What Is The Role Of Owners and Contractors In The Application Of Trust Funds?

Construction Law – Construction Liens – Trust Fund Provisions

The Ontario Court of Appeal has recently considered some interesting issues relating to the trust fund provisions of the Construction Lien Act of Ontario.  In Colautti Construction Ltd. v. Ashcroft Development Inc, the Court provided some useful guidance about the roles of owners and contractors in the application of trust funds. The Court also held that those provisions cannot be enforced by the owner, but only by the subcontractors or suppliers for whose benefit the provisions were enacted.

Ashcroft was the developer of residential and commercial real estate.  Colautti contracted with Ashcroft to provide services in relation to the construction of basements, municipal services and roads under seven different contracts.  Colautti also provided services for Ashcroft in relation to the projects under certain older contracts.  During the early stages of the projects, each time Ashcroft paid Colautti, it told Colautti which invoices of Colautti it was paying.  But later in the projects, Ashcroft refused to advise which invoices it was paying and for which contacts or projects, even though Colautti made repeated inquiries.  Colautti applied some of the monies it received against the oldest contracts.  Ashcroft later objected to the application of the funds by Colautti, alleging that Colautti had been paid on the seven contracts that it was suing under, if the payments were applied as Ashcroft maintained they should be.

The court held that Colauttii had acted properly in the application of the payments, particularly in the absence of any contemporary advice from Ashcroft about which invoices it was paying. The court applied two principles.

First, a contractor has an obligation to make reasonable inquiries of the debtor, to determine which invoices are being paid by the debtor. The court held that Colautti had fulfilled this obligation.

Second, absent an allocation of a payment by the debtor, the creditor can make the allocation. The court applied the words of the House of Lords in Cory Brothers & Co. v. Owners of the Turkish Steamship “Mecca”, [1897] A.C. 286, at p. 293:

“When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor.”

Accordingly, the court held that Colautti acted reasonably in making the application of the funds it received from Ashcroft, in the absence of advice to the contrary from Ashcroft. The court confirmed that the trust fund obligations of the Act did require Colautti to apply the payments it received to the related projects. But having made reasonable inquiries and receiving no advice from the owner about the matter, Colautti was entitled to make the allocation of the payments to the various contracts relating to the projects, including the older contracts.

The court then dealt with Ashcroft’s claim that Colautti had breached the trust fund provisions of the Act. Ashcroft said that, at each time that Colautti received payments, Colautti had obligations to subcontractors under the seven contracts, and it was obliged to pay those subcontractors at that time. Ashcroft claimed a right to have its payments to Colautti re-allocated to those subcontractors, and particularly the subcontractors on the seven projects in question and not the older projects.

The court held that Ashcroft had no standing to enforce the trust fund provisions in this fashion. The court said that only subcontractors and other parties for whose benefit the trust fund provisions had been enacted could enforce those provisions:

“Simply put, standing to complain of a s. 8 breach of trust is limited to those
“who stand in direct privity with the contractor and who are owed amounts by the contractor”….. The protected class of creditors are those “down the chain” from the trustee of the s. 8(1) trust fund. The Developers, as owners of the Projects, do not come within that class.”

This decision is a welcome clarification of the trust fund provisions.  Those provisions are some of the most important parts of the Construction Lien Act.  They provide very substantial protection for contractors, subcontractors and suppliers. Clearly the Ontario Court of Appeal was concerned that an owner could effectively undermine those provisions or use them for a purpose for which they were not intended. The court was not prepared to allow an owner to refuse to allocate funds paid by it and then complain later about the contractor’s allocation of them. Nor was it prepared to allow the owner to use the trust fund provisions for its benefit in that re-allocation effort.

Construction Law – Construction Liens – Trust Fund Provisions:

Colautti Construction Ltd. v. Ashcroft Development Inc., 2011 ONCA 359 (CanLII)

Thomas G. Heintzman, O.C., Q.C.                                                                                               June 19, 2011
www.constructionlawcanada.com

Have You Chosen The Right Forum For A Construction Arbitration?

