is a clear reminder of the power and effect of an arbitral award, and the direction in Article 36 of the UNCITRAL Model Law.  Unless there are strong public policy reasons for not doing so, arbitral awards must be enforced by the courts.  If they are not, then the efficacy of the whole arbitration process is undermined.

Ironically and unusually, in the present case the party which was enforcing the award was the one which was discontented with it.  That party was apparently acting contrary to the award (or at least continuing the dispute in another court) while at the same time seeking to enforce it.  But that did not change the principle.  And the principle required the court to enforce the award, whatever the result of the UK proceedings might be.

The same principle applies under domestic arbitration law.  Section 50 of the Ontario Arbitration Act, 1991 provides that, on the application of a party to a non-family arbitration, the Superior Court “shall give judgment enforcing an award” unless the award is under appeal or subject to an application to set it aside or has been set aside.  In view of this mandatory statutory direction, arbitration awards will be enforced without regard to other considerations, unless the award has been or is being impugned by appeal or judicial review.

 

Arbitration – Enforcement – Anti-Suit Injunction

Accentuate Ltd v. Asigra Inc, 2010 ONSC 3364; 2011 ONCA 99 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                                                July 24, 2011

www.constructionlawcanada.com

When Does The Negotiation End And The Limitation Period Begin For An Arbitration Claim?

Construction Law – Arbitration – Negotiations – Limitation Periods – Contract

An arbitration clause in a construction contract may be written in a way that encourages the parties to settle their differences by negotiation and agreement. But if the parties attempt to do so and fail, can one of the parties then say to the other: “Gotcha! The limitation period for your claim has now passed!” That is the issue which the Ontario Court of Appeal recently addressed in L-3 Communication Spar Aerospace Limited v. CAE Inc.

SPAR was awarded a contract to develop a hardware and software system. SPAR subcontracted some of the deliverables to CAE. SPAR was required to deliver data about those deliverables to CAE within a certain timetable. The subcontract said that if the data was not delivered within 90 days of that timetable “and the parties cannot agree to a price adjustment due to the delay….beyond the 90 days”, then CAE was relieved of its obligations under the subcontract “only to the extent that performance is not possible as a direct result of Spar to provide that information”. The subcontract then stated: “The price and other adjustments that are not agreed between the parties may be referred to arbitration” under the arbitration clause in the contract.

SPAR provided certain data to CAE, but CAE took the position that it was inadequate, and that SPAR should obtain further data from the vendors of the relevant software to SPAR. Spar refused to do so, and its refusal to do so was clear by November 2005. CAE proceeded to obtain the data from SPAR’s vendors. CAE’s evidence was that it had discussions with SPAR about settling the question of who would pay for the cost of obtaining that data.

When the cost and price issue was not settled by December 2008, CAE demanded payment for the cost of obtaining the data from SPAR’s suppliers. SPAR responded by stating that CAE’s demand was premature and that CAE was required to proceed by way of the arbitration. When CAE then delivered a Request to Arbitrate in January 2009, SPAR took the position that CAE’s arbitration claim was barred by the two year limitation period in Ontario. SPAR said that the limitation period commenced in November 2005 when SPAR unequivocally said that it would not obtain the data. SPAR commenced a court application for a declaration to that effect.

The Ontario Superior Court dismissed SPAR’s application and its decision was upheld by the Ontario Court of Appeal.

The Superior Court held that, under the wording of the subcontract, the right to arbitrate arose and the limitation period for CAE’s claim commenced, not from the date that SPAR said that it would not obtain the data, but from the date that the parties had failed to agree on a proper price adjustment. The Court held that that date was not until at least the fall of 2007, and accordingly the arbitration claim was commenced in time. The Court did not agree with CAE that the limitation period did not commence until CAE had full knowledge of the full costs of obtaining the data. But it did agree that the entitlement to arbitrate and the limitation period did not commence until “SPAR indicated its intentions to avoid any and all financial responsibility for the increased costs associated with procuring the data”.

The Court of Appeal agreed. It held that the commercially reasonable interpretation of the subcontract was that “a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration.” Only then did the right to arbitrate arise and the limitation period commence running.

The Superior Court also found that, by its conduct, SPAR was estopped from asserting that the limitation period was running from November 2005. In light of its decision on the primary matter, the Ontario Court of Appeal did not deal with this issue.

Two comments can be made about this decision:

First, it is a welcome recognition of the duty to negotiate where such a duty is contained in the contract. Had the courts held that the limitation period started running from the time SPAR refused to obtain the data, the obligation to negotiate the price and costs dispute would have been effectively removed from the contract. When parties include an obligation to seek an agreement over those sorts of matters, then full recognition and effect should be given to that obligation. The only way to do so is to hold that the limitation period does not commence until that process is complete. That causes no hardship on either party, since either party can at any time state that negotiations are over and refuse to negotiate further.

