Unjust Enrichment-Are the Services “Incontrovertibly Beneficial”?

Unjust Enrichment – Are the Services “Incontrovertibly Beneficial”? 

A recent decision of the Ontario Court of Appeal outside the field of construction law reminds us of the principles of Unjust Enrichment that apply to the payment for services provided to a construction project.  Unless the services were requested by the defendant, payment can only be recovered in unjust enrichment if the services were “incontrovertibly beneficial” to the defendant.

In Grover v. Hodgins, 2011 ONCA 72   (CanLII), the plaintiffs were owners of condominium units in British Columbia who had retained lawyers to sue the manager of the condominium building.  However, the defendants had refused to retain those lawyers.  The plaintiffs said that the defendant had benefited from the litigation against the manager because the management contract had been terminated and the condominium units had been sold for a substantially higher value.  The plaintiffs sued the defendants in British Columbia for unjust enrichment and were successful.  They then sought to enforce the judgment in Ontario.

The Court of Appeal for Ontario held that the defendant was not unjustly enriched.  The Court distinguished between the benefit from services from the benefit from money.  In the case of alleged benefit from services, the defendant must be shown to have “incontrovertibly benefited” from these services.  The Court of Appeal applied the words of the Supreme Court of Canada in Peel (Regional Municipality) v. Canada; Peel (Regional Municipality) v. Ontario, 1992 CanLII 21 (S.C.C.), [1992] 3 S.C.R. 762.  In the Peel decision, the Supreme Court said that an incontrovertible benefit means something “that is an unquestionable benefit, a benefit that is demonstrably apparent and not subject to debate or conjecture”.

In Grover, the Ontario Court of Appeal held that, since the relationship between the departure of the manager and any consequential benefit to the defendant by the increased value of his condominium unit was not incontrovertible, the plaintiffs were not entitled to require the defendant to contribute to the legal costs.

This decision is a warning to suppliers of services to construction projects: get clear instructions.  If you don’t, and you later want to make a claim based on the equitable principles of unjust enrichment, you will have a high standard of proof.  You will have to show that the defendant received a benefit from those services that is not subject to debate or conjecture. That may not be easy to do.

Unjust Enrichment – Grover v. Hodgins, 2011 ONCA 72   (CanLII) 

Building Contracts – Tenders – Bonds

Building Contracts – Tenders – Bonds

Today we will examine a recent decision of the Court of Appeal of Ontario which dealt with Tenders for construction contracts.

In Bois A. Lachance Lumber Limited v. Conseil Scolaire Catholique de District des Grandes Rivieres, the tender documents required the bidders to obtain performance bonds “upon acceptance” of a bid.  The Court of Appeal held that the successful bidder did not have to provide a performance bond with its bid, but only after acceptance of its bid.

The Court of Appeal went on to hold that, once the successful bid was accepted, then all owner’s tender duties owed to the other bidders were terminated, applying the rational of the Supreme Court of Canada in Double N Earthmovers Ltd. v. Edmonton (City), 2077 SCC .  Accordingly, the owner could then wave or vary any term of the bid and enter into whatever contract it liked with the successful bidder, and substitute a letter of credit for the performance bond.

This decision is a reminder of the difference between the contract formed by the tender process (Contract A) and the contract between the owner and a bidder arising from the tender process (Contract B).  While Contract A contains a duty of fairness and a duty not to accept a non-compliant bid, once Contract A is completed and those duties are fulfilled, and the owner selected a bidder that meets the criteria of the tender documents, then the owner can enter into a Contract B which is different than the tender terms of Contract A.

The law entitles the owner to enter into a Contract B which is different from the terms set out in the tender documents because the law expects the owner to act in its own economic self-interest and not give up economic value to the contractor, and because the law wishes to leave the owner an contractor with the flexibility to enter into the best deal.

However, what has not been explored in this case is the degree to which the owner can influence the tender process.  Can the owner put terms into the tender, and thus into Contract A, which it knows that it will not insist upon, and which it knows that certain bidders cannot meet?  Can the owner stipulate that the successful bidder must provide a performance bond, well knowing from the beginning that certain bidders cannot provide such a bond and that it will waive that requirement or accept security of an entirely different nature?  Can the owner stipulate a particular building material in the tender, intending from the outset to waive that requirement and accept another material?  At what point does that sort of conduct amount to bad faith and a breach of Contract A? And at what point does Contract B become an entirely untendered contract?  In the case of a public authority required to contract by tender, at some point does that conduct fall outside that requirement?  These are unanswered questions which are raised by decisions such as that in Bois.

Building Contracts – Tender – Bonds:  Bois A. Lachance Lumber Limited v. Conseil Scolaire Catholique de District des Grandes Rivieres, 2010 ONCA 694 (CanLII) 

Construction Law Canada

This website is intended to encourage discussion about recent developments in construction law in Canada.

