A Builders Lien Does Not Apply To The Lease Of An Airport

The British Columbia Court of Appeal recently considered the constitutional limits of the Builders Lien Act of that province.  In Vancouver International Airport Authority v. British Columbia, the Court held that the Act did not apply to the leasehold interest of the Vancouver International Airport Authority.  The Court drew the constitutional boundary based upon the purpose of the lease from the Federal Crown.  The drawing of the boundary based upon the purpose of the lease may raise questions relating to the enforcement of provincial lien statutes against sub-leases of federal lands or from federally regulated institutions.  

          The Authority leases the Vancouver Airport from the Federal Crown under a 60 year Lease. The Lease required the Authority to use the Airport Lands for the management, operation and maintenance of an international airport.  It also required the Authority to keep the Demised Premises free of encumbrances, to indemnify the Federal Crown from construction or builders liens and prohibited the Authority from transferring its leasehold interest except with the consent of the Federal Crown.

The Builders Lien Act of British Columbia says that any agreement that provides that the Act is not to apply is void.

The B.C. Court of Appeal upheld the decision of the lower court that the Builders Lien Act did not apply to the Authority’s Lease.  The Court first applied the constitutional principle of “interjurisdictional immunity”.  This principle holds that, under the Constitution Act, there is a core of legislative jurisdiction reserved to each of the federal Parliament and the provincial legislatures, and that provincial legislatures cannot invade the core of federal legislative authority. The B.C. Court of Appeal applied recent decisions of the Supreme Court of Canada which limited the interjurisdictional immunity principle to circumstances in which provincial legislation impairs, and not merely affects, a federal power.  Accordingly, if the Builders Lien Act impaired the federal authority over aviation, then the Act was inapplicable to that extent.

The Court then reviewed the extent of the federal power over aviation.  It acknowledged that anything which is an “integral and vital part of aeronautics and aerial navigation” falls within that power and that, accordingly, airports are integral to aviation.  The Court concluded that the ultimate “hammer” in a builder’s lien is the enforcement of the lien, which would impair the operation of the airport if the lease was seized. In addition, the ability to register a lien impaired the ability of the Authority to obtain financing of the improvements necessary to fulfil the Authority’s mandate.

The Court distinguished the decision in Western Industrial Contractors Ltd. v. Sarcee Developments Ltd (1979), 98 D.L.R. (3d) 424 (Alta. C.A).  In that case, the Crown had leased land to a native development corporation, and the Alberta Court of Appeal held that the lease was subject to the provincial builders’ lien legislation, notwithstanding the federal Indian Act.   The B.C. Court of Appeal held that the distinction between the two cases arose from the purpose of the lease in each case.  In Sarcee, the purpose of the lease was for a commercial development having nothing to do with the federal legislative power. In the Vancouver International Airport Authority case, the purpose of the Lease “concerns the matter of aeronautics” and therefore the Lease fell within the exclusive federal jurisdiction.

The Court did not rule on an alternative argument, namely, that the airport land itself was “Public Property” and therefore within exclusive federal jurisdiction under s. 91(A) of the Constitution Act.

The Court’s decision raises interesting questions for sub-leases of federal land or from federally regulated institutions.  If the sublease from the airport is to a donut shop, or a clothing or magazine store, would the same result pertain?  Would the unpaid lien holder’s claim against the store owner interfere with the “purpose” of the airport?  What if the sub-lease was from a bank or a port authority, which are both federally regulated institutions, to a purely commercial operation having nothing to do with banking or shipping?  Would the lien holder’s claim against the shop owner and its sub-lease fall within the Vancouver International Airport Authority decision, or the Sarcee decision?  Does the answer change depending how important the lessee’s operations are to the commercial success, or how distant they are from the aeronautical nature, of the airport?  Thus, does a sub-lease of space to an airline fall on one side of the line and the donut shop sub-lease fall on the other?   These are questions for which the present decision provides no clear answers.

Construction Liens – Constitutional law:  Vancouver International Airport Authority v. British Columbia (Attorney General), 2011 BCCA 89 (CAnLII)

 

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

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

The law of Limitations creates a difficult question for those involved in construction projects: When does the limitation period begin for a claim in negligence arising from a construction project?   In Timminco Ltd. v. ABB Industrial Systems Inc., an Ontario judge recently held that the answer is: when the plaintiff knew or ought to have known of the particular defect that gave rise to the damage for which the plaintiff sues.

The plaintiff produced magnesium billets.  In March 1998, it retained engineers and started the design of a new facility to mill, alloy and refine magnesium. In August 1998, it contracted with the defendant for the supply of the two furnaces for the facility. The furnaces were installed and tested in 1999.  In November 2000, molten magnesium spilled out of the furnace, through a gap in the floor and landed on the pipes carrying glycol coolant to the furnace. The glycol was ignited, a fire ensued and the furnaces were damaged.

The plaintiff did not commence an action against the defendant until November 2006 or just within the old six-year limitation period in Ontario if the limitation period started which the fire occurred in November 2000.  The plaintiff said that the damage which occurred in November 2000 was an essential element of its cause of action, that the cause of action did not accrue until then and therefore the six year limitation period had not expired when it started its action.

The defendant brought a summary judgment motion to dismiss the action. The defendant asserted that, well before November 2000, the plaintiff knew all about the circumstances which led to the fire.  The characteristics of the design of the facility were well understood by the defendant and its engineers during the construction of the facility.  Incidents had occurred prior to November 2000 – during the construction project itself, the testing period and the operation period leading up to November 2000.  Those incidents had caused damage, including damage arising from spilled magnesium causing a previous fire in September 1999.  From those incidents, the defendant said that the plaintiff knew or ought to have known of the very defects which allowed the spilled molten metal to come into contact with the pipes carrying the glycol to the furnaces.  Accordingly, the defendant said that, at the very latest, the limitation period ran from the date of those incidences, and that by November 2006 the limitation period had expired.

The problem with the limitation period is that the elements of the tort of negligence contradict the principles relating to limitations of action.  The occurrence of damage is an essential element of the tort of negligence. So, the “cause of action” in negligence should only arise when the damage occurs.  However, both the courts and the legislatures have said that it is unfair to expect a plaintiff to sue if the damage is unknown. The common law in Canada developed the principle that the limitation period for a claim in negligence only commences when the plaintiff knew or ought to have known of the cause of action. That principle is now contained in Ontario’s Limitations Act, 2004.

In these circumstances, the question is: What facts must the plaintiff know or ought to know for the limitation period to begin?  Any damage arising from the negligent act or omission? Any defects arising from the negligent act or omission?  The particular damage for which the plaintiff sues? Or the particular defect which gave rise to the particular damage for which the plaintiff sues?

If the first two answers were correct, then the plaintiff’s claim would have been out of time under Ontario’s old six-year limitation period.  The defendant asserted that the second answer was the correct one. If the third answer was correct, then the plaintiff’s action would be in time. This was the theory advanced by the plaintiff. If the last answer was correct, then the facts might establish that the plaintiff did, or did not, know about the particular defect which caused the fire until that fire occurred, or within six years of when the action was commenced.

