Contract Limitation Clause Precludes Contractor’s Claim Over Against Designer

The limitation periods which apply to construction claims are difficult to sort out at the best of times. They are even more complicated when the limitation period applies to a claim over for contribution or indemnity.

That situation arises when the owner sues the contractor and the contractor then seeks contribution or indemnity from another party involved in the construction project, say a subcontractor or designer. In this situation there are a number of building and consulting contracts in place and there can be a variety of contractual and statutory provisions that contain limitation provisions. The question may be: which provisions trump which?

In Weinbaum v. Weidberg, the Ontario Divisional Court recently held that the contractual limitation period in the contract between the owner and the consultant prevailed when the contractor sought contribution and indemnity from the designer. The contractual limitation period effectively trumped the statutory limitation period for making claims for contribution and indemnity. Since the contractual limitation period had expired, the statutory period was not applicable.

Background

Mr. and Mrs. Weinbaum entered into a contract with Makow Architects for the design and construction of their home. The contract contained a six-year limitation of liability running from substantial completion of the work, which occurred in late 1994.

In January 2010, the Weinbaums commenced an action for damages against Mr. Weidberg, the construction manager of the project. The Weinbaums alleged that they first discovered evidence of extensive water damage and mold growth in August of 2008. The Weinbaums did not sue the architects.

Then, Mr. Weidberg commenced a third party claim against Makow Architects and its principal, Stan Makow (the architects). The third party claim sought indemnity from the architects on the basis that their conduct caused or contributed to any damages suffered by the Weinbaums. Mr. Weidberg alleged that the architects failed to carry out their duties to the Weinbaums and did not assert an independent or contractual claim against the architects.

Statutory Regime

Section 18 of the Ontario Limitations Act, 2002 states as follows:

“18.  (1)  For the purposes of subsection 5 (2) and section 15, in the case of a claim by one alleged wrongdoer against another for contribution and indemnity, the day on which the first alleged wrongdoer was served with the claim in respect of which contribution and indemnity is sought shall be deemed to be the day the act or omission on which that alleged wrongdoer’s claim is based took place. (underlining added)

As can be seen in the first underlined portion, Section 18(1) states that the subsection is “for the purpose of subsection 5(2) and 15.” So one has to understand those latter provisions, as well as section 4.

Under section 4, unless the Act provides otherwise, a proceeding “shall not be commenced after the second anniversary of the day on which the claim is discovered.” So Section 4 establishes the general two-year limitation period that starts on the discovery of the claim, not on the day of the wrongful act.

Section 5(1) then establishes a number of criteria for determining the date when the claim is discovered. Summarizing the subsection, that date is the date when the plaintiff first knew, or ought to have known, that damage has occurred which arose from an act or omission of the defendant for which a civil action was an appropriate remedy.

Section 5(2) then says that a person with a claim “shall be presumed to have known of the matters referred to in clause (1) (a) on the day the act or omission on which the claim is based took place, unless the contrary is proved.” So the plaintiff has the burden of showing that it first knew or ought to have known of the claim on a later date than when the act or omission took place.

Section 15 then sets an ultimate limitation period. That ultimate limitation period is the “15th anniversary of the day on which the act or omission on which the claim is based took place. “ Thus, even though the normal limitation period is based on the date of discovery, the ultimate limitation period is based on the date of wrongful conduct. That ultimate limitation period over-rides the normal limitation period so that, once the 15 years expires, the claim expires even if not discovered.

Motion Judge’s Decision

The Motion Judge held that section 18 of the Act was intended to alter the previous law of limitations applicable to claims for contribution and indemnity, and that all those claims now have a general two year limitation period running from there date when the person seeking contribution and indemnity is served with the Plaintiff’s claim. Accordingly, the Motion judge held that the third party claim was commenced within that limitation period.

Divisional Court’s Decision

The Divisional Court held that section 18 does not change the previous law with respect to contractual limitation periods. Under that law (as most notably held by the Supreme Court of Canada in Giffels Associates Ltd. v. Eastern Construction Co., [1978] 2 S.C.R. 1346), a claim over for contribution and indemnity cannot be made by a defendant against a third party if that third party is not liable to the plaintiff due to the expiry of a limitation period in the contract between the third party and the plaintiff.

The Divisional Court acknowledged that section 18 does over-rule statutory limitation periods, including sections 4 and 5 of the Limitations Act, 2012 itself and other statutory limitation periods (such as those governing the engineering and other professions). Nevertheless, the Divisional Court held that contractual limitation periods are not affected by section 18. In arriving at this conclusion, the Court referred to a number of decisions of the Ontario Court of Appeal which, in its view, indicated that section 18 did not apply to or over-rule contractual limitation periods. It also expressed the view that the policy of the law is to leave parties to make their own commercial contracts absent a reason to the contrary relating to consumer protection or the like.

Accordingly, the Divisional Court dismissed the contractor’s third party claim over against the architects.

Discussion

This decision is very important for the construction industry for three reasons.

First as already noted, building projects almost always involve a number of parties, and if something goes wrong then each party that is sued will almost invariably wish to claim over against one or more of the other parties involved in the project, asserting that those other parties are responsible, in whole or in part, for the loss or damage.

Second, building contracts often contain a limitation period that runs from a specific date or occurrence – usually substantial or final completion of the project. Thus, the CCDC contracts have a six-year limitation period running from substantial completion.

Third, damages arising from a construction project may be discovered many years after the project is completed. If the owner has a CCDC-type contract with its contractor, then the owner can’t sue the contractor once that limitation period expires. But under the discovery-based regime in the Ontario Limitations Act, 2002 – and in the limitation statutes of most Canadian provinces –the owner can bring an action against other parties involved in the building project until two years expires after the owner knew or ought to have known of the damage. That discovery may occur many years later. According to the decision in Weinbaum v. Weidberg, those parties are precluded from claiming over against the contractor.

For this reason, any party involved in a building project should be aware of the terms, and in particular the limitation term, of the other contracts under which other parties are providing work or materials to the project. It may seem presumptuous for one party to a construction project to ask to see the terms of all other contracts, and very unlikely that this will occur in practice. But the Divisional Court’s decision makes it advisable to do so.

Moreover, if a party is sued then that party must immediately assert any claims for contribution or indemnity. Any hesitation may result in the passage in the meantime of a limitation period in another contract applicable to the project. In Weinbaum v. Weidberg, the limitation period in the prime contract had long since passed so there was nothing that the contractor could do.

The whole problem arising in Weinbaum v. Weidberg is due to two factors.

First, different limitation periods are expressed to run from different dates: date of discovery, date of a wrongful act, and a specific date (such as substantial completion). Obviously, when there are different limitation periods, then they will expire at different times.

Second, courts have refused to synchronize these dates. In Weinbaum v. Weidberg, the Divisional Court could have synchronized the limitation periods by holding (as the Motion Judge did) that section 18 applied to all claims over for contribution and indemnity, including contractual claims.

The Divisional Court’s policy reason for its decision is open to debate. It held that the parties should enjoy the freedom to contract as they wish, including with respect of limitation periods. That approach may be suitable when one is dealing with parties to the same contract. They may wish to agree to a contractual limitation period for claims between themselves. That approach, however, seems more problematic when dealing with claims for contribution or indemnity. In that situation, the parties have not contracted with each other. They have both entered into contracts with other people to provide services or materials to the project. Thus, in Weinbaum v. Weidberg, the contractor and the architect each contracted with the owner, not with themselves. Is it fair that the terms in the contract between the owner and the architect should bar a claim over by the contractor against the architect, when the contractor is sued by the owner? Is that fair when the owner did not assert its claim against the contractor until limitation period for suing the architect had gone by? Maybe, but it doesn’t seem to have much to do with freedom of contract.

Another reason why the result in Weinbaum v. Weidberg appears unfair is that, generally speaking, the plaintiff can recover its full loss from the defendant even if the loss was partly caused by another party.  When a limitation period in a contract that the plaintiff has made with another party blocks a claim over by the defendant against that other party, perhaps the plaintiff should only be able to recover from the defendant the portion of the damage attributable to the defendant’s conduct.

The construction industry might be advised to consider whether the present regime relating to claims over for contribution or indemnity is a fair one, and to seek amendments to the Limitations Act, 2002 if that regime is considered to be unfair.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 9, part 3.

Weinbaum v. Weidberg, 2017 CarswellOnt 3205, 2017 ONSC 1040

Building Contracts – Limitation Periods – claims for contribution and indemnity

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

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

New International Commercial Arbitration Act Enacted In Ontario

On March 22, 2017, a new International Commercial Arbitration Act, 2017 came into force in Ontario (the 2017 ICAA). The 2017 ICAA is contained in Schedule 5 to the Burden Reduction Act, 2017, SO 2017, c. 2.. The 2017 ICCA replaces the existing Ontario International Commercial Arbitration Act, RSO 1990, c I.9 (the Old ICAA).