The commentary in this website will relate to legislation and case law. Each item for discussion will be set out individually. The item will have a short description of the subject matter. Then, a lengthier discussion of the item will follow. The discussion is solely a matter of my personal view and opinion and does not constitute legal advice.

The discussion will generally follow the subjects addressed in my book: Heintzman & Goldsmith on Canadian Building Contracts (5th ed. Carswell).  Reference to that text will be made from time to time as “CBC”, that is Canadian Building Contracts. However, a broader range of subjects will be addressed in this site than those addressed in CBC.

I welcome any views about the commentary in this website and hope that a dialogue will develop about the distinctive aspects of construction law in Canada.

Limitation Period for Construction Project Claims

January 30, 2011

Limitation Period for Construction Project Claims

This week I will examine a recent decision of  the Court of Appeal for Ontario which has settled an important issue concerning the Limitation period for actions arising from construction projects.  In Waterloo Region District School Board v. Truax Engineering Ltd, the Court confirmed that the limitation period for a claim for contribution and indemnity brought by a defendant against another party involved in the project is two years from the date that the defendant is served with the plaintiff’s claim.

The defendant Truax Engineering Ltd. provided services for a construction project.  Its services were concluded on February 19, 2003.  Under the Professional Engineering Act at that time, the limitation period was one year and expired on February 19, 2004.  Accordingly, the claim by the owner against Truax had expired by the time the owner sued all the parties in 2008.  The owner’s action against Truax was dismissed based on the limitation period.  However, one of the other defendants sought to maintain a claim for contribution and indemnity against Truax.

The Ontario’s new Limitations Act, 2002 had come into force on January 1, 2004.  It repealed, among other limitation periods, the limitation period in the Professional Engineering Act, and provided for a standard two year limitation period.  Section 18 of the new Act establishes a limitation period for a “claim by one alleged wrongdoer against another for contribution and indemnity”.  In that case, section 18 states that “the date on which the first alleged wrongdoer was served with the claim…shall be deemed to be the day the act or omission on which that alleged wrongdoer’s claim is based took place.”

Truax argued that the old law, which existed before 1946, was re-introduced by section 18.  Truax said that, since the limitation period for the plaintiff to sue it had long since expired, a claim for contribution and indemnity could no longer be asserted against it by a defendant, even though that defendant had been properly sued within the relevant limitation period applicable to it.

That old pre-1946 law had established a regime in which the limitation period for a claim over for contribution and indemnity could expire before the defendant was even sued by the plaintiff and before the defendant even knew that it had a claim over against another alleged wrongdoer.  That law had been changed by section 8 of the Negligence Act introduced in 1948, to allow such claims to be made by the defendant within one year of the judgment against it.  Truax argued that the new Limitations Act had re-established the old pre-1946 law.

The Court of Appeal disagreed.  It held that section 18 clearly and unambiguously provided that the limitation period for a claim for contribution and indemnity started on the date that a defendant is served with the plaintiff’s claim.  Therefore the limitation period had not expired when one of the defendants made a claim for contribution and indemnity against Truax within two years of being served with the plaintiff’s claim.

The Court of Appeal obviously considered this matter to be important as it assigned five members to the hearing panel instead of the normal three members.  In its decision, the Court made a number of observations.  First, it said that the two year period applies to the claim “whether in tort or otherwise”.  Second it said that “this is the only limitation period provision that applies to claims for contribution and indemnity.”  The court confirmed the position that the Limitations Act, 2002 is intended to create a “comprehensive and simplified limitations regime.”

Accordingly, there is one limitation period in Ontario for the claims for contribution or indemnity, whether they are in tort, contract or however they may arise.  In arriving at this conclusion, the Court of Appeal brought certainty to the limitation period for these sorts of claims which are very common in the construction industry.

Limitation periods relevant to construction projects are dealt with in my book Goldsmith and Heintzman on Canadian Building Contracts (“CBC”) in Chapters 1 (part 2(a)), 6, and 8 (part 3).

Limitations: Waterloo Region District School Board v. Truax Engineering Ltd, 2010 ONCA 838.

Building Contract-Inducing Breach of Contract

Construction Law Canada    January 23, 2011

Inducing Breach of Contract – Building Contracts

Today we examine the application of the tort of Inducing Breach of Contract to the field of Building Contracts.  The New Brunswick Court of Appeal recently dealt with this tort in its decision in SAR Petroleum et al. v. Peace Hills Trust Company.

The Court addressed the following issue:

When a lender knows that its refusal to advance funds to the owner will cause the owner to default on its payment obligations to the contractor, does that refusal amount to inducing the breach of the owner’s contract with the contractor, and make the lender liable to the contractor for inducing breach of contract?