Construction Law –Arbitration – Appeal – Quebec  – Civil Procedure

My article on May 24, 2011, on Arbitration Appeal Rights:  Think About Them Before Signing A Contract, dealt with the rights of appeal from arbitration awards. That blog made reference to the appeal rights from arbitration awards in most Canadian provinces, but did not deal with the province of Quebec. This blog will address the appeal rights in Quebec.

In Quebec, the rights arising from an arbitration award are found in Book VII of the Code of Civil Procedure.  The Code provides for arbitration awards to be registered (“homologated”) in the Superior Court by way of a motion to the court. The court can only refuse to homologate the award upon certain specific grounds, including invalidity of the arbitration agreement, procedural irregularity, jurisdictional grounds, the dispute is not subject to arbitration under Quebec law or the award is contrary to public order. Article 946.2 states that a court examining a motion for homologation cannot inquire into the merits of the award.

Article 947 states that the only possible recourse against an arbitral award is by way of an application for annulment. The grounds for annulling an arbitral award effectively reflect the same grounds upon which the court may refuse to homologate an award.

So, in these ways, the Code states that an arbitration award cannot be appealed nor the merits of the award questioned.  Article 940 states that these provisions of the Code, among others, are peremptory and not subject to agreement otherwise by the parties.

Similarly, a court considering an application for recognition and enforcement to homologate a foreign arbitration award cannot enquire into the merits of the dispute.

Foreign, international and domestic arbitrations are all dealt with under the same regime in Book VII of the Code.  In essence, all arbitration awards are not subject to appeal, are all subject to similar homologation procedures and all may be attacked on the grounds reflecting the grounds for homologation.

This review of Quebec Arbitral law leads nicely to a comparison of the appeal rights from international arbitral awards in the United Kingdom.  There, as in Quebec, domestic and international arbitrations are dealt with under one statutory regime, the U.K. Arbitrations Act, 1996.  But the effect has been the opposite, so far as appeal rights are concerned.  The U.K. Act permits the court to grant leave to appeal.  That appeal right is derived from statutory provisions which originally related to domestic arbitrations.   However, in Shell Egypt West Manala et al v. Dana Gas Egypt Ltd, [2009] EWHC 2097, [2010] EWHC 465, the English court granted leave to appeal from an international arbitral award conducted under the UNCITRAL rules.  Those rules provide that arbitral awards are “final and binding”.  The English court held that those words were insufficient to preclude the appeal rights under the U.K. Arbitration Act, 1996.

Returning to the Canadian landscape, there are in essence four appeal regimes relating to arbitral awards.  The most common regime relating to domestic arbitral awards is found in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia. That regime generally provides (with some variations) for an appeal to the provincial superior court with leave of that court, or if the parties have so agreed, on matters of fact, law and mixed fact and law.  In those jurisdictions, a further appeal to the provincial appeal court, or an appeal of a decision relating to an application to set aside the award or declare it invalid, is only permitted with leave.

The second regime provides for no appeal rights from arbitral awards, but imposes no specific limit on appeals from other decisions of the superior court relating to arbitral awards (such as setting aside, or declaring invalid, arbitral awards, or relating to homologation in Quebec).  That regime applies to all provincial regimes relating to international commercial arbitrations, and to domestic awards in Quebec and Newfoundland and Labrador.

The third regime is found in Prince Edward Island where, if the parties consent to an appeal in their arbitration agreement, the appeal is directly to the Appeal Division.

The forth regime is found in British Columbia, where the parties may provide for, or the court may permit by way of leave, an appeal on a question of law.

This review of appeal rights in Canada underscores the point which was made in my article of May 24, 2011.  The parties to a construction contract which contains an arbitration clause should carefully consider the rights of appeal before they sign the contract.  If the arbitration involves a serious issue of law, or if there are other good reasons to do so, consider whether to include a right of appeal.  As importantly, insert into the contract an arbitral law that allows for an appeal. The law of neighbouring provinces – for instance, Ontario and Quebec – are completely different so far as appeals are concerned. So choosing the appropriate arbitral regime is crucial.