The 2017 ICAA introduces into Ontario law the UNCITRAL Model Law updated as of July 7, 2006 (Updated Model Law). The Updated Model Law is attached as Schedule 2 to the 2017 ICAA. The 2017 ICAA also makes other amendments to the existing Ontario International Commercial Arbitration Act (Old ICAA).

In addition, a number of other statutes are annexed to Burden Reduction Act, 2017 which affect international dispute resolution, including the International Choice of Court Agreement Convention Act, 2017.

Practitioners involved in arbitration in Ontario should be aware of the changes that are introduced by the 2017 ICAA. Here are some of the more notable changes.

  1. Limitation period

Section 10 of the 2017 ICAA introduces a new ten year limitation period for the recognition and enforcement of international commercial arbitration awards, starting in January 2019. Section 10 states as follows:

“10. No application under the Convention or the Model Law for recognition or enforcement (or both) of an arbitral award shall be made after the later of December 31, 2018 and the tenth anniversary of:

(a)  the date on which the award was made; or

(b)  if proceedings at the place of arbitration to set aside the award were commenced, the date on which the proceedings concluded.”

A similar ten-year limitation period for domestic arbitrations is introduced by section 13 of the 2017 ICAA. Under that section, subsection 52 (3) of the Arbitration Act, 1991 is repealed and the same 10 year limitation period is introduced, commencing in 2019. The commencement of the limitation period is expressed slightly differently, as being:

(a)  the day the award was received; or

(b)  if an application to set aside the award was commenced, the date on which the application was finally determined. (underlining added)

The Old ICAA and the Model Law attached to it do not contain a limitation period. The limitation period for the enforcement of international commercial arbitration awards was settled in Canada in Yugraneft Corp. v. Rexx Management Corp., [2010] 1 S.C.R. 649. In that decision, the Supreme Court of Canada held that the general two-year limitation period in Alberta’s limitation statute applied to such an enforcement in Alberta.

The March 2014 report of the Uniform Law Conference of Canada (ULCC) expressed the view that a two-year limitation period for the enforcement of an arbitral award is too short and not consistent with the limitation periods in other countries. The ULCC report recommended a 10-year period, which has been adopted by the Ontario legislature.

  1. Appeals re Preliminary Decision Declining Jurisdiction

Section 11 of the 2017 ICAA provides for an appeal to the Superior Court in the following words:

(1)  If, pursuant to article 16 (2) of the Model Law, an arbitral tribunal rules on a plea that it does not have jurisdiction, any party may apply to the Superior Court of Justice to decide the matter.

(2)  The court’s decision under subsection (1) is not subject to appeal.

(3)  If the arbitral tribunal rules on the plea as a preliminary question and an application is brought under this section, the proceedings of the arbitral tribunal are not stayed with respect to any other matters to which the arbitration relates and are within its jurisdiction. (underlining added)

Article 16(3) of the Model Law says that if the arbitral tribunal “rules as a preliminary question that it has jurisdiction,” there is an appeal to the court, and that there is no appeal from the court’s decision. The Model Law does not expressly provide for an appeal in the event that the arbitral tribunal decides that it does not have jurisdiction. Section 11 if the 2017 ICAA now provides for an appeal in that situation, but (reflecting the Model Law on this point) there is no appeal from the Superior Court’s decision.

There are several interesting questions about Section 11 and Article 16. First, why did drafters of the Model Law not provide for an appeal if the tribunal declines jurisdiction? According to the March 2014 report of the ULCC, the drafters of the Model Law felt that it was “inappropriate to compel a tribunal to decide matters that it concluded it lacked jurisdiction to decide“ and accordingly gave the court no power to reverse the tribunal’s decision and require it to decide the dispute. The drafters of the Model Law may also have been of the view that a decision by the arbitral tribunal declining jurisdiction is a final award and subject to an application for judicial review of the award under Article 34 of the Model Law. The view that a negative jurisdictional decision is a final award and subject to appeal under Article 34 is apparently shared by Gary Born as expressed in International Commercial Arbitration (2nd ed., 2014, Vol. 1, p. 1104).

If there is a right to review an arbitral award declining jurisdiction, then the normal rights of appeal would presumably apply to that application. The drafters of the Model Law may have decided to provide for an appeal from a decision of an arbitral tribunal accepting jurisdiction because such a decision is an interlocutory, not a final award, and there is no other recourse against such an award.

The Ontario legislature has accepted the recommendation of the ULCC that there should be an appeal if the arbitral tribunal declines jurisdiction. The reasons for the ULCC’s recommendation were that:

  • the international consensus favours allowing appeals from negative rulings;
  • it is unfair and inconsistent to allow appeals from positive rulings without also allowing appeals from negative rulings;
  • denying the opportunity to correct erroneous negative rulings can lead to injustice and frustrate the parties’ intention of avoiding litigation in national courts; and
  • parties may prefer to seat their arbitrations in states that allow appeals from negative rulings.

Section 11(1) of the 2017 ICAA is drafted in a rather ambiguous way. One is left to wonder whether the words “that it does not have jurisdiction” modify the word “plea” or the word “rules”. If the former, then an appeal may be taken whichever way the tribunal rules. If the latter, then an appeal may not be taken if the ruling is that the tribunal does have jurisdiction. Since Article 16 provides for an appeal if the tribunal decides that it has jurisdiction this ambiguity may not be important since on either reading, Section 11(1) provides for an appeal if the tribunal holds that it does not have jurisdiction. It is likely that the 2017 ICAA was drafted to allow for an appeal when the tribunal held that it did not, to fill this loophole in the Model law.

What is the impact of section 11 of the 2017 ICAA? Is an appeal under section 11 the exclusive remedy if the arbitral tribunal declines jurisdiction, in which case there is no appeal from the order of the Superior Court? Or is there a right, under Article 34, to bring an application to the Superior Court to review an arbitral decision declining jurisdiction on the basis that the decision is a final award? If there is a right of review under Article 34, is there a right of appeal from that review notwithstanding section 11(2) of the 2017 ICAA?

The second issue relates to res judicata and issue estoppel. If the arbitral tribunal decides to accept jurisdiction and continue with the hearing, and there is no appeal from that decision, presumably there is no issue res judicata at that point, and the final arbitral award is subject to review on all grounds, including jurisdiction. But if, under Article 16(3) of the Model Law, a party appeals to the court the decision of the arbitral tribunal accepting jurisdiction, is the court’s decision res judicata?  If so, then that factor has a big impact on the decision to appeal to the Superior Court.

Similarly, if the arbitral tribunal declines jurisdiction, an appeal is taken, and the court reverses the arbitral tribunal and sends the matter back to the tribunal, is that decision of the court res judicata? Or is the party objecting to the tribunal’s jurisdiction entitled to raise that objection in a later application to review the final award, or in defence in an application to enforce the final award? Articles 34 and 35 of the Model Law expressly state that lack of jurisdiction is a ground to review, and to refuse the recognition and enforcement of, an arbitral award. In effect, can the jurisdiction of an arbitral tribunal always be raised?

  1. Interim relief

The Updated Model Law contains a much broader power for an arbitral tribunal to grant interim relief. As summarized in the ULCC report:

  • Article 17 of the Updated Model Law re-states the authority of arbitrators to award interim measures and then adds a description of the categories of permissible interim measures.
  • Article 17A sets out the tests that applicants for interim measures must meet. The tests are:

(a) Irreparable Harm that substantially outweighs the harm that is likely to result to the party against whom the measure is directed if the measure is granted; and

(b)  A reasonable possibility that the requesting party will succeed on the merits of the claim. The determination on this possibility is not to affect the discretion of the arbitral tribunal in making any subsequent determination.

  • Article 17B empowers the arbitral tribunal to make preliminary orders and the conditions for granting such orders. These orders may be granted ex parte if the tribunal decides that the disclosure of the request for an interim measure will frustrate the purpose of the interim measure.
  • Article 17 C sets forth the specific regime for preliminary orders. While a preliminary order expires twenty days after its issuance, its terms may be adopted or modified in an interim measure. A preliminary order is binding on the parties but not subject to enforcement by a court, and does not constitute an award.
  • Article 17D authorizes arbitrators to modify, suspend or terminate interim measures.
  • Article 17E authorizes arbitrators to require applicants for interim measures to provide security.
  • Article 17F requires prompt disclosure of all material circumstances and of any changes in circumstances that might have a bearing on the interim measure.
  • Article 17G creates a cause of action for damages and costs against parties who obtain interim measure that the tribunal later concludes should not have been granted.
  • Article 17H makes orders or awards for interim measures enforceable in a similar manner to other awards.
  • Article 17I sets out the grounds on which a court may refuse recognition and enforcement of interim measures.
  • Aricle 17J gives the court the same powers regarding interim measures in relation to arbitration proceedings as the court has in relation to court proceedings.