Second, this decision is a reminder that it is the exception. It is the exception because most construction contracts do not contain an express duty to negotiate and attempt to agree on costs or other matters in dispute under the contract. Accordingly, in most instances it is dangerous for a party to continue to negotiate when, based upon the date of the other party’s alleged wrongful conduct or its discovery, a limitation period is looming. In most cases, the limitation period will have started to run and the party with the claim must protect its litigation rights, and then negotiate.

So there are two lessons to be learned:

First, when you are negotiating the contract and want to provide for an obligation to negotiate, expressly state that obligation in the contract and expressly state that any limitation period will only commence once the negotiations are complete.

Second, if you are in the midst of a contractual dispute and a limitation period is looming based on the date of the wrongful conduct or its discovery, then initiate the arbitration claim and negotiate later, unless you are very certain that the contract provides that the limitation period is not running in the meantime.

Construction Law  – Arbitration – Negotiations – Limitation Periods:

L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133; 2011 ONCA 435 (CanLII)

Thomas G. Heintzman, O.C.,  Q.C.                                                                                           July 17, 2011
www.constructionlawcanada.com

Does An Insurance Clause Preclude The Contractor From Being Sued?

An insurance clause in a building contract usually provides that one of the parties will obtain insurance for the project, and that some or all of the other parties engaged on the project will be covered under that insurance. The issue raised by such a clause is whether the party that agreed to take out that insurance, or that party’s insurer, may sue another party which was to be covered by that insurance.

In Greater Toronto Airport Authority Association v. Foster Wheeler, the Ontario Superior Court recently held that the insurance clause did preclude such an action against the contractor. In the course of its decision the Ontario court set out some useful principles.

There is always a tension between the liability or indemnity clauses, and the insurance clause, in a building contract. If the contract states that the contractor shall be liable for faulty workmanship, or warrants that the project will be free of defects for a certain period of time, or agrees to indemnify and hold the owner harmless from certain liabilities, how can the insurance clause over-ride those provisions? Yet, if the owner agrees to take out builders’ or other broad insurance policy that would normally cover the contractor in those circumstances, how can the owner’s insurer maintain a subrogated action in the owner’s name against the contractor?

Foster Wheeler entered into a contract with the GTAA to supply four boilers to the GTAA. One of the boilers exploded during installation, damaging the boiler and other property. The GTAA was compensated by its insurer which brought a subrogated claim against Foster Wheeler.

The contract between GTAA and Foster Wheeler contained a variety of apparently conflicting provisions:

1.      GTAA agreed to take out an All Risk Course of Construction insurance policy, and to include Foster Wheeler as an additional insured (“the insurance clause”);

2.      Foster Wheeler warranted the boilers to be free of defects for 12 months;

3.      Foster Wheeler was responsible for damage to GTAA’s property that occurred as a result of Foster Wheeler’s operations under the contract, except to the extent that the GTAA received proceeds of insurance under the All Risk Course of Construction insurance policy;

4.      Foster Wheeler agreed to place all risk insurance on its machinery and equipment and that such insurance was to contain a waiver of subrogation against the GTAA.

5.      GTAA agreed to waive any claim for damages against Foster Wheeler in contract or tort “except to the extent that such damage might be recovered under insurance”.

During the negotiation of the contract, Foster Wheeler asked that the contact include a waiver of subrogation under the All Risk Course of Construction insurance policy taken out by the owner, but the GTAA refused to agree to such a waiver.

The Court reviewed a number of Canadian cases dealing with the effect of an insurance clause in contracts of this nature and arrived at what it called the “beneficial aspects” of typical course of construction insurance contracts:

(a)      on a construction site the possibility of damage by one contractor to the property of another and the construction as a whole is ever present:

(b)      there is a common interest in avoiding the necessity to debate issues of negligence and responsibility in court;

(c)      parties can focus on the common goal of completing construction instead of fighting amongst themselves;

(d)      given the obligation of the owner or general contractor to obtain comprehensive insurance it makes “no business sense for sub-contractors to pay premiums to duplicate that coverage”;

(e)      the insurer sets the premium recognizing there is no right of subrogation;

(f)      the owner purchasing comprehensive insurance on behalf of contractors and subcontractors is less expensive than each party obtaining its own insurance.

The Court then considered the contract and concluded as follows:

1.      The All Risk Course of Construction insurance that GTAA had agreed to obtain admittedly provided insurance for Foster Wheeler’s negligence in the present circumstances.  Accordingly, the insurance clause protected Foster Wheeler from GTAA’s claim even in respect of Foster Wheeler’s negligence, up to the limits of that policy.