The motion judge selected the last answer.  She held that in Grey Condominium no. 27 v. Blue Mountain Resorts, (2008), 90 O.R. (3s) 321,  the Ontario Court of Appeal had held that each deficiency in a construction project gives rise to a separate cause of action in negligence. She reasoned that the decision in Grey Condominium means that there are separate causes of action “not because there were separate and distinct injuries, but because the deficiencies in question were distinct deficiencies and the discovery of one would not reasonably give rise to the discovery of the other.”

Applying this principle, the motion judge held that two questions arose. First, were the defects giving rise to the fire in November 1999 latent or patent?  If they were latent, then they were arguably unknown and reasonably unknowable to the plaintiff. Second, even if the defects were known, were they the same defects as those that gave rise to the prior incidents?  If not, then this incident in November gave rise to a new limitation period.

The judge held that these questions could not be answered on a summary judgment motion, and accordingly ordered the action to proceed to trial.

In rejecting the third answer, the motion judge refused to apply a Massachusetts’ decision – Cigna Insurance Company v. Ov Saunatec Ltd, 241 F. 3d 1 (1st Cir 2001). In that case, the court held that each damage gives rise to a separate cause of action, even though caused by the same act of negligence, and that “if there are multiple injuries, there will be multiple causes of action with multiple dates of accrual if the injuries are separate and distinct.”  The motion judge said that, while the Grey Condominium decision appeared to support this approach, its reasoning dictated to the contrary. She held that it was the distinction between the defects, not the distinction between the damages, which led to the result in Grey Condominium.  Accordingly, if the same defect led to two occurrences causing damage, the first occurrence could well cause the limitation period to run.  If the defects were different, then the limitation period relating to the damage for this second occurrence only commenced at the date of that occurrence.

The motion judge did give effect to one part of the summary judgment motion. The contract limited the damage recoverable to the amount of the purchase price for the furnaces.  The motions judge granted a declaratory judgment limiting the amount of the plaintiff’s recovery to that amount.

Needles to say, these distinctions can make the head spin.  Whether the same deficiency led to the same damage, whether the deficiency was latent or patent and whether the plaintiff knew or ought to have known any of this, will confuse even the most sophisticated persons engaged in construction projects.  All the more reason to carefully monitor the course of construction and the condition of the constructed project, and to start any claim as soon as possible.  This is particularly so since, under the Limitations Act, 2004, the Ontario limitation period has now been reduced to two years.

Limitations – Negligence – Limitation clauses:

Timminco Ltd. v. ABB Industrial Systems Inc. 2010 ONSC 6971

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”.

What Happens When a Party Refuses to Arbitrate?

A construction lawyer must keep track of the general law of contract and arbitration.  In turn, many construction cases have settled fundamental principles of the general law.  The recent decision of the UK Supreme Court in Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan is a case in point.  This decision dealt with a fundamental element in the principle of competence-competence in relation to the jurisdiction of arbitration boards.

At its heart, this case was just an ordinary construction case.  But its international dimensions may take it out of the radar screen of construction lawyers. The Plaintiff, Dallah entered into a Memorandum of Understanding with the Government of Pakistan to provide housing for pilgrims to Saudi Arabia through a 55-year lease of property with related financing.  That MOU was replaced by an agreement between Dallah and a Pakistani Trust promulgated under an ordinance of the Pakistani government.  The Trust was to be financed by contributions and savings from pilgrims and philanthropists. The Pakistani Ministry of Religious Affairs was to act as secretary of the Trust.  The agreement between Dallah and the Trust provided for arbitration under the ICC (Paris) Rules.

With a change in government in Pakistan, no additional ordinances were promulgated and the Trust disappeared under Pakistani law.  The project collapsed and  Dallah commenced an arbitration, asserting that the Government of Pakistan was the real party to the agreement and was bound by the arbitration clause.  The Government of Pakistan asserted that it was not a party to the agreement and refused to participate in the arbitration.  Dallah appointed its nominee and the ICC appointed the other two nominees to the arbitration board.

The arbitration board sat in France.  Applying the competence-competence principle now well known to arbitration law, it held that it was competent to determine its own competence.  The board held that the Government of Pakistan was the real party to the agreement and found the Government liable under that agreement.  

Dallah then sought to enforce that arbitration award in England. The decision of the UK Supreme Court (which has replaced the House of Lords as the highest court in the United Kingdom) is of importance to construction lawyers for two reasons.

First, the Supreme Court held that the decision of the arbitration board about its own competence and jurisdiction had no effect on the UK court, and provided no support for the enforcement of the award.

Second, the Court held that, on the facts, the Government of Pakistan was not a party to the agreement and was not bound by that agreement or the arbitration clause found in it.

The Court rejected a variety of arguments that the decision of the arbitration board should be res judicata, or given some weight.  While the principle of competence-competence did allow the tribunal to make an initial decision about its competence, that principle and that decision was only valid and effective for the purpose of the arbitration tribunal itself and its decision about whether to proceed with the arbitration hearing or not.

However, if a party refused to participate in that process, as the Government of Pakistan did, it was not bound by the result, nor did principles of estoppel come into effect. The Court said: “An arbitral tribunal’s decision as to the existence of its own jurisdiction cannot therefore bind a party who has not submitted the question of arbitrability to the tribunal.”  That principle applied whether the tribunal’s award was sought to be enforced in the jurisdiction where it was made, or in another jurisdiction.

Nor was the issue affected by the tribunal’s own decision about jurisdiction. The UK Supreme Court said:   “The tribunal’s own view of its jurisdiction has no legal or evidential value, when the issue is whether the tribunal had any legitimate authority in relation to the Government at all.  This is so however full was the evidence before it and however carefully deliberated was its conclusion.”   The Court used a tennis analogy when it described Dallah’s application to enforce the award in England: “Dallah starts with the advantage of service, it does not start fifteen or thirty love up”.

This part of the decision of the UK Supreme Court is of legal significance.  The second part of its award is of some importance from a comparative fact standpoint.  The Court held that, on the evidence, the Government of Pakistan was not a party to the agreement and the arbitration clause found in that agreement.  The Court looked to:  the initial involvement of the Government in the MOU and the distancing of itself from the subsequent agreement; the separate legal existence of the Trust; the Government’s specific guarantee of certain obligations and not others, and its obtaining of counter-guarantees from the Trust and the Trustee’s bank; and the conduct of the parties in performing the agreement. The fact that the Trust never had assets did not prove that it was a mere tool of the Government since its acquisition of property was dependent on arrangements through Dallah which were never carried out.

These sorts of circumstances may be familiar to those involved in construction projects.  Often, a party of substance inserts a corporation, trust or other entity as the named contracting party.  The other party will have to be very careful to ensure that the named contracting party has the wherewithal to complete the project, or that suitable guarantees are obtained from the party of substance or from other guarantors.