Construction Law- Arbitration – Appeal – Quebec – Civil Procedure

Thomas G. Heintzman                                                                                   June 12, 2011

www.constructionlawcanada.com 

www.heintzmanadr.com

www.thomasgheintzman.com

Can A Condition In An Invitation To Tender Be Illegal?

Construction Law – Tenders – Illegality

Can a condition in an invitation to tender a construction contract be illegal?  This is a question upon which construction law is largely silent.  But the Court of Appeal of Quebec has held that a condition of tender may be unlawful. This is not a recent decision, but it is not well known outside Quebec.  The importance of the issue of illegality makes it a suitable subject for this blog.

In Société de developpement de la Baie James v. Compagnie de construction et de developpement Cris Ltée, the contractors contested standing terms which James Bay Development Society inserted into its invitations to tender.  Those terms (sub-sections 3.1 and 3.3) excluded any bid from a contractor who had commenced proceedings against, or was the defendant in proceedings commenced by, James Bay Development Society.  The Court of Appeal held that this condition was illegal as being contrary to public order.

The Court of Appeal held that Section 3.3 was contrary to the principle of the rule of law.  That principle is now incorporated into the Canadian Charter of Rights and Freedoms.  A principle element of the rule of law is access to the courts. While the law of contract is based upon the liberty to enter into any contract that the parties may agree to, there are limits to that liberty, and one limit, in Quebec, is public order. Any contractual provision which contravenes political public order is an absolute nullity.  While the parties can agree in their contract to waive certain rights, they cannot do so with respect to matters which are oppressive to the extent of being contrary to public order.

In addition, the Court of Appeal noted that sub-section 3.1 of the standing terms permitted the Bay James Development Society to accept, in its discretion, a non-compliant bid.  However, the provincial law governing the tenders stipulated that a non-conforming bid was required to be automatically rejected.  Accordingly, the Court of Appeal held that, on this additional ground, sub-section 3.1 of the standing terms was invalid.

This decision is a reminder of the need to review the terms of any invitation to tender from an overall standpoint, including its legality.  In the case of any governmental body, the Charter of Rights and Freedoms, and other statutes, regulations or bylaws applicable to that body, may be relevant.  Those considerations and the James Bay decision, may not be applicable if the owner issuing the invitation to tender is not a public body.  But there may be other conditions of legality which apply to the tender.

See Goldsmith and Heintzman on Canadian Building Contracts (4th ed.), Chapter 1, Section 2(d).

Construction Law – Tenders – Illegality: 

Société de developpement de la Baie James v. Compangnie de construction et de developpement Cris Ltée, (2001), 16 C.L.R. (3d) 26 (Que. C.A.)

Thomas G. Heintzman                                                                                                                                                 June 5, 2011

www.constructionlaw.com 

Is A Site Visit A Material Condition To A Tender?

Construction Law – Tenders – Site Visit – Materiality

An invitation to tender may contain many conditions, some of which are more or less material to the ultimate submitted tender.  Is a requirement that the contractor attend a site visit a material condition of the tender?  In Admiral Roofing v. School District 57 (Board of Education), the British Columbia Supreme Court said Yes, and held that a missed site visit eliminated the contractor from the bidding process.

The District School Board issued an invitation to tender for re-roofing of two buildings. The invitation contained a term stating that a “mandatory” site visit was being held at 8 am on a certain date, that registration at the site visit was required and that “failure to attend and register will lead to the non-acceptance of the tender by the owner.”

The President of Admiral Roofing arrived 15 minutes late at the first site.  After the representatives of the School District had moved to the second site, he joined the group making the site visit.  He was asked by the School District representatives whether he wished them to go back with him to the first site, and he declined stating that he would visit that site himself later.  He was told later that day that Admiral Roofing’s bid would not be accepted.   Nevertheless, he went back to the first site and then submitted the tender. The School Board did not open that tender.