2.      The provision in the contract that exempted Foster Wheeler’s liability for damages to the GTAA’s property up to the limits of the owner’s All Risk Course of Construction insurance policy confirmed that conclusion.

3.      The insurance that the contract required the owner to obtain was described as “course of construction insurance”, which is exactly the sort of insurance that had been held by the Supreme Court of Canada to describe insurance which barred an owner’s subrogated claims against contractors and subcontractors.

4.      The insurance clause commenced with the words “Without restricting any other responsibility of the Supplier….. However, those words did not over-rule the fundamental impact of the insurance clause.

5.      The insurance clause did over-ride the warranty obligations of Foster Wheeler, to the extent of the insurance coverage and that result was “necessarily incidental” to the customary interpretation and effect of an insurance clause.

6.      The fact that, during the negotiation of the contract, Foster Wheeler had asked for a waiver of subrogation clause and the GTAA had not agreed to such a clause did not change the meaning and effect of the insurance clause. Foster Wheeler was not relying on an implied waiver of subrogation but rather an express insurance clause and its accepted effect.

7.      There was an exception to the release of Foster Wheeler’s liability. That exception applied to the extent of damages recoverable under insurance. However, that exception did not over-ride the insurance clause to the extent that the GTAA’s claim was covered by and paid out of the All Risk Course of Construction insurance. Rather, it provided for the liability of Foster Wheeler over and above the insurance obtained by the owner.

The fact that these liability/insurance issues are still being debated is remarkable. In 1976, the Supreme Court of Canada established the general principle relating to the issue, and there have been many decisions applying the principle since then. Yet parties to building contracts continue to insert into those contracts provisions which are contradictory and do not clearly apply the principles set out in the decided cases.

In these circumstances this judgment, which has not been appealed, is a helpful guide to resolving the various clauses relating to liability, indemnity and insurance in a building contract.

The conclusion to be drawn is that, if there is an insurance clause in the contract by which one of the parties obligates itself to obtain builders’ risk or course of construction insurance for the project and another party is to be an insured under that insurance policy, that clause will likely preclude a claim by the owner (or by its insurer in a subrogated claim) against the contractor unless the contract clearly and expressly states that the contractor’s liability to the owner remains outstanding notwithstanding the insurance clause.

If a provision is included in the contract which expressly states that the contractor is liable to the owner notwithstanding the insurance clause, then the contractor will likely have to obtain its own insurance, particularly against claims by the owner.

Limited insurance of that nature may not be available and the net effect may be that the contractor may have to duplicate the owner’s entire insurance program for the project.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed.) at Chapter 1, part 3(d); Chapter 5, part 3 and Chapter 6, parts 2(b)(i)(D) and 2(b)(ii)(D).

Construction Law – Insurance – Contractors:
Greater Toronto Airport Authority Association v. Foster Wheeler, 2011 ONSC 1442 (CanLII)

Thomas G. Heintzman O.C.,Q.C                                                                        July 10, 2011
www.constructionlawcanada.com

The Duty To Defend: What Are The Indemnity Obligations In Construction Contracts?

Construction Law –  Insurance – Duty to Defend

A recent Ontario decision regarding the duty to defend against claims may have wide reaching implications for construction law even though the action did not involve a building contract.

In Cadillac Fairview v. Jamesway Construction, 2011, the Ontario Superior Court recently held that an indemnity obligation in a maintenance contract gave rise to a duty to defend the landlord.  This conclusion may apply to indemnity obligations in a building contract.

Jamesway entered into a contract with Cadillac Fairview to shovel the sidewalks and parking lot of a shopping centre owned by Cadillac Fairview, and to keep those premises free of ice and snow.  The contract contained an indemnity by Jamesway in favour of Cadillac Fairview, and an agreement by Jamesway to maintain CGL insurance in which Cadillac Fairview would be an unnamed insured.  Jamesway did take out such a policy.  So far as the reasons of the court disclose, the contract did not contain an agreement by Jamesway to defend Cadillac Fairview from any claim.

When Cadillac Fairview was sued arising from a slip and fall on the ice on the shopping centre, it brought an application against Jamesway and the CGL insurer to require those parties to defend Cadillac Fairview in the slip and fall action.  The Superior Court granted the application against Jamesway.

In arriving at its conclusion, the court referred to a number of cases involving insurers and an insurer’s duty to defend.  Relying on the reasoning in those cases, the court held that Jamesway had a duty to defend Cadillac Fairview.  The court held that the indemnity and the obligation to insure combined to create an obligation to defend.