With the 2017 ICAA now in force, Ontario practitioners in the field of international commercial arbitration will have to become familiar with the broader interim relief regime contained in the Updated Model Law.

  1. Written Agreement

Article 7 of the Updated Model Law provides two alternative forms of arbitration agreement that qualify as an “arbitration agreement” under that Law. Option 1 is a written agreement which is of the same nature as the arbitration agreement as defined in the present Model law. Option 2 is a less formal agreement, simply “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” Section 5(2) of the 2017 ICAA adopts Option 1, so there is no change in the Ontario law in this respect.

  1. Enforcement of an award

Article 35(2) of the Updated Model Law states that the party relying on an award or seeking to enforce it “shall supply the original award or a copy thereof.” Article 35(2) of the prior Model Law required that party to provide a “duly authenticated original award or a duly certified copy thereof, and the original arbitration agreement….or a duly certified copy thereof.” So, under the Updated Model Law, the party seeking to rely upon the award or enforce it need not, at least in the first instance, provide the arbitration agreement or a copy of it.

Other Statutes annexed to the Burden Reduction Act, 2017

In addition to the 2017 ICAA, there are many other statutes attached to the Burden Reduction Act, 2017, including the International Choice of Court Agreement Convention Act, 2017, the International Electronic Communications Convention Act, 2017, the International Recognition of Trusts Act, 2017 and the International Sale of Goods Act Amendments.

For practitioners involved in international disputes, the International Choice of Court Agreement Convention Act, 2017 is particularly important. That Act adopts the International Choice of Court Agreement Convention. The Convention seeks to put court litigation in a similar position to arbitration, so far as reciprocal enforcement is concerned. Clearly, reciprocal enforcement is one of the great advantages of international arbitration. Those engaged in court litigation have long since wanted court judgments to enjoy the same reciprocity of enforcement.

Reciprocity of enforcement for court judgments is achieved in the Convention by permitting parties to enter into a written “exclusive choice of court agreement” for the purpose of choosing a court to decide disputes “which have arisen or may arise in connection with a particular legal relationship.” If they do, then the selected court may not decline to exercise jurisdiction on the ground that some other court should decide the dispute and, except in limited circumstances, any other court shall decline to decide the dispute. The judgment of the chosen court shall be enforced by the courts in all other signatory countries, and those latter courts shall not review the merits of the dispute or the facts found by the chosen court. A judgment shall be recognised only if it has effect in the State of origin, and shall be enforced only if it is enforceable in the State of origin.

The Convention is subject to a broad exclusion of subject matters, including amongst others: consumer claims; employment contracts including collective agreements; status and legal capacity of natural persons; maintenance and family law matters; wills and succession; insolvency and composition; carriage of passengers and goods; marine pollution, limitation of liability for marine claims, anti- trust; person injury for natural persons; tort claims for damage to tangible person property not arising from contracts; and certain claims relating to intellectual property. By these exclusions, the Convention appears to focus on the court resolution of commercial disputes.

Ontario’s adoption of the International Choice of Court Agreement Convention may well encourage Ontario parties to insert choice of court agreements into their dealings with foreign parties and to rely on that Convention to enforce their rights, and not international arbitration. The difficulty, of course, is in coming to an agreement on a court to settle all claims between the parties. Each party may not want the courts of the other party’s country to decide the disputes between them. So arbitration may still be their preferred option.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th Ed. Chapter 11

Arbitration – International Commercial Arbitration – new legislation

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

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

 

 

Construction Contract Held To Mandate The Payment Of Extras

One of the most contentious issues in building contracts is mechanism to ensure that the contractor is guaranteed payment for extras, and that the owner is guaranteed not to pay for something that is not an extra. It would be simple to state these propositions in a building contract, but they usually aren’t there.

However, in King Road Paving and Landscaping Inc. v. Plati, the Ontario Superior Court of Justice found that that is exactly what the contract said. The contract was for the renovation of a barn, to convert it into a “marijuana grow operation” said the contactor, or a nightclub said the owner. The parties entered into an initial written contract to renovate the barn. However, there were no signed contracts for much of the work that was done and the payments for the work were largely made in cash without any receipts. There were disputes over a large amount of work for which additional payment was claimed by the contractor.

The Decision

The court performed a two-stage test to determine if the owner was obliged to pay for this work:

“in the absence of any written agreements relating to extras, the only way to determine whether something is an extra is by reference to the original contract. A secondary issue is whether the work claimed was actually performed, and, if so, the cost of such work.

Having performed this exercise, the court held that under the following term of the contract, the contractor was entitled to be paid for this work:

“All work not stated will be a charge of time and materials.”

Accordingly, the court found that since the work was done, and was not covered by the written contract, the owner was required to pay for it. Payment was to be the basis of “time and material” where invoices or other evidence supported the claim.

In arriving at this conclusion, the court found that the owner’s representative was on the site and therefore aware that the work was being done. As the court said:

“[the owner] often assumed (or perhaps hoped) that any extras would be covered by the price set out in the contract. That, however, is not what the contract provides.”

Discussion

Why make a fuss about this simple little case? Because the building contract stated an express obligation to pay for extra work that so many building contracts don’t quite state.

Thus, the CCDC contracts never quite state that obligation. Instead, they construct an elaborate regime under which the consultant is to oversee the progress of the work and rule on whether work or materials are extras, and then an equally elaborate procedural regime relating to dispute resolution, change orders and changed conditions. Those regimes appear to intend that the contractor will be paid for extra work and materials, and that the owner won’t pay for work and materials that are covered by the contract. But they never quite say that expressly.

The real problem is with respect to work that, during the job, the owner says the contractor must perform as it is within the contract and the contractor says is not within the contract. If the consultant sides with the contractor and the contractor feels obliged to proceed with the work, the contractor may be shut out of a quantum meruit claim based upon the decision of the Supreme Court of Canada in Peter Kiewit Sons Co. of Canada v. Eakins Construction Ltd. [1960] S.C.R. 361. If the contractor refuses to do the work, then the owner may terminate the contract and sue the contractor for damages.

It is this conundrum that the dispute resolution and change order provisions of the CCDC contracts are intended to address. They are intended to ensure that the contractor can proceed with the work without prejudicing its claim for extra payment for the work. The court or arbitrator can later determine that the work or materials were or were not part of the contract, and if they were not, then the contractor is entitled to be paid for them.

This is the result that the Supreme Court of Canada arrived at in Corpex (1977) Inc. v. Canada, 1982] 2 S.C.R. 643. The Court said that, as long as the contractor gives timely notice under these procedural clauses of its claim that the work is an extra (or is due to unforeseen circumstances, or due to the owner’s delay or whatever the claim arises from), then the contractor is “practically certain of being compensated for additional costs”.

The words “practically certain” aren’t the strongest foundation for a claim in these chancy circumstances, but coming from the Supreme Court of Canada contractors have been relying on them to proceed with the work and assert the claim. But those words are, perhaps, appropriate because the sorts of extras/changed condition/dispute resolution provisions dealt with in Corpex provide procedural remedies. They don’t actually say that the contractor will be paid. But they must mean that, as long as the contractor gives timely notice and the work and labour is later found to be extra to the contract.

Refreshingly, in twelve rather inelegant words, the contract in the King Road Paving case said exactly that: the contractor will be paid for extra work. Maybe other building contracts can say exactly that.

Thomas G. Heintzman O.C., Q.C., LL.D (Hon.) FCIArb                   April 1, 2017

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 4, part 8 and chapter 10, part 6(c).

King Road Paving and Landscaping Inc. v. Plati, 2017 CarswellOnt 1712, 2017 ONSC 557

Building contract – extra work and materials – quantum meruit –

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

Discovery Of Facts Following Mediation Impacts The Limitation Period: Ontario Court Of Appeal

In 625805 Ontario Ltd. v. Silverwood Flooring Inc., the Ontario Court of Appeal has recently held that the discovery of facts following a mediation had the effect of extending the limitation period. This decision has an important impact on the limitation period for all claims, and particularly claims arising from building projects, in which the facts relating to the claim may be gradually disclosed to the claimant.

Facts:

Henry Smith and his son Carl Smith were home builders who carried on business through the applicant 625805 Ontario Ltd (625). Tamar Royt carried on her business through Silverwood Flooring Inc. (“Silverwood”). Silverwood supplied hardwood flooring to building projects. In 2009, the parties entered into a Joint Venture Agreement (“JVA”) in order to sell and install hardwood flooring to building projects. The JVA provided that Silverwood would continue to engage in its hardwood flooring supply business with customers who were not referred to it by the Smiths. Ms. Royt was responsible for managing the JV and would receive a two percent management fee.

In March 2010, the Smiths secured a customer for the joint venture, being M5V Condominiums Project (the “M5V Project”). Ms. Royt confirmed that all open orders in the system up to and including April 30th 2010 would be shared “as per the agreement as well as M5V of course.” After that, the former partners to the JVA disagreed about their obligations and benefits from the M5V Project.