In the result, a case of international proportions has some down-to earth-lessons for construction lawyers.  First, if a construction agreement contains an arbitration clause, an award under that clause is only as good as the binding effect of the agreement, unless the opposing party separately agrees to submit to the jurisdiction of the arbitrators.  Second, it is difficult to impose a construction agreement on a party which has not signed and expressly agreed to be a party to that agreement.

Arbitration – Competence-Competence  – Construction Law –  Construction Agreement – Enforcement

Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46

Who Knew That Mary Carter Was Involved In Construction Law?

In Aecon Buildings v. Stephenson Engineering Limited, the Ontario Court of Appeal recently dismissed a construction law claim because a Mary Carter agreement was not immediately disclosed.

A Mary Carter agreement is a settlement agreement between a plaintiff and defendant in which the defendant remains an active party to the litigation and the claim also proceeds against other parties.  Since the defendant continues to participate in the action, the appearance is conveyed that the defendant is still liable to the plaintiff, contrary to the reality of the settlement.  For this reason courts have always insisted that a Mary Carter agreement be immediately disclosed to all parties.  But what happens if it isn’t?  The Ontario Court of Appeal faced that situation in this case.

The general contractor, Aecon, sued the owner, the City of Brampton, for damages due to the delay in the construction project.  The City blamed the consultant for the delay.  The consultant blamed the sub-consultants.

Before the action was commenced, Aecon and the City settled Aecon‘s claim on the basis that Aecon would only recover from the City the amount that the City recovered from the consultant.

While the settlement was effectively made before the action was commenced by Aecon against the City, it was reduced to writing the day after that action was commenced.  Once the action was commenced, the City claimed over against the consultant and the consultant claimed over against the sub-consultants.

Aecon and the City remained active parties in the litigation, but the settlement agreement was not immediately disclosed to the consultant or sub-consultants who only discovered it later through other sources and demanded that it be produced.

The Court of Appeal held that the delay in the disclosure of the settlement agreement amounted to an abuse of process, even though the disclosure did occur before the affected parties were required to plead.  The agreement had only been produced several months after its existence was discovered by the consultants and when it was specifically requested.

The Court said that the only way for it to control its own process, in order to ensure that Mary Carter agreements are immediately produced, was to dismiss the City’s claim against the consultant and thereby the further claims by the consultant against the sub-consultants.  Permitting the litigation to proceed without disclosure of the agreement rendered “the process a sham and amounts to a failure of justice” in the Court’s view.

This decision is a reminder of the drastic remedies available to the Courts if litigation is conducted unfairly.  While Mary Carter agreements are most often used in personal injury or medical malpractice actions, they can also be used to settle construction litigation.  When they are, the parties must be scrupulous to ensure that the agreement is immediately disclosed.  Otherwise, any further claims in the action may well be dismissed.

Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898 (CanLII)   

Construction Law – Claims – Settlement – Agreement – Litigation – Champertous – Abuse of Process – Motion

www.constructionlawcanada.com                                                    April 3, 2011

Does A Breach of Fiduciary Duty Fall Within an Arbitration Clause?

In the recent decision, St. Pierre v. Chriscan Enterprises Ltd., the British Columbia Court of Appeal considered whether a claim by an owner against the project manager for breach of fiduciary duty fell within the wording of the arbitration clause in the project management agreement.

The arbitration clause stated that disagreements “as to the interpretation of this contract or the quality of the material or construction arranged by the project manager or any issues relating to project deficiencies” were to be arbitrated under the British Columbia Commercial Arbitration Act. 

The owner’s claim was that the project manager had arranged for some of the work to be contracted to a company in which the principal manager of the project manager, Chriscan, had an interest and that the project manager or its principal had received secret profits in this way.  The owner asserted that its fiduciary duty claim against the project manager relating to those secret profits did not fall within the arbitration clause.

The B.C. Court of Appeal disagreed.  It noted that, if the arbitration clause referred to “all disputes”, then there would be no argument and the dispute would clearly have to be arbitrated.  The Court held that, while the present arbitration clause was narrower, it still captured the dispute which depended on determining whether the relationship between the parties was a fiduciary one or not.  That issue depended upon an “interpretation of the contract” between the parties.  Accordingly, the dispute fell within the arbitration clause.

The Court held that “it is only by interpreting the contract, in its factual context, that the legal nature of their relationship and whether the appellants’ allegations have any merit can be determined”.

This decision reflects the tendency in Canadian law to include any claim within an arbitration clause which arguably falls within it.  In this case, the parties appeared to be at some pains to draft a narrow arbitration clause, yet the Court held that the clause applied to conduct quite outside the actual performance of the construction project – a secret profit allegedly earned by the project manager through a related company.  It is hard to imagine an arbitration clause and a claim which are more disassociated, yet the Court held that the claim fell within the arbitration clause.

The lesson here is that an arbitration clause in a construction project should either be drawn to encompass “all claims” in dispute, or if the parties intend to limit the disputes which may be arbitrated then those limitations should be set out in explicit exclusionary language.

St. Pierre v. Chriscan Enterprises Ltd., 2011 BCCA 97 (CanLII) 

Construction Law – Claims – Arbitration

www.constructionlawcanada.com                                                                                                                                               March 28, 2011

Construction Liens: Two Thorny Issues: Can non-lienable work be sheltered? Can off-site work be liened?

In John Barlot Architect Ltd. v. 413481 Alberta Ltd, the Alberta Court of Appeal has recently dealt with two thorny issues relating to a consultant’s services and construction liens: Can a lien shelter non-lienable work?  And can a consultant’s services provided to one project be liened on a second project if they were also used on the second project?

The plaintiff architect undertook three kinds of services to the owner defendant, and filed a lien for those services when its contract was terminated and it was replaced as the architect on the project.

First, it provided rezoning, subdivision and development services for the project.

Second, the architect did some work for a Sales Centre for the project, and that work was properly the subject of a lien.

Third, the architect submitted plans to the owner which were actually plans that had been previously prepared to construct another building in another location.  The owner used those plans to develop cost estimates.  The plaintiff architect claimed that the work to prepare these plans was also protected under its lien.

The Alberta Court of Appeal applied prior judicial authority in Alberta and held that the services relating to rezoning, subdivision and development were not sufficiently connected to the construction to constitute an “improvement” to the land.  Therefore, the lien was improperly filed in respect to that work.

The Court also confirmed the trial judge’s finding that the plans for the other project were not in fact connected to the owner’s project because they were not seen or used by the replacement architect.  The plans which the plaintiff architect had prepared were different and “too far removed from the intended construction process” to support a lien.

Most importantly, the Alberta Court of Appeal arrived at two further legal conclusions.  First, the Court held that even if the evidence of the plaintiff architect was accepted and the plans for the other building and the plans for the present project were similar, the plans for the other building were “not prepared ‘in respect of’ an improvement intended to be constructed on the subject land”.   Accordingly, while the plaintiff might have a claim in contract against the owner for the work in relation to those plans, the plaintiff had no lien rights.   That conclusion means that work prepared for a first project and site but useable on a second project and site cannot, as a matter of statutory interpretation, give rise to lien rights in relation to the second project.