The contractor and the School Board brought an application to determine whether Admiral Roofing’s tender was non-compliant so that the School District was unable to accept it.  The British Columbia Supreme Court held that it was.

The contractor argued that it substantially complied with the site visit requirement by attending part of the site tour, signing its name and returning later to the first site.  The court held that the word “attend” required the attendance at the two locations and at the mandatory site tour starting at 8 am.  The Court held that the words “failure to attend and register will lead to the non-acceptance of the tender by the owner” made this mandatory requirement sufficiently clear.

The Court also held that this failure by the contractor could not be waived by the owner under the tender condition entitling the owner to waive “irregularities … of a minor or technical nature.”  While arriving late by five minutes might have been technical if the School District’s site team had still been there, there was no discretion to waive the actual first site visit itself.

The Court quoted from another case in which it was held that a defect is material if it “undermines fairness of the competition or the process of tendering …impacts the cost of the bid or the performance of contract B …or creates a risk of action by other (complaint) bidders.”

The Court applied a “restrictive interpretation” to the discretion clause, which approach has been held necessary “in order to respect the mandatory requirements of the instructions to tenderers and to protect the tendering process.”  Applying that approach, the Court held that there was no discretion to accept the bid.

This approach places a very narrow limit on the owner’s discretion to accept non-compliant bids, from two aspects.

First, it treats procedural irregularities in the same way as substantive irregularities.  It may be argued that the procedural necessity to attend a site meeting is of a different order or nature than the actual contents of the bid or timing of its delivery.  The former cannot impact the content of the bid itself or the constructed project.  Nor does a missed site visit appear to unfairly impact other bidders who are required to deliver their bids on time.  A site meeting seems to be very much for the benefit of the bidder, and to the extent that it has any value to the owner, that value would seem to be one that the owner should be entitled to waive.

Second, the Court’s interpretation appears to place an inordinate importance on the threat of a claim by another contractor.  The late attendance at the site meeting does not seem to materially interfere with the other ingredients referred to by the Court:  the fairness of the competition, the process of tendering, the cost of the bid, or the performance of Contract B.   Rather, reading between the lines, the threat of an action by another bidder that makes the “defect” material.  That approach may be inappropriate for two reasons.

First, in this case, the parties apparently made the application to the court immediately, and before the tender were completed.  So the court was in a position to deal with the legality of the bid before claims were made by other contractors.

Second, the threat of litigation should not, by itself, be relevant to the materiality of the defect of default.  Otherwise, the other contractor will always “hold the hammer” and the owner’s discretion to accept a bid with a non-material defect will virtually disappear.

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

Construction Law – Tenders-Site Visit – Materiality:

Admiral Roofing v. School District 57 (Board of Education), 2010 BCSC 1394

Thomas G. Heintzman                                                                                                  May 29, 2011

www.constructionlawcanada.com

Arbitration Appeal Rights: Think About Them Before Signing A Contract

Owners and contractors will normally insert an arbitration clause into their contract.  When they do so, they rarely consider their rights of appeal from an arbitral award.  The recent decision of the Ontario Court of Appeal in Kingsway Insurance Company v. Gore Mutual Insurance Company provides a good opportunity to develop a strategy towards appeal rights before signing a construction contract containing an arbitration clause.

Under the domestic Ontario Arbitration Act, an appeal of an arbitration award may be taken in two circumstances.  First, if the parties agree, then an appeal may be brought on a matter of law, fact or mixed fact and law.  Otherwise, an appeal may be brought on a matter of law with leave of the Superior Court.  In addition, of course, an application may be brought to set aside the award or for a declaration of the invalidity of the award.