In December 2010, the Smiths commenced an application against Ms. Royt, 2219970 Ontario Inc., and another company. The application sought an accounting of the amounts owing by Ms. Royt and 2219970 Ontario Inc. to the Applicants under the JVA. Silverwood was not named as a defendant in the application because it was not a party to the JVA and the Smiths claimed they had no knowledge that Silverwood supplied hardwood flooring to the M5V Project.

Ms. Royt swore an affidavit in the application. During a cross-examination on her affidavit in January 2012, Ms. Royt testified that Silverwood, not the joint venture, had supplied the flooring for the M5V Project.  She also testified that the project made a profit, that she or Silverwood had received some of the proceeds from that project, but that it was less than 2 percent. While the Smiths then knew that Silverwood had supplied the flooring for the M5V Project, they did not join Silverwood as a respondent in the application.

In September 2015, the Smiths’ numbered company, 625, issued a statement of claim against Silverwood, Ms. Royt and John Doe seeking a declaration that the defendants have been unjustly enriched at the plaintiff’s expense and an accounting from the defendants as to the amount by which they have been unjustly enriched. After pleadings were delivered, in January 2016 Silverwood and Ms. Royt moved for summary judgment dismissing the action on the basis that the limitation period had expired before the action was commenced.

The motion judge dismissed the action on the basis that by 2012 the plaintiffs knew that Silverwood had made a profit on the M5V Project and had the means to explore the revenues from the M5V project and whether the JV would have made a profit on the project, so that by September 2015 the two year limitation period had expired.

Ontario Court of Appeal’s Decision

The Court of Appeal allowed the appeal. It held that the facts upon which the plaintiffs brought their 2015 action were not known to them until March 2015. The Court of Appeal said, in their pleadings and affidavits, the Smiths allege that:

  1. “in the cross-examination on her affidavit in January 2012, Ms. Royt lied about the profits made on the M5V Project”;
  1. “In or about March of 2015, following an unsuccessful mediationin the Commercial Court action, Royt disclosed to Henry Smith that contrary to her earlier evidence, Silverwood had in fact made at least $200,000 in profit in respect of the sale of flooring to M5V. She also told him that the representation she had made to him in 2009 regarding Silverwood’s overhead expenses was untrue in that it was significantly less than $40,000.00 per month. Royt made these admissions during the course of a meeting, following further unsuccessful settlement discussions, where Henry Smith again requested that the financial records relating to the sale of flooring to M5V be disclosed after Royt’s admissions that she lied during her 2011 testimony.”

The Court of Appeal held that in these circumstances the Smiths had not discovered their loss until March 2015:

  1. Since Ms. Royt had testified that the amount earned on the project was less than her management fee (in 2012), it was reasonable for the Smiths to understand that the JV had suffered no financial loss or damage. As the court said:

“In light of the two percent management fee to which Ms. Royt was entitled before profits could be distributed to the joint venture and Ms. Royt’s express statement that profit from the M5V Project was less than her management fee, the possibility that the Smiths had suffered damage from the M5V Project and that the damage was caused by the respondents was removed from the Smiths’ minds. Accordingly, this is not a case where a party knows that it has suffered a loss but does not know the extent of the loss….”

  1. This was not a case in which the Smiths knew or ought to have known that they or the JV had suffered damage in 2012. The court said:

“It is true that the Smiths could have disbelieved or doubted Ms. Royt’s answers and brought a motion to compel production of financial documentation and/or to add Silverwood as a party to the original application. I do not think this was necessary. Parties are entitled to accept that information testified to under oath is truthful and accurate….In these circumstances, the appellant “discovered” the potential “damage” that grounds its unjust enrichment claim when Ms. Royt told Henry Smith in 2015 that Silverwood made a profit of at least $200,000 on the M5V Project.”

Discussion

There are two interesting aspects of this decision.

First, the decision demonstrates how the evolving disclosure in civil litigation may extend the limitation period. Clearly, the Ontario Court of Appeal was not inclined to be generous to the defendants in the application of the limitation period, particularly when the plaintiffs alleged that the defendants had lied under oath about important matters relating to the limitation period. Nor, in these circumstances, was the court inclined to be technical about the discovery of damage, or the duty to take steps to explore that issue.

As a result, in building contract disputes, the parties will have to be vigilant about telling the truth in order not to allow the other party to assert that its non-disclosure caused the limitation period to be extended. Equally, parties should always consider whether new information disclosed after the project occurred has caused the extension of the limitation period.

Second, the other interesting aspect of this decision is the court’s reference to information disclosed after a mediation. If the information was disclosed as part of the mediation process, was that information admissible in evidence?

Section 9(1) of the Ontario Commercial Mediation Act, 2010 says that, subject to subsections (2) and (3), the following information is not “discoverable or admissible in evidence in arbitral, judicial or administrative proceedings.” That information includes “2. A document prepared solely for the purposes of the mediation; 3. Views expressed or suggestions made by a party during the mediation concerning a possible settlement of the dispute: 4. Statements or admissions made by a party during the mediation.

None of the exceptions in subsections (2) or (3) appear to apply in the present case. However, one exception which is potentially applicable is section 9(2)(a) which reads: “information referred to in subsection (1) may be admitted in evidence to the extent required, (a) by law.”

In this circumstance, the following questions appear to arise.

First, was the information in this case part of the mediation? How does one determine that issue? Following a mediation, should parties be careful in designating whether or not information is being provided as part of the mediation?

Second, if this information was disclosed during the mediation, could it still be admissible? Does the discoverability principal contained in the Limitations Act, 2002 trump the Commercial Mediation Act, or vice versa? If the plaintiff is entitled to rely on the discoverability principal in the Limitations Act, 2002, is the information obtained during mediation admissible “as required by law”?

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 9, part 3.

625805 Ontario Ltd. v. Silverwood Flooring Inc., 2017 CarswellOnt 1734, 2017 ONCA 125

Building contracts – limitation periods – mediation – discoverability

Thomas G. Heintzman O.C., Q.C., L.L.D. (Hon.), FCIArb                         March 12, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

 

Standard Form Contract To Be Given Plain Meaning, Not The Industry Meaning: Supreme Court Of Canada

In its recent decision in Sabean v. Portage La Prairie Mutual Insurance Co., the Supreme Court of Canada has held that words in a standard form contract used by the public should be given their plain and ordinary meaning, and not a different meaning that those words might be given by the industry or trade which drafted the contract.

While this decision related to an insurance contract, it may well apply to standard form building contracts. The question may then arise as to whether building contracts – such as the CCDC contracts – are standard form contracts. If they are, can the words in those contracts have a trade or industry meaning when they are used between participants in the building industry who understand that meaning, and another meaning when they are entered into by a member of the public, such as a homeowner?

Background      

The plaintiff recovered a judgment arising from a motor vehicle accident. The judgment exceeded the limits of the tortfeasor’s insurance policy. The plaintiff claimed the shortfall under the policy with his own insurer. Under the standard form excess insurance provision of that policy, there were deductions from the amount payable by the insurer. One of those deductions was for future benefits arising from a “policy of insurance providing disability benefits.” The plaintiff was entitled to receive future Canada Pension Plan (CPP) disability benefits. The insurer asserted that the CPP was a “policy of insurance”. The trial judge held that the CPP benefits were not deductible from the amount payable by the insurer. The Nova Scotia Court of Appeal held that they were. The Supreme Court of Canada re-instated the trial judge’s decision, holding that the CPP benefits were not payable under a “policy of insurance”.

Decision of the Supreme Court of Canada

In arriving at its conclusion, the Supreme Court held that benefits payable by the Canada Pension Plan did not fall within the plain meaning of the words “policy of insurance”. The insurer then submitted that in Gill v. Canadian Pacific Railway, [1973] S.C.R. 654, the Supreme Court of Canada had decided that CPP payments were deductible in calculating monies due under the Families’ Compensation Act of British Columbia. The insurer submitted that the court in the present case should apply the reasoning in the Gill decision. More particularly, however, the insurer submitted that the Supreme Court should recognize that, by reason of the Gill decision, the deductibility of CPP benefits from damage claims had been recognized or assumed in the insurance industry and that therefore the words “policy of insurance” in private insurance policies, like the one in issue in the Sabean case, were meant to include CPP benefits. Accordingly, the insurer submitted that this meaning which had developed in the insurance industry, not the ordinary meaning of the words “policy of insurance, should be applied to those words.