Second, the Court held that the valid lien for the Sales Centre work could not shelter the rezoning, subdivision and development work. The Court noted that there was little authority on the proposition that a valid lien in respect of some work could shelter other non-lienable work.  However, it concluded that such a proposition was inconsistent with the whole scheme of the Act.  The word “improvement” cannot be interpreted to include the words “plus any related work not in respect of the improvement”.  That proposition would also play havoc with the application of the words “price of the work” and the hold back and trust fund provisions of the Act.  The owner and others receiving money on the project would never know what amount of non-lienable work was to be included in the hold back and trust funds.  In addition, a contractor or supplier which had delivered a small amount of lienable work or supplies but a large amount of non-lienable work would be unfairly preferred over one who had provided no lienable work or supplies.

Two important conclusions can be drawn from this decision.  First, the sections of the Construction and Builders’ Lien Acts are highly integrated.  Each provision depends on the others. Changing the impact of one section may change the impact of other sections. The Alberta Court of Appeal concluded that expanding lien rights to protect work on other projects, or other non-lienable work, would stretch the Act unfairly and unworkably.

Second, the decision also shows that the Construction and Builders’ Lien Acts provide uncertain protection for “soft services” such as those provided by consultants.  Originally, those services were not protected by some of these Acts, probably because the connection to the actual improvement of the land was thought to be indirect and debatable.  When they are protected, courts will be careful not to expand the net of lienable consulting services to those which do not directly relate to the improvement to the lands.

Building Contract – Consultant- Construction Lien – Improvement- Sheltering:  

John Barlot Architect Ltd. v. 413481 Alberta Ltd, 2010 ABCA 51 (CanLII)   

www.constructionlawcanada.com                                                                                                                                                                       March 20, 2011

Contractors Beware: Don’t Rely On Quantum Meruit To Fill a Gap in a Contract

The principles of contract interpretation and quantum meruit are obviously quite distinct.  But in its recent decision CH2M Hill Energy Canada, Ltd. v. Consumers’ Co-operative Refineries Ltd., the Saskatchewan Court of Appeal has reminded us that they also give rise to two very different and separate payment obligations.  There cannot be an obligation to make a quantum meruit payment if the contract, properly interpreted, covers the subject matter but contains no contractual obligation to pay.

CH2M Hill Energy Canada Ltd. (“CH2M”) answered a request for proposal issued by Consumers’ Cooperative Refineries Ltd. (“CCRL”). The accepted proposal was for the provision by CH2M of home office services and field management services, and also included the provision of craft labour.  The proposal stated that there would be a specified mark-up on the home office services and field management services, including percentages for burden and overhead.  However, while the request for proposal and the accepted proposal provided for payment of the cost of the craft labour itself, neither provided for a mark-up on craft labour.

The Court rejected the argument that the principle of “contractual quantum meruit” could be used to imply an obligation to pay a mark-up on craft labour when the contract contained no such obligation.  Contractual quantum meruit only applied, the Court said, if the contract contained an obligation to pay for the mark-up, but left the amount of payment unspecified.

Another concept is restitutionary quantum meruit which applies if the parties have not made any agreement about the subject matter at all.  That was not the case here.  The agreement did include the subject matter of craft labour but only provided for payment for the direct cost of that labour.

In the present case, the request for proposal and the proposal contained no obligation to pay for mark-up on craft labour.  The Court said that CM2H was seeking to imply into the contract a “multimillion dollar claim for overhead”.  The Court noted that overhead is “too variable a term” and its calculation “inherently uncertain and controversial”.  In the present case, the amount of the overhead would be about $10 million.  Before an obligation to pay for a mark-up on craft labour could be implied into the contract, cogent evidence of the parties’ intention to that effect would have to exist.  To the contrary, the request for proposal and the proposal itself contained no such evidence, in contrast to the mark-up specified for the other services.  Absent a contractual obligation to at least pay for the mark-up on craft labour, there was no room for the application of quantum meruit.

This decision is a fair warning to contractors:  If you want to be paid for each element of the materials or services that you provide, then ensure that the contract clearly identifies those elements and states an obligation to pay for each of them.  If you don’t at least provide for the obligation to pay, then don’t expect quantum meruit to fill the gap left by an adverse interpretation of the contract.

Building Contracts – Interpretation – Quantum Meruit:   CH2M Hill Energy Canada, Ltd. v. Consumers’ Co-operative Refineries Ltd. 2010 SKCA 75 (CanLII) 

The Trust Fund Provisions of the Construction Lien Act (Ontario): New Developments relating to Suppliers and Third Parties

The Trust Fund Provisions of the Construction Lien Act (Ontario):   New developments relating to Suppliers and Third Parties

By Thomas G. Heintzman O.C, Q.C. and Mekhriban Mamedova[1] 

 

6th Annual Current Issues in Commercial Litigation:

Hamilton Law Association;

March 2, 2011

1.            Introduction

The Construction Lien Act looks like a formidable statute to most lawyers, from both a substantive law and procedural standpoint. Filing a lien?  Within strict time periods and according to technical rules?  That’s not for me!  Looks like something to be shipped out to a specialist!

True in part, but there is one section in the Construction Lien Act that does not involve filing a lien, and involves basic principles of trust law.  That is Section 8 of the Act.

Section 8 gives each contractor, sub-contractor and supplier a right to share in the funds owing down the chain of those who have improved the lands of an owner.  Those funds constitute a trust fund for all persons below the person owing the funds.

This paper will examine two important developments relating to the trust fund provisions of the Act.

First, in its recent decision in Sunview Doors v. Pappas, the Ontario Court of Appeal has thrown the doors wide open for suppliers to recover under the trust fund section. Whether you act for owners, contractors or suppliers, or for a financial institution that may be embroiled in the payment of monies relating to a construction project, you should know about Sunview Doors.

Second, you should know about the Supreme Court’s pivotal decision about tracing trust funds in Citadel General v. Lloyd’s Bank.  That decision is now being applied by lower courts to trace funds which originate under the trust fund provisions of the Construction Lien Act.

Both Sunview Doors and Citadel General offer new opportunities for counsel to use the trust fund provisions of the Act to pursue and trace funds relating to construction projects, and new obligations for defence counsel to creatively defend against those claims. New challenges for creative advocates!

2.            The Trust Fund “Funnel”

            Before we examine Sunview Doors and Citadel General, it is important to recognize that the trust fund section creates a “funnel” which requires that trust funds be passed down from one level to the next level, from the owner to the contractor to the sub-contractor to the supplier, and not diverted to other persons or purposes.  So when we come to apply Sunview Doors and Citadel General, we do so in a closed universe which should have captured all the funds which started out at the owner’s level and cannot be used for any other purpose than payment to those who improved the land.