The court referred to no cases in which an obligation to defend had been ordered against a non-insurer, nor any case in which such an order had been made against a non-insurer when the contract contained no express obligation to defend.  Rather, the court reasoned from the cases against insurers, and then concluded that the indemnity plus the duty to obtain insurance amounted to an agreement to defend.

The court dismissed the application against the CGL insurer, holding that there was no privity of contract between Cadillac Fairview and that insurer.

The implications of this decision for the construction industry are obvious.  Many construction contracts contain indemnities.  For example, Article 12.1 of the standard CCDC 2 Stipulated Price Contract contains indemnities between the owner and the contractor.  However, construction contracts do not usually contain an express obligation on either party to defend the other party in the event of litigation by a third party.  Even in an insurance setting, an obligation to defend will not necessarily be inferred if it is not expressly contained in the insurance contract.  Implying such a duty to defend into a maintenance or construction contract may well exceed the intentions of the parties.

Construction Law- Insurance- Duty to Defend: 

Cadillac Fairview v. Jamesway Construction, 2011 ONSC 2633 (CanLII) 

Thomas G. Heintzman O.C.,Q.C.                                                                                                                July 3, 2011

www.constructionlawcanada.com

Pay-When-Paid: When Is The Contractor Not Obliged To Pay The Subcontractor?

Construction Law  –  Building Contract  –  “Pay When Paid”

The Ontario Superior court recently wrestled with the issue of how to interpret and apply a “Pay When Paid” clause in a subcontract.

In 1473662 Ontario Limited v. Avgroup Consulting Services Limited, the Court appears to apply the traditional approach to this clause, but opened a door for subcontractors to avoid its severity.

Avgroup was the general contractor for a hotel construction project. The numbered company (which carried on business as “Dyson Electric”) was the electrical subcontractor.  Avgroup alleged that the parties had contracted pursuant to the CCDC subcontract, and that the contract contained a “Pay When Pay” clause which read:

“The Contractor shall pay the Subcontractor no later than thirty (30) days after the Submission Date or three (3) working days after the Contractor receives payment from the Owner, whichever is the later.”

However, that contract was never signed.  Dyson alleged that the contract was found in the invoices which it had submitted to Avgroup and which Avgroup had accepted as the basis for payment.  Those invoices did not contain a Pay When Paid clause.

The Court appeared to accept that the Pay When Paid clause in the form of CCDC contract relied upon by Avgroup was substantially similar to the clause in the contract which had been considered by the Ontario Court of Appeal in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc (1988) 32 C.L.R. 32 (Ont. C.A.).  The clause in that case stated:  “Payments will be made not more than thirty (30) days after the submission date or ten (10) days after the certification or when we have been paid by the owner, whichever is the later.”

The Court of Appeal in Timbro held that such a clause was not just a payment-timing clause operating during the project, but entirely precluded the sub-contactor from recovering from the contractor in the event that the contractor was not paid by the owner.

The court in the present case evidently felt itself to be bound by the Timbro decision.  But the court held that there was a triable issue relating to whether the contract was in the form of the CCDC subcontract or in the form of the subcontractor’s invoices.  Accordingly, the court dismissed Dyson’s motion for summary judgment.

This decision highlights the need for the Supreme Court of Canada to review the Pay When Paid issue.  There is conflicting authority in Nova Scotia (Arnoldin Construction & Forms Ltd. v. Aslta Surety Co (1995), 19 C.L.R. (2d) 1 (N.S. C.A.)) and leave to appeal that decision was dismissed by the Supreme Court of Ontario.  Moreover, members of the construction industry, and the drafters of the CCDC subcontract, should clarify their intention about the meaning of a Pay When Paid clause.

The fundamental questions are these:  Who should bear the risk of the owner’s insolvency, the contractor or the subcontractor?

Why should the subcontractor, who has no dealings with the owner and no means of managing the risk of the owner’s insolvency, bear that risk rather than the contractor?  A subcontractor may reasonably be expected to bear the risk of the timing of the payments by the contractor during the project, but it is more difficult to understand why the subcontractor should bear the risk of the owner’s insolvency.

The same issue can, of course, arise in a sub-subcontract or a supply contract if that contract contains a Pay When Paid clause.  Here, the risk is the contractor’s insolvency.  Is it reasonable for the sub-subcontractor or supplier to the sub-contractor to bear the risk of the contractor’s insolvency when they have no dealings with the contractor?

These are questions which the courts and the construction industry need to carefully consider.

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

Construction Law – Building Contract – “Pay-when-Paid”: 

1473662 Ontario Limited v. Avgroup Consulting Services Limited, 2011 ONSC 2900 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                               June 26, 2011

www.constructionlawcanada.com