The Supreme Court disagreed. Having found that the ordinary and natural meaning of the words “policy of insurance” did not include CPP benefits, the Supreme Court rejected the submission that an insurance industry or trade meaning could displace the ordinary meaning of those words. It said:

“The insurer submits and the Court of Appeal accepted that the meaning of “policy of insurance” under the Endorsement must be understood in the context of this Court’s decision in Gill. Implicit in the approach urged by the insurer is the suggestion that this Court’s decision in Gill itself supports an alternative reasonable interpretation of the disputed words at the first stage of the Ledcor analysis. As I shall explain, I cannot accept this as a reasonable interpretation of this insurance policy. Gill does not interpret or inform the ordinary words of the Endorsement. Nor would the average person applying for this insurance contemplate the distinct tort and statutory context in Gill in understanding the words of the Endorsement. The insurer relies on its specialized knowledge of the jurisprudence to advance an interpretation that goes beyond the clear words of the policy.” (underlining added)

The Supreme Court arrived at this conclusion for a number of reasons. The purchasers of insurance coverage are not knowledgeable about the insurance case law nor about the drafting of insurance policies:

“It cannot be assumed that the average person who applies to purchase this excess insurance policy would imbue the words in the Endorsement with knowledge of how they were interpreted by the courts for the purposes of provincial insurance legislation and the collateral benefits rule in tort. In this context, the purchaser is not someone with the specialized knowledge of related jurisprudence or of the objectives of the insurance industry. Thus, the history and intention of the insurance industry in drafting the Endorsement following Gill do not assist in the interpretation of this contract.” (underlining added)

In addition, the Gill decision dealt with a statutory, not a contractual, provision. The court in Gill was applying the legislature’s intent, not the intent of parties to a contract as in Sabean. As the Supreme Court said in Sabean:

“…the decision in Gill is confined to a distinct statutory context. When interpreting a statute, the court searches for the intention of the legislature. In interpreting a standard form policy of insurance, the court is concerned with the ordinary meaning of the contract as it would be understood by the average insured.”

Discussion

This decision follows and has solidly entrenched the recent decision of the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. 2016 SCC 37. Both cases deal with standard form contracts. In Ledcor, the court held that the meaning of the words in a standard form contract cannot be changed by the circumstances surrounding one instance of the use of the contract, because they must be given the same meaning for all users of the contract.   In Sabean, the court has held that the meaning of the words in a standard form contract cannot be changed by industry or trade usage, at least when the contract is entered into by members of the public who are not familiar with the case law and drafting behind that wording. In both decisions, the Supreme Court has strongly endorsed the principle that standard form contracts, and particularly those prepared by a member of an industry for contracting with a member of the public, must be interpreted as written and in according with their ordinary meaning, and must not be altered by extraneous factors, particularly at the instance of and in favour of that industry.

This decision raises important questions for building contracts, such as the CCDC contracts. As I raised in my article of October 10, 2016 about the Ledcor decision, an initial question may be: are the CCDC contracts “standard form contracts”? Since they are not drafted by one particular company and are not issued on a “take it or leave it” basis to customers, but rather developed on a consensual basis by the entire building industry, there is an argument that building contracts like the CCDC contracts are not standard form contracts that fall within the Ledcor and Sabean decisions.

If building contracts do fall within the Sabean decision, what is the effect? If one of the parties to the contract is a member of the public – such as a homeowner, or a business seeking a building for its premises – then the decision in Sabean means that words in the contract may not be given a technical or trade meaning understood by the building industry but not by the general public.

But what if the contract is between the contractor and the subcontractor? Could the same contentious words in the contract be given a technical or trade meaning known to the building industry? And then what happens when there is a main contract with a member of the public and a subcontract between two members of the building industry, and the contentious words appear in both contracts? Could the words in the main contract mean one thing – because they cannot be given an industry meaning – but mean another thing in the subcontract – because the words have a well-known meaning in the building industry? And if the subcontract incorporates the main contract by reference, what happens to the conflicting meaning of the words?

Building contracts often contain a Definitions section to ensure that the parties understand what they mean by particular words. In the CCDC contracts, the Definitions are some two pages in length. The Sabean case is a warning to those drafting “standard form” contracts, including those in the building industry, that they should carefully review their contracts. If those contracts contain any wording that relies on an industry or trade meaning, that meaning should be clearly spelt out in the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 2, parts 3(a), 3(e) and 4(v)

Sabean v. Portage La Prairie Mutual Insurance Co., 2017 CarswellNS 38, 2017 CarswellNS 39, 2017 SCC 7

Interpretation of Contracts – Standard Form Contracts – Trade and Industry meaning –

Thomas G. Heintzman O.C., Q.C., L.L.D. (Hon.), FCIArb                         March 5, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

CRA Entitled To Priority Over Subcontractors To Trust Funds In Owner’s Hands

The Manitoba Court of Queen’s Bench recently held that the Canadian Revenue Agency (CRA) has priority over subcontractors and the bonding company in respect of holdback funds held by the owner in trust for the contractor. The decision in Manitoba Housing and Renewal Corp. v. Able Eavestroughing Ltd., once again underlines the impact of federal legislation on the holdback and trust fund sections of construction and builders’ lien legislation.

This decision raises questions about the scope of the subrogation rights of a bonding company under a labour and materials payment bond, and public policy issues about lien statutes being used for the purpose of collecting taxes.

Background

The Manitoba Housing and Renewal Corporation (MHRC) was the owner on a project In Brandon, Manitoba and Falcon Creek was the general contractor. The bonding company issued performance and labour and materials payment bonds in respect of Falcon Creek’s obligations under the general contract and the subcontracts. MHRC held back 7.5% of the amounts payable to Falcon Creek as mandated by the Manitoba Builders’ Lien Act (BLA). Unpaid subcontractors, and the bonding company which had paid over $600,000 to other lien claimants/subcontractors under the payment bond, asserted that they were entitled to the holdback funds under the payment bond and the BLA.

The Canadian Revenue Agency (CRA) asserted that it was entitled to the funds under s. 224(1.2) of the Income Tax Act of Canada (ITA). That section effectively provides that, once the section is triggered by the CRA, monies owing to a person who is liable to pay an assessment under the ITA (in this case, Falcon Creek) become the property of the CRA in priority to any other interest.

The bonding company and subcontractors asserted that MHRC had the legal right or privilege to pay the trust funds to the subcontractors holding liens, rather than to Falcon Creek. The bonding company asserted that, pursuant to the payment bond and the subrogation principles of the law of guarantee, it entitled to be recompensed out of the holdback funds for the monies it had paid to subcontractors. They argued that MHRC was not obliged to pay Falcon Creek and was entitled to pay the holdback funds to the subcontractors. Accordingly, MHRC was not “liable” to the contractor, Falcon Creek, in respect of those funds and therefore section 224(1.2) of the ITA did not apply.

Decision of the Manitoba Court of Queen’s Bench

The judge of the Manitoba Court of Queen’s Bench held that nothing in the arrangements between the owner, general contractor and bonding company could or did displace the effect of section 224 of the ITA. The court held:

“I am satisfied that the conclusion that the contract and Bond do not create an obligation on the part of MHRC to pay subcontractors is applicable to the case before me. That is, the private arrangements between MHRC, Falcon Creek and Guarantee Company cannot affect the rights of the Crown under s. 224(1.2). The Crown acquired those rights by operation of law and the issuance of a Requirement to Pay; its rights too cannot be displaced by private arrangements….. There are important policy considerations involved in the collection of withholding tax and source deductions. The Income Tax Act entrusts employers with the duty of deducting income tax from the wages of employees and remitting it on their behalf. Employers’ withholding tax or source deductions is at the heart of the collection procedures for personal income taxation in Canada…. Private arrangements between MHRC, Falcon Creek and Guarantee Company cannot interfere with this. (underlining added)

So far as the submissions of the bonding company and subcontractors relating to subrogation and assignment, the Manitoba court held that, while MHRC may have had the right or privilege to pay subcontractors, MHRC had no obligation to do so, and therefore the bonding company or subcontractors did not obtain, by subrogation or assignment, any rights of MHRC to pay the subcontractors. Accordingly, the bonding company and the subcontractors could not interfere with MJRC’s entitlement to pay the monies in it hands to the CRA.   In this respect, the Manitoba court appears to have differentiated between a performance bond, in which a subrogation right might arise compelling the owner to pay the subcontractors and bonding company, and a payment bond, in which case the court says no such subrogation rights arise.

The Manitoba court also rejected the argument that the subcontractors had a right to sue on the general contract as third party beneficiaries of that contract. There was no evidence that MHRC intended to extend the ability to sue on the contract to unpaid subcontractors. In addition, the third-party beneficiary exception to privity of contract is only a shield and not a sword.

In arriving at these conclusion the Manitoba court relied upon the decision of the Alberta Court of Appeal in Iona Contractors Ltd. (Receiver of) v. Guarantee Co. of North America, 2015 ABCA 240, 19 Alta. L.R. (6th) 87 (Alta. C.A.), leave denied (2016), [2015] S.C.C.A. No. 404 (S.C.C.)). In that case, the contest was between a bonding company and the contractor’s trustee in bankruptcy pursuant to the Bankruptcy and Insolvency Act.