Some of the principles developed in the case law which enforce the “funnel” effect of the Act include the following:

(a)          Trust funds must be held by a recipient until it has paid all claims relating to the project, and not merely those outstanding at the time it receives the money. The recipient cannot divert monies simply because it has received more money at that point in time than it has obligations to then pay;[2]

(b)          Once the plaintiff establishes the existence of the trust, the defendant must show that it has paid all the money in accordance with Act.  The recipient is accountable for and must justify all expenditures from the fund.  The trust takes priority over the recipient paying itself;[3]

(c)          If the recipient intermingles funds from more than one job in an account, then in any tracing exercise in relation to those funds the recipient must justify what it did with the funds it received on the project on which each claimant was engaged;[4]

(d)          The recipient cannot escape its trust fund obligations simply by showing that it paid out more than it received. Rather, it must trace the received monies into valid payments to valid recipients;[5]

(e)          The recipient can only seek credit for payments on the basis that they were made from non-trust funds if it can affirmatively prove that its subsequent payments were not out of trust funds. If it cannot, then it cannot take a credit for those payments on the supposed basis that they came from non-trust funds;[6]

(f)           The recipient cannot deduct its overhead out of trust funds;[7]

(g)          A recipient does not satisfy its trust fund obligation simply by creating a separate bank account into which all the trust funds are deposited. It still has to show that all monies were paid into or out of that account in accordance with its trust fund obligations. [8]

These well-known principles provide the background context in which we may discuss Sunview Doors and Citadel General.  These principles show that the net around the trust funds arising from a construction project is very tight.  So when a supplier claims a remedy under Sunview Doors, or other claimants seek remedies against third parties under Citadel General, those claimants are working within a system that has already maximized the probability that there were funds upon which those remedies are operative.

3.            Trust Funds owed to the Suppliers

The primary question in the appeal in Sunview Doors Limited v. Pappas[9] was whether Sunview Doors – a supplier – was entitled to the benefit of a statutory trust pursuant to s.8(1) of the Construction Lien Act (the “Act”).[10]

Section 8(1) creates a statutory trust fund for the amounts owing to a contractor or subcontractor, or received by a contractor or subcontractor.  The trust fund is created for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement and who are owed amounts by the contractor or subcontractor.  There is an obligation placed on each payer and recipient not to convert any part of the fund to their own use.

            Sunview supplied custom-made patio doors to Academy Doors and Windows.  It knew that the doors were supplied for the purposes of improvements; however, it did not know the location of the improvements.

Sunview brought an action against Academy for breach of contract on the basis of the unpaid accounts and against Academy and the three individual officers and directors of Academy for breach of trust under ss. 8 and 13 of the Act.[11]

The trial judge based his conclusions on the decision in Central Supply Co. 1972 Ltd. v. Modern Tile Supply Co.[12]  In that decision, a panel of the Court of Appeal sitting as the Divisional Court held that, in order for a s.8 (1) statutory trust to arise, the claimant or supplier must “intend that the material sold be used for the purposes of a known and identified improvement.”  Following that decision, the trial judge in Sunview Doors found that Sunview could not establish that, at the time it sold or supplied its doors to Academy, it intended that they be used for known and identified improvements.[13]  As a result, the trial judge concluded that s.8 (1) statutory trust had not arisen.

In the Sunview Doors decision, the Court of Appeal for Ontario overturned the trial judge’s decision and reversed the prior decision in Central Supply.  The Court held that nothing in the wording of the Act requires that the supplier intend that the material be incorporated into a known and specific improvement at the time of sale or supply.  Provided that the supplier is able to link the material to the improvement to which the subcontractor was owed money or has been paid, the supplier will be entitled to the benefit of the s.8.  The connection or link need not be direct and was described by the Court of Appeal as follows:

“[W]here the contractor or subcontractor does not allocate the supplier’s material to a particular piece of land or improvement within a project, but it is clear that the contractor or subcontractor has received money on account of the contract price for the project and that the contractor or subcontractor owes money to the supplier, a link to the contractor’s or subcontractor’s contract for the project will be sufficient to establish a s. 8 statutory trust….

In order for Sunview to establish that it was the beneficiary of a trust under s. 8(1) of the Act, it must prove that:

(i)            Academy was a contractor or subcontractor;

(ii)           Sunview supplied materials to the projects on which Academy was a contractor;

(iii)          Academy received or was owed monies on account of its contract price for those projects; and

(iv)         Academy owed Sunview money for those materials.”

In the case at bar, the link was established because of Academy’s conduct in deliberately frustrating Sunview’s attempts to obtain the disclosure that would enable it to link its products to the improvements into which they had been incorporated.[14]

The Court emphasized the purpose of s.8 (1) statutory trust – to impress upon money owing to or received by contractors or subcontractors a statutory trust, a form of security, to ensure payment to suppliers: “The object of the Act is to prevent unjust enrichment of those higher up in the construction lien pyramid by ensuring that money paid for an improvement flows down to those at the bottom.”[15]

In arriving at its conclusion, and, in particular in dealing with the onus of proof when the contractor has failed or refused to produce its records, the Court considered St. Mary’s Cement Corporation v. Construc Ltd.[16]  St. Mary’s Cement supplied concrete blocks to Construc, a contractor, who used them in connection with a construction project on two adjacent lots.  Some of the invoices did not specify to which of the two lots the materials were delivered.  The contractor claimed he had no record of the amount of concrete blocks used on each lot because he had lost all his records.  The trial judge held that;

“it is common ground that there is an initial onus on the plaintiff to prove the existence of a trust under s.8 of the Act.  In order to discharge that onus in this case, the plaintiff would need to show that Construc received money on account of its contract price for a particular project, that the plaintiff supplied materials on that project and that Construc owes money to the plaintiff for those materials.  If all these elements are clearly proven, the trust [under s.8] comes into play.”[17]

One can clearly see the broad implications of the Sunview Doors decision.  Now, once a supplier shows that it has delivered to a contractor or subcontractor, the potential for a trust fund claim arises.  Then, the burden is on the contractor or subcontractor to explain what it did with the money it received from the contractor or owner, and to demonstrate that none of the money leaked outside the trust.  To so demonstrate, the contractor or subcontractor will have to maintain a good system of records of the receipt and disbursement of funds for each project, and strictly adhere to that system.

The implications of Sunview Doors also apply to the directors, officers, servants and agents of the contractor and subcontractor.  If the contractor or subcontractor does not maintain records to show that the trust obligation has been strictly complied with, then under Section 13, those persons may be held liable if they assented to or acquiesced in conduct that they ought reasonably to have known amounted to a breach of trust.

Even the banker or lender to the subcontractor can be implicated in the breach of trust, and to that issue that we now turn.