The lender had agreed to lend $3 million to the owner.  The owner had contracted with the contractor to build a gas station on first nation’s lands under a contract which did not include a holdback provision.  When the owner ran short of funds, the lender decided to withhold funds.  It did so in reliance on the New Brunswick Mechanics’ Lien Act which likely did not apply to first nation’s land.  The owner failed to make payments to the contractor and the contractor sued the lender for inducing breach of the contract between the owner and the contractor.

The New Brunswick Court of Appeal held that the lender was not liable to the contractor if its real intent was to protect its rights as a lender and not simply to harm the contractor.

The Court held that a number of the ingredients in the tort of inducing breach of contract were satisfied.  Thus, it held that causation was satisfied because the breach of the construction contract was a natural and foreseeable consequence of the lender’s failure to make timely progress payments and the lender’s failure to pay the percentage holdbacks.  It held that the “knowledge” ingredient of the tort was satisfied because the lender and its lawyer had been provided with a copy of the contract and they were aware that the construction contract contained no holdback provision and that delay in payments by the lender would result in a breach of the construction contract.  The Court also held that the lender knew that its actions would result in a breach of the construction contract because it knew that the owner needed the money from the lender to honour its contractual obligations to the contractor.

However, the Court held that the contractor could not show that the lender “intended” the breach of the construction contract.  To satisfy that element of the tort, the contractor was required to show that the primary objective  of the lender was not to protect its own economic self interest, but rather to cause the breach of the construction contract.  That “intention” issue could be tested in a number of ways.  Thus, if the defendant would obtain the very advantage that the plaintiff was seeking under its contract, then the “intention” element would likely be satisfied.  Here, the lender was not seeking the construction contract, or the benefits of that contract.  Its sole or predominant intention was to protect itself as lender.  As the Court said:

“The law seeks to discourage those who deliberately embark on a course of action with the object of obtaining a contractual benefit promised to another …..On the other hand, defendants who in good faith are pursuing their economic interests in accordance with existing contractual rights will fall outside the intended scope of the tort.  Certainly they cannot be accused of acting for an improper purpose.”

The Court concluded that the lender did not profit from the breach of the construction contract, other than through the protection of its rights as lender.  The lender’s conduct did not qualify as ‘improper or opportunistic conduct.”  Accordingly, the ingredient of “intention” did not exist in this case.  In this sense, the breach of the construction contract was a consequence of the lender protecting its economic position as lender, not a result which the lender primarily intended and desired.

The Court also tested the existence of a wrongful “intention” by looking at the advice which the lender received from its lawyer.  The lawyer provided a series of opinions advising the lender to maintain a holdback.  In these circumstances the Court was unwilling to hold that the lender had the wrongful “intention” required for this tort.

The tort of inducing breach of contract has not often been applied to construction projects.  That is surprising since the tort seems well designed for those projects.  On its face, it would enable a contractor, sub-contractor or supplier which has been unpaid and cannot get paid from the insolvent party with which it contracted to turn its legal claim on another party which allegedly caused the project to fail.

In this context, the decision in SAR Petroleum provides a useful framework to test the conduct of the various parties to a construction project.  It shows that a plaintiff will have a difficult time asserting a claim for inducing breach of contract if the defendant is simply protecting its own economic position, does not intend to obtain the benefits of the plaintiff’s contractual position and has acted on legal advice.

Building Contract – Inducing Breach of Contract:  SAR Petroleum et al. v. Peace Hills Trust Company, 2010 NBCA 22 (CanLii)

A Contentious Insurance Issue – The Scope of the Duty to Defend Under a CGL Policy

Today we will examine a recent decision of the Supreme Court of Canada relating to Insurance Law and the insurer’s Duty to Defend in the context of construction projects:  Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada.

This case provided the Supreme Court with an opportunity to consider a contentious issue in Canadian insurance law, namely, an insurer’s duty to defend under a Commercial General Liability (CGL) policy issued to a building contractor.

In the construction industry,  insurers have denied coverage to owners and contractors under CGL policies on two grounds.  First, insurers have insisted that the damage must be to the property of a third party, not the property installed by the contractor.  Second, insurers have asserted that the defective property installed by the contractor cannot be covered since that would allegedly convert a CGL policy into a performance bond.  Both of these contentions by the insurer were rejected by the Supreme Court.

The CGL policies in question covered “property damage” caused by an “accident”.  The Supreme Court held that the ordinary meaning of “property damage” includes damage to any property and is not limited to damage to third-party property.  Therefore, damage to one part of a building arising from another part of the same building could be included in the definition.  An “accident” could arise if an event causes property damage and is not expected nor intended by the insured.  An “accident” need not be a sudden event and arise from continuous or repeated exposure to conditions.