Discussion

At one level, this decision raises an important issue about subrogation. The court has held that while the bonding company may be subrogated to the position of the owner under a payment bond, it does not acquire any rights to compel payment of the holdback to the subcontractors rather than the contractor. In this respect, the court appears to differentiate between a performance bond – which might permit the bonding company to compel such payment – and a payment bond – which apparently does not. The court also appears to differentiate between the exercise of subrogation rights in relation to a contractual obligation – in this case payment to the contractor – and the exercise of subrogation rights in relation to a contractual or statutory right or privilege – in this case, the owner’s right to pay the subcontractors.

The right of the owner to pay a liening subcontractor directly is so important that it is enshrined in section 30 of the Manitoba Act, as it is in other provincial lien statutes. Courts have previously recognized that a right – such as the right to settle a claim, or to complete the building – falls within the ambit of subrogation. Indeed, the failure by the obligee to properly exercise its rights and privileges may discharge the bonding company from its obligations under the bond. Yet, in this case, the court seems to say that the subrogation rights of the bonding company under a payment bond do not include the right to be subrogated to the right or privilege of the owner to pay the subcontractors.

It is to be hoped that this issue is addressed by an appellate court. There seems to be no dispute in the decision that, generally speaking, a bonding company is subrogated to the obligee’s right’s (that is, the owner MHRC’s rights) under the building contract (with Falcon Creek in this case). That seems to be black letter law. The Manitoba court did not provide a good rationale as to why those subrogation rights would not include all the rights of the owner, including the right to pay the subcontractors directly, and why subrogation should not apply to that right under a payment bond as well as a performance bond. If the efficacy of the holdback system under the builders’ and construction lien statutes is to be maintained, if the statutory right of the owner to pay subcontractors is to be fully recognized, and if bonding companies are to be encouraged to issue bonds on the basis that they are fully subrogated to the rights of the obligee, then there seem to be good arguments in favour of a bonding company being allowed to exercise the owner’s right to pay the subcontractors, or the bonding company itself if it has paid subcontractors.

At a second level, this decision raises issues of fairness about the purposes of the respective statutes, and in particular the purpose behind builders’ and construction lien statutes.

The purpose behind the holdback and trust fund provisions of those statues is to require the owner (and others down the pyramid scheme) to withhold monies for the purpose of having them paid to the subcontractors and suppliers who are not paid by the contractor. Without those holdback and trust fund provisions of the lien statutes, the owner (and others down the payment chain) would go ahead and pay the contractor. In effect, this case means that the whole scheme of the builders’ and construction lien statues can be used as a tax collection scheme. The tax authorities can wait until the end of the project and scoop up the holdback, a holdback which would not have been there except for the builders’ and construction lien regime.

While the Manitoba judge emphasized the public purpose behind tax statutes, it is arguable that the purpose behind the builders’ and construction lien statutes deserves at least as high a recognition. The taking of the holdback moneys for tax purposes removes those moneys from the payment chain that produced them in the first place through the construction of the building, and takes them from the payment chain that caused them to be preserved. It is only because the builders’ and construction lien statute mandates the holdback that those monies are there in the first place. The taking of those monies for tax purposes impairs the very structure of the lien statutes. Compared to the tax department, contractors and suppliers have few, if any, means to protect themselves from the failure of contractors to pay their taxes. Should the subcontractors suffer when a contractor doesn’t pay its taxes? And will bonding companies provide bonds to the construction industry at the same cost if those bonds can be undermined by the tax authorities? Some might argue that this example of the government preferring itself over the ”little guy” shows why there is angst among some citizens across the western world, who see governments as more the problem than the solution for small businesses.

This decision did not consider the succession-of trust-funds and “no leak” principles in the BLA. The Manitoba Act, like the lien statues in Saskatchewan, Ontario and Nova Scotia starts the trust fund obligation at the owner’s level, and the beneficiary of the trust fund at that level is the contractor which has contracted with the owner. In other provinces, the trust fund starts at the contractor level. In all these provinces, the trust fund provisions apply at the contractor level and below. So in Manitoba, the owner holds the funds payable to the contractor in trust for the contractor, and once the contractor receives the funds, the contractor then holds those monies in trust for the unpaid subcontractors. What is the purpose of the trust fund at the owner’s level? Surely, to ensure that those funds are passed down to the trust fund at the next lower lever, the contractor level. There is no other reason for the trust fund provision at the owner level. It is not to allow the contractor or another person or authority to come in and scoop the funds. The holdback and trust fund provisions do not envision any leakage in the payment scheme.

In the present case and those which it followed, the courts do not apply the second part of the “no-leak” principle, namely, that the monies paid by the owner to the contractor are held in trust by the contractor for the subcontractors.

In this circumstance, the wording in section 224. (1.2) of the ITA may require some re-visiting. That section applies if the recipient of the CRA’s notice is “liable to make a payment …(a) to another person…” In the present case, the Manitoba judge held that MHRC was liable to make a payment to Falcon Creek, so the section applied. But if “another person”, like Falcon Creek, is obliged to hold those funds in trust for others, the subcontractors, can the ITA interfere with the application of trust principles, and has it done so clearly? The Manitoba court has effectively answered Yes to this question, but it deserves consideration at the appellate level.

The drafters of the provincial lien statutes may wish to consider amendments that will address this situation. One way may be to provide that the subcontractors and other person improving the lands are beneficiaries of the trust at the owner level, and similarly at the contractor level, that sub-subcontractors and other persons improving the lands are beneficiaries of the trust at that level. This is what the New Brunswick statute states at the contractor level and below. However, most provinces have amended their lien statues to limit the trust fund obligation to the next lowest level (that is, to the contractor in the case of trust funds held by the owner) and may be unwilling to re-open the scope of the trust fund obligation.

Lastly, while the Manitoba court did appear to hold that the ITA applies no matter what the bonding contract says, the judge did go on to consider the contractual environment, as did the Alberta courts in the Iona case. That being so, it may be that creative drafters of guarantee bonds will go back to the drafting table. If the contracts can change this result, there appear to be several elements to be addressed.

First, the bonding company may have to ensure that the owner is party to the bond, which will normally be the case for a payment or performance bond at the contractor level.

Second, the bond may have to expressly state that the bonding company is subrogated to the owner’s rights and privileges, including the right to pay subcontractors and suppliers (or the bonding company after it pays the subcontractors or suppliers) , and that those rights of the bonding company become effective at some point before the CRA delivers its notice to the owner, perhaps at the time that the first lien arises although not exercisable until, and to the extent that, the bonding company pays the subcontractors or suppliers.

Third, the bond may have to ensure that the holdback monies are beneficially owned by the bonding company once, and to the extent that, it pays subcontractors and suppliers.

Whether provisions such as these could properly be included in a bond and would be effective against the ITA or in light of the builder’s or construction lien statutes, time, future case law and creative drafting may tell.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, part 6(i).

Manitoba Housing and Renewal Corp. v. Able Eavestroughing Ltd., 2017 CarswellMan 56, 2017 MBQB 27

Builders’ and construction liens – holdback – trust fund – bonds- income tax

Thomas G. Heintzman O.C., Q.C., LLD (Hon.), FCIArb                 February 19, 2017

www.heintzmanadr.com

www.constructionlawcanada.caom

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

 

 

Breach Of Covenant To Obtain Fire Insurance Coverage For Another Party Means No Claim May Be Made Against That Party: Ontario Court Of Appeal

Those involved in building projects should always be alert to court decisions dealing with insurance, or insurance clauses in contracts, even if those contracts are not building contracts. Those decisions will inevitably impact the interpretation of insurance clauses in building contracts.

So the decision of the Ontario Court of Appeal in Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc., (2016), 130 O.R. (3d) 2016 ONCA 246 should be noted by those involved in the building industry and construction law. In a landlord-tenant setting, the court held that when a tenant covenanted in the lease to obtain fire insurance covering the tenant’s property in which the owner would be named as an additional insured, and failed to obtain insurance in which the landlord was so named, the tenant and its insurer could not recover against the landlord even though the fire was caused by a contractor hired by the landlord.

Changing landlord, tenant and contractor to owner, contractor and subcontractor, the same result would likely apply in the building contract setting.

Background

The lease required the tenant to obtain insurance against all risks of loss or damage to the tenant’s property. If fire insurance was not provided by that insurance, the tenant was required to carry insurance against the risk of damage to its property caused by fire. The lease also required the tenant to include the landlord as an additional insured on the liability and property damage policies. In the lease, the landlord indemnified the tenant for damage arising from the act, default or negligence of the landlord, its agents, contractors and others, and the tenant indemnified the landlord in similar language. The property damage insurance obtained by the tenant did not name the landlord as an additional insured.

A welding contractor engaged by the landlord caused a fire while working at the premises, causing damage to the tenant’s property and business. The limits of the tenant’s property damage insurance policy did not cover the tenant’s losses. The tenant sued the landlord to recover its property and business losses. It sought to recover both the subrogated losses and the uninsured losses.