4.            Trust Fund Liability of other Persons

In Citadel General Assurance Co. v. Lloyds Bank Canada,[18] the Supreme Court of Canada set forth the principles to be applied when a plaintiff seeks equitable remedies against other persons who have received trust funds.  The facts of this case related to the insurance industry, but the trust fund rules relating to insurance premiums are similar to the trust fund provisions of the Act relating to funds in a construction project.

An insurance agent sold insurance to auto dealers.  After paying commissions and settled any current claims under the policies, the insurance agent paid the balance of the premiums on a monthly basis to the appellant insurance companies.

In December 1986, the insurance agent started banking with Lloyds, using one bank account for all its transactions.  The Bank was aware that insurance premiums were being deposited into that account.  From June, 1987, the insurance agent no longer settled paid claims under the insurance policies, with the result that the amount of premium money being paid into its bank account increased significantly.  Lloyds then received instructions from the insurance agent’s parent company to transfer all funds in defendant’s account to the parent company’s account at the end of each business day.  The transfer of funds between the accounts resulted in an overall reduction in the parent company’s overdraft to Lloyds.  After the insurance agent and its parent company ceased carrying on business, the appellant insurance companies brought an action against Lloyds for the outstanding insurance premiums.  The Supreme Court of Canada re-instated the trial judgment holding Lloyd’s liable to the insurance companies for breach of trust.

            Section 124(1) of the Alberta Insurance Act, provides that an agent who receives any money as a premium for an insurance contract from the insured is deemed to hold the premium in trust for the insurer.  The Court held that the arrangement between the parties met the three characteristics of a trust: certainty of intent, certainty of subject-matter, and certainty of object.  The fact that funds in the insurance agency’s account with Lloyd’s were commingled with other funds did not undermine the relationship of trust between the parties.  The insurance agent’s actions in failing to remit to the appellants the insurance premiums collected on their behalf in July and August 1987 were clearly in breach of trust.

The Supreme Court considered three ways in which a stranger to a trust could be held liable for breach of trust: (i) a trustee de son tort; (ii) for “knowing assistance”; and (iii) for “knowing receipt.”

The Court did not consider the first situation, for the Bank had never assumed the office or function of trustee.  It also rejected the application of the second ground to the facts of this case – “knowing assistance.”  A stranger to a trust can be liable for breach of trust by knowingly assisting in a fraudulent and dishonest design on the part of the trustee: “it is clear that only actual knowledge, recklessness, or wilful blindness will render the [B]ank liable for participating in the breach of trust.  Since the [B]ank had only constructive knowledge, it cannot be liable under the “knowing assistance” category of constructive trust.”[19]

Lastly, the Supreme Court considered liability on the basis of “knowing receipt”, which required that a stranger to the trust receive or apply trust property for its own use and benefit.  By applying the deposit of insurance premiums as a set-off against the parent company’s overdraft, the Bank received a benefit and thus received the trust funds for its own use and benefit.[20]

The second requirement for liability on the basis of “knowing receipt” related to the degree of knowledge required of the Bank in relation to the breach of trust.  The Court held that there should be a lower threshold of knowledge required of the stranger to the trust.  “More is expected of the recipient, who, unlike the accessory, is necessarily enriched at the plaintiff’s expense.  Because the recipient is held to this higher standard, constructive knowledge (knowledge of facts sufficient to put a reasonable person on notice or inquiry) will suffice as the basis for restitutionary liability.”[21]  Therefore, this lower threshold is sufficient to establish the “unjust” or “unjustified” nature of the recipient’s enrichment, thereby entitling the plaintiff to an equitable remedy.

On the issue of knowledge, the Court concluded that it was clear from the trial judge’s findings that the Bank was aware of the nature of the funds being deposited into, and transferred out of, the insurance agent’s account.  The Bank knew that the insurance agent’s sole source of revenue was the sale of insurance policies and that premiums collected by the insurance agent were payable to the appellant insurance companies.  In light of the Bank’s knowledge of the nature of the fund, the daily emptying of insurance agent’s account was in the trial judge’s view “very suspicious.”  A reasonable person would have been put on inquiry as to the possible misapplication of the trust funds.  The Bank should have inquired whether the use of the premiums to reduce the account overdrafts constituted a breach of trust.  As a result, by failing to make the appropriate inquiries, the Bank had constructive knowledge of the insurance agent’s breach of trust.  Therefore, the Bank’s enrichment was clearly unjust, rendering it liable to the appellants.[22]

We will now examine cases applying these principles under the trust fund provisions of the Construction Lien Act, or the comparable legislation in other provinces.

            In Provincial Drywall Supply Ltd. v. Toronto-Dominion Bank et. al., 2001 MBCA 38, the Manitoba Court of Appeal was concerned with a claim by Provincial against The Toronto-Dominion Bank for breach of duties and obligations arising under The Builders’ Lien Act (the “BLA”) of Manitoba.[23]

When dealing with the knowing receipt issue, the Court considered the Citadel principle, i.e., that constructive knowledge was sufficient in order to establish knowing receipt on behalf of the Bank:  “At the very least, the Bank had constructive knowledge that Geon Interiors’ deposits included an element of trust funds and that when applied to Geon Interiors’ indebtedness to the Bank, a breach of the statutory trust imposed by the BLA was inevitable.  Under the circumstances, the Bank was under a duty not to appropriate those trust funds in reduction of the Bank debt.”[24]

Thus, constructive trust was found to be established by the operation of law.  That is, the trust fund provisions of the BLA provided a necessary element in the application of the “knowing receipt” principle.  This reasoning may be a powerful aid to claimants seeking equitable remedies against third parties who receive monies arising from construction projects.

The tracing issue was considered by the Court to the extent permitted by s. 8 of the BLA, which stated that “[n]o action to assert any claim to money constituting a trust under section 4 or 5 shall be commenced after the expiry of 180 days after the date upon which the person bringing the action first became aware of the breach of trust.”  The Court referred to the Glenko Enterprises Ltd. v. Keller,[25] where it was held that “in circumstances where the in rem tracing remedy might be available to a claimant, it must be acted upon within 180 days, after which the tracing remedy expires.”  Thus, the tracing was available to the claimant, as long as the time restrictions were met.

            In Iori v. Village Building Suppliers (1997) Ltd., 2007 ONCA 156, Ontario Court of Appeal considered two issues: (i) unjust enrichment; and (ii) constructive trust.  Village supplied drywall to the drywall subcontractor on a construction project.  Village agreed to discharge its lien in return for a mortgage on a property in the name of the wife of the owner of the drywall subcontractor. The wife then asserted that the mortgage was null and void against her, and the Court so found.  Village then asserted a claim against the wife based upon unjust enrichment and constructive trust.

So far as constructive trust is concerned, the Court of Appeal confirmed that the wife, as a stranger to a trust, might be liable as a constructive trustee for breach of trust on the basis of knowing receipt of trust property.  However, liability depended on Village proving that two requirements had been satisfied: (i) the wife received trust property; and (ii) she had knowledge of the breach of trust.