In Kingsway, the Court of Appeal has held that leave to appeal is required before a further appeal may be taken from the Ontario Superior Court to the Court of Appeal for Ontario.  In arriving at this conclusion the Court resolved a statutory conflict.  Section 49 of he Ontario Arbitration Act states that leave to appeal is required from a decision of the Superior Court relating to an appeal to that Court of an arbitral award, or an application to set aside the award or a declaration of invalidity of the award.  However, section 6(1) (b) of the Ontario Courts of Justice Act states that an appeal lies to the Court of Appeal from a final decision of a judge of the Ontario Superior Court.

The Court of Appeal held that these two provisions are in direct conflict and that the conflict must be resolved in favour of the more specific provision in the Arbitration Act, being the Act which specifically governs domestic arbitrations in Ontario.

While Kingsway was not a construction law case, this ruling may be of importance to owners and contractors, particularly if they wish to preserve appeal rights relating to the arbitral decision.  Under Ontario law, the parties may include in their arbitration agreement a full appeal to the Superior Court on matters of law and fact.  If they do so, that is probably because they wish those issues to be dealt with by the Court in the usual way.  They may now be surprised to learn that the normal appeal route is not available to them, and that, despite their agreement and despite the normal situation in civil actions, they are only entitled, as of right, to one level of appeal.

The situation created by section 49 of the Ontario Arbitration Act may be contrasted with the Ontario International Commercial Arbitration Act (“ICAA”).  That Act applies to international arbitrations.  Like the ICAAs of virtually all the other provinces, the Ontario ICAA incorporates the New York UNCITRAL treaty provisions which do not countenance an appeal of the arbitral award.  Likewise, those provisions contain no provisions relating to an appeal from a decision of the Superior Court setting aside, or refusing to set aside, the award.  In these circumstances, the normal provisions of Section 6(1) (b) of the Ontario Courts of Justice Act presumably apply, as presumably would the comparable legislation in the other provinces.  Indeed, there are instances in which appeal courts in Canada have heard appeals from the provincial superior courts dealing with arbitrations under the ICAA statutes, without leave being granted.

Ironically, therefore, the ICAA statutes may allow for appeals as of right from a reviewing judge’s decision in circumstance in which no such appeal as of right exists under the domestic arbitration regime. That would be ironic since ICAA is generally considered to contain an “anti-appeal” regime.

A comparison of domestic arbitration statutes across Canada reveals a somewhat diverse regime with respect to appeals from decisions of reviewing judges.  The statutes in Ontario, Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia generally provide a similar regime. They allow for an appeal from the arbitral award to the Superior Court with leave on a question of law (except in Nova Scotia).  They generally allow the parties to provide in the arbitration agreement for appeals without leave on matters of law, fact and mixed fact and law.  But they also generally provide that any further appeals from the reviewing or appeal decisions of the Superior Court to the Court of Appeal are only with leave.

British Columbia permits an appeal of the arbitral award to the British Columbia Supreme Court on a question of law either with leave or on consent, but does not deal with further appeals.

Newfoundland and Labrador does not expressly provide for appeals from arbitration awards and establishes no express limit on, and does not address, appeals from orders reviewing and setting aside, or refusing to review and set aside, arbitration awards.

The Prince Edward Island statute contains the novel provision, whereby if the parties provide for an appeal in the arbitration agreement, then the parties have the right to appeal directly from an arbitral award to the Appeal Division.

In these circumstances, owners and contractors who are entering into arbitration agreements should carefully consider their rights of appeal.  Perhaps, rights of appeal are the very last thing they want.  In this case they may wish to specifically state that there are to be no rights of appeal.  In some provinces (like Ontario), the parties can, in the arbitration agreement, entirely contract out of their right to an appeal even with leave, while in other provinces (like Manitoba) they cannot.

But the parties may wish to have full rights of appeal, particularly if there are serious issues of law at stake.  If so, they may want to stipulate that the arbitral law of a specific jurisdiction is to apply to their contract and select one which is the most appeal-friendly.  If this is the case, then Ontario arbitral law may have become less suitable to those parties and more suitable to parties wishing to restrict appeal rights following a hearing before the Superior Court.