The motion judge granted summary judgment against the landlord. The landlord’s appeal was allowed by the Court of Appeal.

Decision of the Ontario Court of Appeal

The Court of Appeal held that, by agreeing to obtain insurance against “All Risks of loss or damage to the Tenant’s property” and “against the risk of damage to the tenant’s property within the Premises caused by fire”, the tenant assumed the risk of loss or damage to its own property caused by fire. That covenant relieved the landlord from liability for that loss or damage, even if caused by the landlord’s negligence, unless the lease elsewhere provided to the contrary. The lease did not provide elsewhere to the contrary. The court concluded:

“Here, the parties specifically agreed that the tenant would insure against the risk of loss or damage to its property by fire. That is the very risk that materialized. No coverage exclusion applied under the Lumbermen’s policy and the tenant’s claim was paid to the extent of the policy limits. The fact that, as it happens, the tenant was underinsured for this risk does not mean that its failure to obtain full protective coverage can be laid at the landlord’s door.”

The Court of Appeal also held that the tenant’s failure to obtain insurance, which named the landlord as an additional insured barred its subrogated claim against the landlord, for two reasons.

First, as already found, the tenant had assumed the relevant risk so the tenant’s insurer could be in no better position.

Second, the tenant’s covenant to add the landlord as an additional insured, if honoured, would have barred a subrogated claim by the tenant’s insurer since an insurer cannot sue another insured under the same policy. The court said:

“The tenant’s insurer can be in no better position than that of the tenant itself….where, as here, the risk of loss or damage by a specific peril passes to one contracting party under the terms of its insurance covenant, there is no basis for the covenantor’s insurer to assert a subrogated claim against the beneficiary of the covenant. Simply put, because the covenantor (in this case, the tenant) has contractually assumed the risk of liability for loss or damage caused by a specific peril, neither it nor its insurer can seek to recover for loss or damage caused by that peril from the beneficiary of the insurance covenant (in this case, the landlord). Further, had the tenant complied with its s. 8(5) obligation to have the landlord named as an additional insured on its property damage insurance policy, no right of subrogation for the tenant’s property loss or damage due to fire would arise. An insurer cannot assert a subrogated claim against its own insured…”

Finally, the Court of Appeal held that the covenant whereby the landlord indemnified the tenant did not over-ride the insurance clause, but only applied in the event that the insurance to be obtained by the tenant did not cover the loss. Referring to the approach taken by a judge in a previous decision, the court said:

“Applied to the facts of this case, this interpretive approach gives meaning to all the challenged provisions of the lease. It holds the tenant to its contractual bargain under the tenant’s insurance covenants to assume responsibility for the risk of loss or damage to its own property caused by fire and requires the landlord to indemnify the tenant under the landlord’s indemnity covenant for those types of risks against which the tenant is not required to insure. It also ensures that, under the immunity provision, the landlord is not exposed to negligence claims where the tenant has agreed to insure against an underlying risk, such as fire… “

Discussion

In this decision, the Ontario Court of Appeal has followed and applied previous decisions of that court and the Supreme Court of Canada holding that an insurance clause in a contract, requiring one party to take out insurance, necessarily places the risk of loss specified in that insurance clause on the party required to take out that insurance. Neither that party nor its insurer may then sue the other party for that loss. That result flows from contract law.

And if the insurance clause requires that party to name the other party as an insured in the policy, that is icing on the cake. Due to the principles of subrogation, the insurer cannot sue the other party. That result flows from insurance law.

Perhaps the most interesting aspect of this decision is its resolution of the conflict or tension between the insurance clause and the indemnity clause in the lease. On their face, these clauses seem totally at odds with each other. But then the principles of contract interpretation swing into play. A way must be found to reconcile these seemingly opposing paragraphs. And the court has said that the way to do so is to allow the insurance clause to operate within the coverage that the insurance clause says the party obtaining it is to secure, and to allow the indemnity clause to operate outside that coverage.

Insurance clauses and the impact of a failure to obtain insurance conforming to that clause in the context of construction projects, were discussed by me in previous articles dated February 20, 2012 and June 24, 2012.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., Chapter 14, parts 7and 8.

Deslaurier Custom Cabinets Inc. v.1728106 Ontario Inc, (2016), 130 O.R. (3d) 2016 ONCA 246

Insurance – insurance clauses – subrogation – indemnity clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 29, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

Contractor’s Contract With The Buyer Of Land Was A Sufficient Reason To Deny A Construction Lien And Unjust Enrichment Claim To The Contractor

In J. Lepera Contracting Inc. v. Royal Timbers Inc. the Ontario Divisional Court recently dealt with a claim in unjust enrichment by a contractor who had done work for the purchaser of land. The purchaser had agreed to buy the land under an agreement of purchase and sale, but later defaulted under that agreement, and then failed to pay the contractor for its work. The land reverted to the selling owner on the purchaser’s default, together with the improvements made by the contractor.

The court concluded that the contractor had no claim against the selling owner under the Construction Lien Act of Ontario because the selling owner had not requested the work. The court also concluded that the contractor had no claim in unjust enrichment against the selling owner because the building contract between the purchaser and the contractor provided a “juristic reason” for the selling owner’s benefit and the contractor’s detriment.

Is this result fair? Should the contractor at least have a lien claim in respect of the greater value of the land due to its work? And if the contractor’s claim does fall outside the lien statute, should the existence of the contractor’s contract with the purchaser entitle the owner/vendor to the benefit of the improvements without payment, and impose that detriment on the contractor?

Background

Royal Timbers owned two plots of land, Lot A and Lot B. It agreed to sell Lot B to Sonoma. Royal Timbers was going to develop Lot A and Sonoma was going to develop Lot B. Royal Timbers and Sonoma hired the same architect who sent out an invitation to tender for work on both lots. The invitation to tender stated that the invitation was being issued by Royal Timbers for Lot A and Sonoma for Lot B. Lepera was the successful bidder for the work to install services on both lots.

Lepera entered into a contract with Royal Timbers to do the services work on Lot A, did that work and was paid by Royal Timbers for that work. Lepera entered into a contract with Sonoma to do the services work on Lot B, did that work and submitted its invoice to Sonoma for the work, and was not paid by Sonoma for that work as Sonoma had defaulted on its agreement to buy Lot B from Royal Timbers.

Lepera filed a lien claim against both Royal Timbers and Sonoma in respect of Lot B. Lepera also asserted a claim in unjust enrichment against Royal Timbers in respect of the work that Lepera had done on Lot B.

The trial dismissed Lepera’s lien claim against Royal Timbers for the work done by Lepera on Lot B on the ground that Royal Timbers had not requested the work to be done on Lot B and was, therefore, not an “owner” of that lot within the meaning of the Construction Lien Act.

The trial judge dismissed Lepera’s unjust enrichment claim against Royal Timbers on the basis that Royal Timbers had not caused the deprivation of Lepera, but rather, the deprivation was caused by Sonoma’s breach of its contract with Lepera.

The Divisional Court’s Judgment

  1. Lien Claim

The Divisional Court upheld the trial judge’s decision with respect to the lien claim. It held that Royal Timbers was not an “owner” with respect to Lot B because Sonoma, not Royal Timbers, had requested that the work be done on Lot B.

The Divisional Court agreed with the trial judge that the invitation to tender established separate tenders for the two lots, and did not constitute a request by Royal Timbers for work on Lot B. In addition, the trial judge was correct in finding that the surrounding facts did not establish a request by Royal Timers with respect to the work on Lot B.

  1. Unjust Enrichment Claim

The Divisional Court disagreed with the trial judge on the role of causation in the law of unjust enrichment. The Divisional Court held that there is no need for the defendant to cause the claimant’s deprivation. The Court said:

“While the deprivation must be linked to the benefit received by the defendant, based on a straightforward economic approach, none of the cases require that the defendant must have caused it.”

However, the Divisional Court upheld the trial judge’s decision on the basis that there was a juridical reason for the deprivation suffered by Lepera, namely, its contract with S. It said:“Lepera’s claim for unjust enrichment cannot succeed on the basis that Lepera’s claim for the monies owing for work it did on Phase 1 arises from its contract with Sonoma. In my view, that contract constitutes a juristic reason sufficient to defeat Lepera’s claim against Royal Timbers in unjust enrichment…Further, on the facts as found by the Trial Judge, it is clear that the reasonable expectations of the parties at the time that the work began was that Lepera would be paid by Sonoma for the work done by it on Phase 1 in accordance with their contract and not by Royal Timbers, with whom it had a separate contract for the work on Phase 2.”

Discussion

This decision raises important issues about the policies underlying the Construction Lien Act and the law of unjust enrichment, and the proper intersection of those policies. If a contractor does work for someone who has agreed to buy land from the owner, should those policies mean that the contractor has neither a construction lien claim against the land nor a claim in unjust enrichment, at least to the extent of the increase in value of the land due to the contractor’s work?