On the facts of the case, the Court of Appeal held that the wife did not have sufficient knowledge of the circumstances such that, she should have been on inquiry, as required by Citadel case.  Moreover, the Court also found that the wife had never received trust property; that is, she had not received any of the monies paid by the contractor to the drywall subcontractor.  As a result, the appeal was dismissed, for no constructive trust based on knowing receipt had arisen.

            In Glenko Enterprises Ltd. v. Keller, 2008 MBCA 24, the Manitoba Court of Appeal considered the issue of “knowing assistance” by the appellant in the breach of statutory trust under the Manitoba Builders’ Lien Act. entered into a sub-contract with Glenko for the latter to provide gravel and concrete supplies for a project.  Keller Ltd. stopped paying Glenko’s invoices. Mr. Keller (sole shareholder) had guaranteed Keller Ltd’s indebtedness to the Bank to a maximum of $550,000.  The Bank withdrew its financial support from Keller Ltd. and refused to accept any further deposits.

The Manitoba Court of Appeal agreed with the trial judge’s conclusion that Mr. Keller knowingly participated in a breach of trust.  The basis of liability for “knowing assistance” required two main elements of proof: “the nature of the breach of trust, which must be fraudulent and dishonest, and the degree of knowledge required of the stranger.”[26]  Actual knowledge; reckless or wilful blindness will also suffice.  Therefore, if the trust was imposed by statute, then he or she will be deemed to have known of it.  Mr. Keller had put the trust funds at risk to the prejudice of Glenko’s rights as beneficiary of the trust, and he knew that the risk was one which it had no right to take.[27]

The Court of Appeal also concluded that the claims for “knowing assistance” and “knowing receipt” were not barred by the 180 limitation period for bringing trust fund claims under the Manitoba Builders’ Lien Act.  That limitation period only applied to a claim to the funds themselves or tracing them, but not to claims for compensation for knowing assistance or knowing receipt.

            While it is not a construction lien case, the decision of the British Columbia Supreme Court in Peel Financial Holdings v. Western Delta Lands et al., 2003 BCSC 1911 is a recent reminder of a fundamental principle relating to tracing trust funds.  In addition to Citadel and Gold v. Rosenberg, the court considered the following statement of the House of Lords in Foskett v. McKeown:[28]

“a beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds every one who takes the property or its traceable proceeds except a bona fide purchaser for value without notice.”

In dismissing a summary judgment motion to dismiss the action, the British Columbia court observed:

“if [a] trust exists, then it is at least arguable that the various defendants either knew, or ought to have known of its existence, and if so, it is at least arguable that they each, in their various ways, acted in a manner inconsistent with that trust.”

            The Citadel decision was applied in a class action relating to trust funds arising from a construction project in Tampa Hall Ltd. v. Canadian Imperial Bank of Commerce, 1998 CanLII 14631.  This was a motion for an order certifying a class action.  The plaintiff sought to represent a class of all unpaid creditors who had supplied materials or services to the bankrupt contractor which were incorporated into improvements and were paid for by the recipient to the defendant bank.

The court referred to the Citadel and Gold v. Rosenberg decisions of the Supreme Court of Canada in order to draw a distinction between “knowing assistance” and “knowing receipt” cases: “’knowing assistance’ cases – where the defendant has assisted in the breach of trust but not benefited from it, and ‘knowing receipt’ cases – where the defendant has received a benefit.”[29]  The court cited and confirmed Citadel principles.  In “knowing assistance” cases, there is a higher threshold of knowledge required of the stranger to the trust.  Constructive knowledge is excluded as the basis for liability in such cases.   In “knowing receipt” cases, which are concerned with the receipt of trust property for one’s own benefit, there should be a lower threshold of knowledge required of the stranger to the trust.

On this basis, the Court concluded that a cause of action in knowing receipt had been properly pleaded by the plaintiff.  However, the Court concluded that, since the liability of the bank would depend on establishing the breach of the s. 8 trust and the constructive knowledge of the trust by the bank, in respect of each class member, the action did not raise common issues and it was not the preferable procedure for the claims to be asserted.  Accordingly the action was not certified as a class action.

The decisions applying the principles in Citadel General show how powerful those principles are in relation to a trust fund claim under section 8 of the Construction Lien Act.  In particular, the cause of action in “knowing receipt” has two advantages.  First, because the trust is a statutory trust, it arises by force of law and no defendant can assert that he or she is unaware of the trust.  Second, the Supreme Court has said that the “knowledge” test is a low one.  Facts sufficient to put a reasonable person on inquiry will establish constructive knowledge for the purpose of “knowing receipt” even if they are insufficient to meet the higher test in “knowing assistance”.  When a bank or other party is dealing with a contractor and receives money from the contractor that it knows or ought to know come from a construction project, then a claim in knowing receipt will have a strong basis.

What is not clear is the boundary between the tracing remedy and “knowing receipt”.  The decisions in Glenko and Provincial Drywall draw a distinction between these two claims, since the limitation period for trust fund claims in Manitoba has been held to apply to the former and not to the latter.  Yet, the elements of “knowing receipt” appear to be very close to those for tracing trust funds into the hands of another person.

5.         Conclusion

The decisions in Sunview Doors and Citadel General provide new grounds for claimants to assert trust fund claims under section 8 of the Construction Lien Act.

Sunview Doors enables suppliers to assert trust fund claims even if they cannot trace their supplies to a specific job site.  If they can show that they supplied to the contractor and that the contractor was connected to the job site, then the onus will fall on the contractor to show that all the funds it received on the project were properly paid to persons involved in the project.  In the absence of such proof, the supplier will not only be able to assert rights against the contractor but also against employees, officers and directors of the contractor and, potentially,  to other persons who received those funds.

Citadel General widens the avenue of recovery for trust funds against persons who have received money from person engaged in construction projects, based upon “knowing receipt” of those funds.  The trust fund section in the Act creates a presumption of legal knowledge of the trust.  The defendant will be liable for “knowing receipt” it is shown to have had constructive, not actual, knowledge of sufficient facts that would put a reasonable person on inquiry as to its receipt of trust funds in breach of the trust established under the Act.  When third parties are dealing with contractors or others engaged in construction projects, it may take very little for that level of knowledge to be found.

[1] Thomas G. Heintzman is counsel, and Mekhriban Mamedova is an articling student, in the Toronto office of McCarthy Tétrault

[2]  Andrea Schmidt Construction Ltd. v. Gatt (1979), 25 O.R. (2d) 567

[3]  Firenze Exteriors Inc. v. Westwing Construction Group Inc., 2005 CanLII 5880 (ON S.C.)

[4]  Forest Trim & Doors v. Azor Woodworking Ltd 2005 CanLII 364 (ONSC); DST Consulting Engineers Inc. V. Towanda Timber Limited 2007 CanLII 38565

[5]  St. Mary’s Cement Corp v. Construc Ltd 1997 CanLII 12114 (ONSC); 802798 Ontario Ltd v. McConnery 2003 CanLII 49340 (ONSC)

[6]  802798 Ontario Ltd. v. McConnery, 2003 CanLII 49340 (ON S.C.)