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

Construction Law – Arbitrations – Contract – Appeals – Civil Procedure

Kingsway Insurance Company v. Gore Mutual Insurance Company 2011 ONCA 87  

Thomas G. Heintzman

www.constructionlawcanada.com                                                                           May 24, 2011

Is A Subcontractor Bound By The Arbitration Clause in the Main Contract?

In a judgment delivered on May 6, 2011, Chief Justice Joseph P. Kennedy of the Nova Scotia Supreme Court dealt with a contentious issue relating to arbitration clauses in construction contracts.

Is an arbitration clause in the main contract between the owner and the contractor incorporated into a subcontract between the contractor and subcontractor?  If that incorporation occurs, then the subcontractor’s court claim must be stayed and the subcontractor must assert its claim by way of arbitration.

In Sunny Corner Enterprises Inc v. Dustex Corporation, the main contract contained an arbitration clause requiring that any dispute between the owner and contractor be arbitrated.  The subcontract was contained in a purchase order that stated that the scope of the work was to be as defined in the main contract.  The contractor argued that the purchase order sufficiently incorporated the terms of the main contract, and therefore the arbitration clause, into the subcontract.  The subcontractor acknowledged that the main contract was integral to the purchase order, but asserted that the purchase order did not specifically incorporate the arbitration clause from the main contract into the subcontract.

The Chief Justice held that the later is the proper statement of the law.  Referring to Goldsmith and Heintzman on Canadian Building Contracts (4thed), he held that an arbitration clause in the main contract will only be incorporated in the subcontract if it is specifically incorporated.  It was not sufficient to merely say in the subcontract that the main contract was an “integral” part of the subcontract.  As he pointed out, there may be many terms in the main contact which are irrelevant to the subcontractor.  He referred to an Alberta decision [Q.Q.R. Mechanical Contracting Ltd. v. Panther Controls Ltd., 2005 ABQB 58] in which a two year guarantee provision in the main contract was held not to have been incorporated into the subcontract.  Accordingly, Chief Justice Kennedy dismissed the motion to stay the action and permitted it to proceed.

There is logic and a lesson to be learned from this case. The parties to a subcontract may well intend to be bound by the conditions in the main contract relating to the actual nature and performance of the work.  After all, they need a common road map to get the project built that is consistent with the main contract.  But it is quite another thing for them to agree to be bound by consequential, remedial and procedural matters found in the main contract.  There is no inherent reason why the parties to the subcontract cannot agree to a different regime for those matters.  For a court to find that they made an agreement to be bound by the main contract about those matters, there should be specific provisions in the subcontract to that effect.

See Goldsmith and Heintzman:  Canadian Building Contracts (4thed) at Chapter 7, section 1 and Chapter 10, section 1.

Arbitration  – Construction Agreement –  Subcontract:

Sunny Corner Enterprises Inc v. Dustex Corporation, 2011 NSSC 172  

Thomas G. Heintzman

https://www.constructionlawcanada.com

May 15, 2011

Tenders in Construction Projects – Which Limitation Period Applies?

What is the limitation period for the commencement of an action arising from a tender in a construction project?

If the owner is a municipality or other public body, does a limitation period in its incorporating legislation apply to the tender?  These were the questions recently faced by the Prince Edward Island Court of Appeal in Central Roadways v. City of Summerside.

In May 2008 the City of Summerside sought tenders for the resurfacing of city streets.  Two bidders, Central Roadways and another bidder, submitted tenders.  Central Roadways’ tender was the lowest, but on June 16, 2008 the City’s Council met and decided to award the contract to the other bidder, and advised Central Roadways the next day.

In November 2008, Central Roadways asked the City why its tender was not accepted and requested a copy of Council meeting minutes of June 16, 2008.  The City replied by letter and provided  a copy of the minutes but the minutes did not disclose any reasons why the other tender was accepted and not the tender of Central Roadways.

On February 20, 2009, Central Roadways commenced an action against the City.  The City brought a motion to dismiss the action on the ground that it was barred by the limitation period in s-s.46 (2) of the City of Summerside Act.