The Supreme Court concluded that whether defective workmanship is an accident will depend on the ultimate facts proven at trial.  At the pleadings stage, however, if the allegations of defective workmanship arguably involve “property damage” and bring the circumstances with the definition of “accident” in the policy, then a duty to defend will arise.

The Court rejected the insurer’s argument that “property damage” must be limited to property of a third party and therefore could not include damage caused by other parts of the same building.  That argument, it said, would leave little or no meaning for the “work performed” exclusion.  The Supreme Court rejected lower court authority to the contrary in some provinces.  It held that the plain and ordinary meaning of “property damage” did not limit that damage to third party property, noting that other provincial courts had arrived at that conclusion.

The Supreme Court was prepared to find that it was open to argument that the definition of “property damage” could include defective property.  The Court also said that it may be arguable that defective property could be covered under “loss of use”, another category of “property damage.”  The Court noted that under a second version of the policies, coverage for defects was specifically excluded and that such an exclusion would be redundant if the insurer’s argument was correct.

Finally, the Supreme Court rejected the argument that interpreting “accident” to include defective workmanship would convert a CGL policy into a performance bond.  It disagreed with the insurer’s argument that “faulty workmanship is never an accident” and also disagreed with the B.C. Court of Appeal’s holding that interpreting the policy in this fashion “offends the assumption that insurance provides for fortuitous contingent risk.”  Fortuity, it said, “is built into the definition of ‘accident’ itself as the insured is required to show that the damage was neither expected nor intended from the standpoint of the Insured…… When the event is unlooked for, unexpected or not intended by the insured, it is fortuitous.  This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.”

As in any duty to defend case, this decision is not a definite determination of coverage, as the facts proven at trial may well fall within or outside the coverage.  In particular, the “work performed” exclusion might apply, depending on which policy applied.  However, the Supreme Court did hold that the claim against the contractor was not unambiguously outside the basic coverage nor was it unambiguously inside the “work performed” exclusion.

This decision is significant because the Supreme Court swept away several of the arguments of CGL insurers that have met with success in lower courts.  It demonstrated a willingness to give full effect to the insurer’s duty to defend under a CGL policy in the construction field.

Insurance Law – Duty to Defend:

Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R.245.

Thomas G. Heintzman O.C., Q.C.                                                                                                                  January 2011

www.constructionlawcanada.com
www.heintzmanadr.com

Construction Lien Action – Summary Judgment

Leave to bring a summary judgment motion can be granted under s. 67(1) of the Ontario Act in a construction lien action;

6007325 Canada Inc. v. LPQ 18 Yorkville Avenue Inc. and Great Gulf (Yorkville) Ltd., 2010 ONSC 2844

Construction Lien Action-Security for Costs

Construction Lien Action – Security for Costs

In a motion by the defendant to require the plaintiff in a lien action to post security for costs, bald assertions of impecuniosity by the plaintiff are insufficient.   The plaintiff must provide supporting documentation as to whether the sole shareholder can borrow against the remaining assets of the corporation, or its insurance claim, or insurance proceeds when received. In the absence of such proof, security for costs on a “pay-as-you-go” basis was ordered:

Sterling Electrical Contractors Inc. v. 20887585 Ontario Inc. 2010 ONSC 5346

Construction Lien action – Discovery Planning

Discovery planning is not necessarily part of a lien action since s. 67(2) of the Ontario Act mandates that interlocutory proceedings are not to be undertaken unless needed and only with leave of the court:

Lecompte v. Doran, 2010 ONSC 6290

Intervention by Bonding Company

Bonds – Construction lien action – Intervention by bonding company:

A bonding company which has issued a Form 15.1 bond in lieu of the land and premises under s. 44 of the Ontario Construction Lien Act has no inherent right to intervene in the lien action. It will only be granted leave to intervene in appropriate cases and to assert the rights of the bonded party. If the bonding company is added, it is added not in its own right but rather to step into the shoes of the bonded defendant to continue with the defense and counter claim as if it was that defendant. Such addition will be on terms which limit the rights of the added party to those of the defendant and the party seeking to be added, depending on the stage of the action, must demonstrate that it can carry on with the action. For example, if the action is at the stage of discovery, the added party must provide discovery as if it were the defendant, that is, have access to the documents and to someone knowledgeable who can be examined for discovery. Lastly, the party seeking to be added must agree to be personally bound to pay the costs. In all instances, the party seeking to be added is put into the shoes of the defendant whatever state those shoes may be at the time of the addition. In the absence of the bonding company showing that those conditions could be met, its application to intervene was dismissed:

Royal Windsor Mechanical Inc. v. Toronto Catholic District School Board, 2010 ONSC 1849. See CBC, Chapter 9, part 3.