[7]  Dietrich Steel Ltd. v. Shar-Dee Towers (1987) Ltd., 1999 CanLII 2757 (ON C.A.); Rudco Insulation Ltd. v. Toronto Sanitary Inc., 1998 CanLII 5529 (ON C.A.)

[8]  Glenko Enterprises Ltd. v. Keller, 2008 MBCA 24; Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805;  Merritt v. Klijn, 2002 ABQB 729 (CanLII)

[9]   Sunview Doors Limited v. Pappas[9], 2010 ONCA 198

[10] R.S.O. 1990, c. C.30

[11] Section 13 of the Act enables the court to pierce the corporate veil by making any person personally liable for a corporations’ breach of trust.

[12] (2001), 55 O.R. (3d) 783 (Div. Ct.)

[13] “Improvements” are defined in section 1 of the Act as: any alteration, addition, repair to; or any construction, erection, installation on – any land, structure or work.

[14] Sunview, at 23

[15] Ibid.

[16] (1997), 32 O.R. (3d) 595 (Gen. Div.)

[17] Ibid.

[18] Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805,

[19] Citadel, at p.3

[20] Ibid., at p.3

[21] Ibid., at p.4

[22] Ibid., at p.5.  The Supreme Court of Canada also considered the tracing of trust funds in Air Canada v. M & L Travel Ltd, [1993] 3 S.C.R. 787 and Gold v. Rosenberg, [1997] 3 S.C.R. 767 (in which the issues were largely related to whether the conduct in issue was “knowing assistance”); and B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, [2009] 1 S.C.R. 504 (in which the issues related to the recovery of monies paid under a mistake of fact).

[23] R.S.M. 1987, c. B91

[24] Provincial Drywall, at 33

[25] [2000] M.J. No. 444 (Q.L.) (C.A.)

[26] Glenko, at 58; see also Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787

[27] Glenko, at 58-59

[28] [2001] 1 A.C. 102

[29] Tampa Hall, at 27

Builder’s Risk Insurance: the Dangers of Misunderstanding the Covered Risks

Builder’s Risk Insurance: the Dangers of Misunderstanding the Covered Risks

Covering risks by appropriate insurance is an essential element in planning a construction project.  But what happens when the insured owner, its insurance agent and the insurance company have a different understanding of the risk?  The British Columbia Court of Appeal recently addressed this issue in Concord Pacific Group Inc. v. Temple Insurance Company.

The owner took out Builder’s Risk Insurance through an insurance agent.  The insurance agent dealt with an insurance representative acting for the insurance company.  The owner understood that the insurance for delay became effective on one date.  The insurance agent and the insurance representative understood that the insurance for delay was effective on a later date, but the later date was not recorded in the policy that was issued.

The insurer sought to rectify the policy and insert the later date into the policy on the ground that the omission of that date had occurred by mutual mistake.  The question was:  whose intention was relevant in determining whether a mistake had occurred?

The Court of Appeal held that the intention of the owner’s insurance agent and the insurance company’s representative was the relevant intention.  That was because the insurance agent and insurer’s representative each had authority to bind their respective principals.  Accordingly, rectification of the insurance policy was granted.

The Court of Appeal also considered section 12 of the B.C. Insurance Act.  That section precludes an insurer from relying on a term or condition which is not set out in writing in the policy when issued.  On its face, section 12 precluded a claim by the insurer to rectify an insurance policy to include a term not found in the written policy when issued, or to amend that policy.  However, the B.C. Court of Appeal effectively held that section 12 did not apply to the rectification of the policy to make it accord with the parties’ intention, but rather to attempted changes to the agreed upon policy.

The decision in Concord Pacific shows how important it is for those involved in construction projects to carefully instruct their insurance agents and review the insurance policies which they obtain. Realistically, they will not be able to understand the technical jargon of the policy. But they can record in writing their basic questions: What is the insurance coverage that I am buying? What triggers that coverage, and when? And they can send an email to their insurance agent insisting upon written coverage that conforms to the answers to those questions.

See Goldsmith and Heintzman on Canadian Building Contracts (“CBC”) at Chapter 1, part 3(d); Chapter 5, part 3 and Chapter 6, parts 2(b)(i)(D) and 2(b)(ii)(D).

Builders’ Risk Insurance – Concord Pacific Group Inc. v. Temple Insurance Company, 2010 BCCA 275 (CanLII).

Construction Law – Consultants: Beware of Overstepping your Authority

Courts do not often examine the authority of a Consultant on a construction project and the liability consequences if the Consultant oversteps its authority.  That issue was recently dealt with by the Queen’s Bench of Alberta in Online Constructors Ltd. v. Speers Construction Inc.

A golf club hired a contractor, Speers, to repair a dam on its property.  Part of the project involved the construction of a concrete spillway.  The golf club hired a Consultant to monitor the project.  The contractor hired a subcontractor, Online, to construct the spillway.  There were deficiencies in the concrete work in the spillway.  The issue was whether those deficiencies were caused by the directions of the Consultant and were therefore the responsibility of the owner, or were caused by the work of the subcontractor Online.

In finding that the Consultant had overstepped its role, the trial judge made a number of interesting findings.  She held that “the engineer cannot compel the contractor to carry out his work in a particular manner or sequence unless that specific right is contained in the contract.  If the engineer acts improperly, the dissatisfied party is entitled to disregard the decision as not binding upon him”.

If, however, the subcontractor follows the engineer’s improper instructions, “such interference will amount to a breach of contract for which the owner is liable to the extent that the engineer is acting as an agent of the owner”. The trial judge recognized that it was “hardly an option” for the contractor to “throw down its tools and cease to work until the dispute is worked out”.

The subcontractor had experienced workmen who wished to proceed in one fashion to pour the cement, while the Consultant’s representative was relatively inexperienced and directed that another method be used.  The trial judge held that the Consultant had over-stepped its responsibilities.  To the extent that the concrete deficiencies were caused by the Consultant’s directions to pour in a certain way, the damages were attributable to the Consultant. Since the Consultant was the owner’s agent, those damages were the responsibility of the owner.

As important as this finding was, equally important in the result was the trial judge’s finding that no damages could be attributed to the Consultant’s error.  This finding underlines the difficulty in proving damages arising from one of many activities in a construction project. Detailed project analyses and forensic damage evidence will likely be necessary to prove that one activity – such as a Consultant’s wrongful direction – caused damage to the claimant.

This decision is also a goldmine of legal analysis on many other issues relevant to construction law: the potential liability of an owner to a subcontractor for Negligent Misrepresentations contained in Tenders; the Incorporation by Reference of the main contract in a subcontract; the circumstances which will give rise to the Repudiation of a construction project; and the obligation of a contractor to make Access to the Site available to a subcontractor.

Construction Law – Consultants: Online Constructors Ltd. v. Speers Construction Inc 2011 ABQB 43 (CanLII).