Section 45 and 46(1) of that Act provided that notice was to be given to the City in the case of damage sustained from unsafe conditions, or from nuisances or encumbrances, on City streets or sidewalks.  Section 46(1) then said that, except as provided in S. 46(1), all actions against the City were to be commenced within six months of the cause of action arising.

The City asserted that this limitation period applied to the claim arising from the tender, and the judge who heard the motion agreed.  But the P.E.I Court of Appeal reversed the decision.

The Court of Appeal examined the wording and history of the City of Summerside Act and concluded that the six month limitation period only applied to claims arising from City bylaws or claims relating to unsafe conditions or nuisances and encumbrances on City property.  Even though the word “all” in s. 46(2) was normally all-encompassing, it should not be so interpreted in light of these surrounding circumstances.

The Court of Appeal noted that the limitation period in P.E.I. for claims in contract is six years and that a limitation period of six months is a very different limitation period.  Since the shorter limitation period was found in a statute for the City’s benefit, it should be interpreted against the City in the event of any ambiguity.  The Court said:

“Interpreted to include all causes of action against the City, the very short six-month limitation period would seriously circumscribe the right of a person to commence any action against the City.  This being so, any ambiguity must be resolved in favour of a less restrictive limit on the time within which to commence an action.”

The Court of Appeal held that the claim by Central Roadways was in contract, since it arose from the alleged breach of its contract with the City inherent in its submission of a tender to the City’s invitation.   While there might be good policy reasons for the City to provide very short limitation periods for actions arising from slip and falls or other accidents on City streets,

“there is no valid policy reason why other actions against the City, like an action for breach of contract, should have the time for the commencement thereof limited to a very short six months…If the Legislature is of the mind that there are valid policy reasons for a shorter limitation period for the commencement of such actions against municipalities like the City, then it should express the policy more clearly in the Act  so as to specifically exclude these actions from the scope of the Statute of Limitations.”

This decision contains warnings about limitation periods relating to tenders.

The first warning is that a claim arising from a tender is a claim in contract and must be brought within the limitation period for a contract claim.  In addition, a tort claim relating to the tender must be brought within the limitation period relating to tort claims.

The second warning is this:  look for any limitation period contained in the tender documents. The tender documents may themselves contain a specific and shorter limitation period.  A shorter contractual limitation period may be permitted under the general limitation statute.  Thus, In Ontario, s.22(5) of the Limitations Act, 2002 permits the normal two year limitation period to be shortened in business agreements, but not consumer agreements.

And third, ensure that there are no other statutory limitation periods which may apply to the tender.  In Ontario, that is unlikely since s.19 of the Limitations Act, 2002 states that a statutory provision containing a conflicting limitation period is of no effect unless that provision is set out in the Schedule to the Limitations Act, 2002.  But if there is a limitation provision in another statute which is potentially enforceable, then depending on the origin and nature of that provision, the decision in the Central Roadways case may require that the limitation provision be read against the public body and only enforceable if it clearly applies to the tender.

Tenders – Limitation Period – Construction Contract – Actions – Breach of Contract – 

Central Roadways v. City of Summerside, 2011 PECA 4 (CanLII) 

Jagosky v. Huntsville

This decision was upheld by the Ontario Court of Appeal on April 26, 2011:

Jagosky v. Huntsville (Town), 2011 ONCA 324 (CanLII) 

When Does The Limitation Period Start For A Negligent Construction Claim?

An addition to my April 17, 2011 article on the start of a limitation period for a negligent construction claim has been made due to a  recent decision by the Ontario Superior Court of Justice.

The principle in the Timminco case was recently adopted and applied by the Ontario Superior Court of Justice in Jagosky v. Corporation of the Town of Huntsville, 2010 ONSC 4590 (CanLII).  The Court held that “distinct construction deficiencies not discoverable by due diligence may give rise to separate causes of action”.

Can A Construction Lien Be Based On A Pre-Incorporation Contract?

Construction Lien Claims  –  Pre-Incorporation Contracts

What happens when a pre-incorporation construction contract is made in the name of a company which does not do the work, and then the construction lien is filed in the name of the company that was later incorporated and did the work?

That was the situation faced by the Alberta Court of Appeal in Canbar West Projects Ltd v. Sure Shot Sandblasting & Painting Ltd.  The Court held that the lien was valid and, furthermore, that the contract had been effectively adopted by the company that did the work.

A company known as Can-West Projects Ltd entered into a contract with Sure Shot  to construct facilities on land owned by a company related to Sure Shot.  The problem was that Can-West was not then incorporated, and when the principals behind it went to incorporate the company, they found that the name was taken. So they incorporated a company by the name of Canbar West Projects Ltd. and that company registered the name “Can-West Projects” as a trade name.  After it was incorporated, the rest of the work was done by Canbar West Projects Ltd and it registered the lien.

The trial judge held that Canbar did not have a valid lien because it had not entered into the contract, and that Canbar had not adopted the contract made in the name of Can-West.  The Court of Appeal of Alberta reversed both of these findings.

First, the Court of Appeal held that, so far as the lien was concerned, it did not matter that the contract was not in the name of Canbar.  The entitlement to a lien arises from three elements:

–         the owner requests the work

–         the claimant does the work

–         and the work improves the value of the land

The lien does not arise from the existence of a contract.  Indeed a contract with the owner will not exist between the owner and a sub-contractor and yet sub-contractors can file liens.  Here, Canbar had done the work, at least from the date of its incorporation; and the land had been improved.  The mere fact that the contract had been made with a contractor under another name did not mean that the owner had not requested the work to be done.  In effect, the trial judge had incorrectly used principles relating to the making of contracts when the issue related to construction liens.

Some of the work had been done before Canbar’s incorporation.  As to that work, the Court of Appeal referred to section 15(3) of the Alberta Business Corporations Act, which deals with pre-incorporation contracts.  The Court held that Canbar had adopted the contract made in the name of Can-West, in two ways.

First, the name on the contract was very similar to the name of the company as incorporated.  In this circumstance, the contract can be said to have been made “in its name” within the subsection.  As the court said, “minor variations in name surely must be included with respect to contracts made in the name of a then non-existing corporation.”

Second, the contract was made “on behalf of” the company within the meaning of the subsection. The principals intended to incorporate a company, to use the Can-West name and to have it perform the work, and they only adopted another name because that name was taken.  The company in fact adopted and performed the contract and the owner took no objection to the company doing further work after they knew that the lien was filed in the name of CanBar.

On the latter point, the trial judge had held that the existence of another, totally unrelated, company having the Can-West name disentitled CanBar from adopting the contract.  The Court of Appeal disagreed. The other Can-West company did no work on the project and did not file the lien.  That company was totally irrelevant to the issue.

This decision is a reminder of two important principles.  One relates to construction liens. Construction liens are a creature of statute, not contract law.  They protect those who improve lands, by virtue of that improvement and not by virtue of a contract. The owner must request the work or materials, but the lien arises from the request and the subsequent improvement, not a contract.

The second principle relates to pre-incorporation contracts.  Adoption of such a contract can, under the legislation, occur “by any act or conduct signifying [the corporation’s] intention to be bound”, but only as long as the original contract was made in its name or on its behalf.  Those involved in pre-incorporation contracts should make both elements very clear, both that the contract was made in the future corporation’s name or on its behalf, and also that there is a clear adoption of the pre-incorporation contract, by an express corporate resolution or contract or other express written document to that effect.  Absent that sort of clarity, pre-incorporation contracts can lead to litigation.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed.) at Chapter 1, para 1(a)(ii) and Chapter 11, para 2(a)(iii).

Construction Lien  –    Pre -incorporation Contracts:

Canbar West Projects Ltd v. Sure Shot Sandblasting &Painting Ltd., 2011 ABCA 107