With respect to the Act, if the lien claimant seeks to impose its lien on, and obtain priority against, the seller’s interest in the land, the lien claimant must establish that the seller was an “owner” under the Act by reason of a “request” for the improvement. There are many cases on this point. The present facts seem to cry out for the application of the lien legislation. If the purchaser defaults on the purchase agreement, the lands revert to the seller, and the seller gets the services on the purchased parcel free of charge. According to the logic of the court’s decision it could be the seller that defaults on the purchase contract; the seller would still get the services free of charge on the parcel agreed to be sold.

However, since as early as 1917, in the 3-2 judgment of the Supreme Court of Canada in John A. Marshall Brick Co. v. York Farmers Colonization Co., 1917 CarswellOnt 18, 54 S.C.R. 569, it has been held that a selling owner in this circumstance is not an “owner” under the Act because it did not request the work.

In the John A. Marshall case, the Supreme Court held that, although the contractor could not succeed in its claim that the seller was an “owner’” under the Act, the contractor could assert an alternative claim that the seller’s interest was that of a mortgagee, due to the provisions of what is now section 78(3) of the Act. Accordingly, the contractor was entitled to assert a lien on the increased value of the property after the first lien arose. That issue was not discussed in the present case.

So far as unjust enrichment is concerned, there are cases which hold that a direct contract between the parties may constitute a justification for the detriment to the claimant. But in the present case, there was no direct contract between the selling owner Royal Timbers and the contractor, Lepera.

There are also cases which hold that a subcontractor cannot assert a claim for unjust enrichment against the owner when the subcontractor has a contract with a superior contractor through whom the monies cascading down from the owner are to flow. The contract with the superior contract, and the payment and holdback regime in the lien legislation, have been held to justify any deprivation to the subcontractor if that subcontractor fails to use the lien legislation to protect its interest and assert its claim.

But the present situation does not involve the cascading of money down from the owner in the typical payment and holdback scenario existing in construction projects. Here, the contractor’s contract is with a purchaser of the property and is outside any such cascading or pyramid payment arrangements with the owner. In that scenario, why should the contract with the would-be purchaser be justify the selling owner (to whom the land reverts on the purchaser’s default) obtaining the improvements without paying for them, and for the contractor’s deprivation?

No explanation was provided by the Divisional Court for why Lepera’s contract with Sonoma should be a justification which can be asserted by the selling owner, Royal Timbers, for the deprivation imposed on Lepera and the benefit obtained by Royal Timbers. If the statutory scheme to protect the contractor does not apply, as the court found, should that be the very situation in which unjust enrichment principles should apply?

There are two decisions of the Ontario Court of Appeal on point. In Nicholson v. St. Denis, 1975 CarswellOnt 831, 8 O.R. (2d) 315, the Ontario Court of Appeal held that a contractor who had done work for a purchaser of land did not have an unjust enrichment claim against the selling owner. In that case, however, the selling owner had no knowledge of the improvement made by the contractor, and the contractor had not asserted any lien rights. On the other hand, in Dixon Roof Truss & Building Components Ltd. v. High Street Construction Ltd., 1983 CarswellOnt 730, 43 O.R. (2d) 691, the Ontario Court of Appeal held the selling owner liable to the contractor who had done work for the purchaser, both under the lien legislation and on the basis of unjust enrichment.

In Von Muenchhausen v. S.A. Taylor Building Ltd., 1995 CarswellNB 159, 23 C.L.R. (2d) 177, the New Brunswick Court of Appeal held that the contractor’s contract with A for the construction of a foundation for a house was not a juristic reason for denying an unjust enrichment remedy against B who benefited from the construction.

Since a claimant in unjust enrichment must show that the defendant was enriched, the claimant will have to show that the improvement made by the contractor actually increased the value of the land to the selling owner to whom the lands revert on the purchaser’s default. That may not always be the case since the improvement made for the purchaser of the land may be of no use to the seller of the land. But in the present case, the work was for services to the land and those services seem to have been valuable to the seller. In this respect, it may be that the claim in unjust enrichment arrives at the same result as the alternative lien claim outlined in the John A. Marshall decision, namely, that in each case the contractor has priority over, and a claim against, the increased value of the land after the first lien arises, due to the contractor’s work. That possibility was not explored in the present case.

It is hoped that in the near future appellate courts will explore these potential and alternative claims to the increased value of the land, and also revisit the issue of whether a contract between a contractor and a purchaser of land under an agreement of purchase and sale is, or is not, a good reason to deny the contractor’s claim in unjust enrichment.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 4 and chapter 16, part 4(a)(iv).

J. Lepera Contracting Inc. v. Royal Timbers Inc., 2016 CarswellOnt 15319, 2016 ONSC 2909 (Ont. Div. Ct.)

Construction lien – request by owner for improvement -unjust enrichment – justification for deprivation

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 22, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Privy Council Defines Extra Work Under A Fixed Price Building Contract

In Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius), the Privy Council of the United Kingdom recently set out some helpful principles to define the entitlement of a contractor to extra payment under a fixed price contract. The Privy Council held that the power to award extra payments under a fixed price contract is wider than the parties assumed, and upheld the entitlement of the contractor to extra payment.

Background

Mascareignes (MSC) was the owner and Chang Cheung Esquares (CCE) was the contractor under a contract to build a 13 storey office building. An architect was named in the contract but that architect did not take part in the administration of the contract and MSC terminated his appointment. A quantity surveyor was named in the contract. MSC engaged another architect to assist it in relation to technical matters, but that architect was not appointed under the contract and did not carry out the functions of the architect under the contract.

During the performance of the contract the quantity surveyor produced interim valuations of the work which CCE had carried out. MSC paid the amounts due under those valuations. At the completion of the contract works, the quantity surveyor prepared a final account showing the amount due to CCE by MSC. MSC then informed CCE that it had terminated the quantity surveyor. The arbitrator later found the removal of the quantity surveyor unlawful. MSC refused to pay the sum which the quantity surveyor stated was due in the final valuation.

CCE commenced arbitration and claimed the amount certified in the final account. The arbitrator awarded CCE, among other amounts, the amount which the quantity surveyor had certified as due in the final account. MSC appealed to the Mauritius Supreme Court which dismissed the appeal, and MSC then appealed to the Privy Council.

Decision of the Privy Council

The Privy Council dismissed the appeal. Its decision contains a number of elements which are of interest generally to the law of building contracts:

  1. Fixed Price contract not changed into a Measure and Value contract

The contractor originally alleged, and the arbitrator found, that by reasons of the conduct of the parties after the contract was entered into, the contract should be interpreted to be a measure and value contract.

The Privy Council rejected this approach, and indeed the contractor’s counsel accepted that it was wrong. The contract stated that:

“This contract shall be a fixed price contract and no increase whatsoever will be allowed for material or labour … The Contractor must allow in his prices for any possible increases that may affect their tender during the execution of the Works.”

The Privy Council held that there was nothing in the facts that contradicted the clear terms of the contract stating that it was a lump sum contract and that the arbitrator erred in relying on the subsequent conduct of the parties to construe the contract to be a measure and value contract.

  1. Contractor entitled to extra payment

The Privy Council nevertheless affirmed the decision of the arbitrator on the basis that the payments certified by the quantity surveyor were properly due on the basis of extras due to the contractor under a fixed price contract. The Privy Council made the following points:

a. The building as built was radically different than the building which CCE had agreed to build:

“MSC had radically redesigned the building from that which it proposed when the parties entered into the Contract. [The arbitrator] recorded CCE’s evidence that ‘the building has been completely changed from the initial project as per the contract, and this inside and outside, from the bottom to the top, the height, the look, the structure, the finish.’ ”

b.  The certificates issued by the quantity surveyor during and at the end of the project were due to two factors: the        radical changes to the building and the owner’s failure to appoint an architect to supervise the construction:

“What [the quantity surveyor] did in preparing the interim valuations resulted in part from the absence of an architect to operate the process of interim certification under the contract and in part from the changes that MSC was making at the time to both the design of the building and the allocation of work. What [the quantity surveyor] did in creating the final account statement was consistent with the building contract remaining a lump sum contract but being adapted, in accordance with clause 13.5 of the Contract, to the wholesale changes to the building works and the allocation of work.”

c.  The authority to grant extras to a contractor under a fixed price contract was larger than the parties had assumed:

“In the Board’s view there is more scope for flexibility in valuing additional or substituted work in a lump sum contract than the parties have submitted. Work which is not expressly or impliedly included in the work for which the contracted lump sum is payable is extra work. An early example of this in a much less formal building contract which commissioned work set out in a bill of quantities is Kemp v Rose (1858) 65 ER 910; 1 Giff 258, 268-269 per Vice Chancellor Sir John Stuart. In the present case the lump sum was made up of elements set out in the fully priced bills of quantities which the arbitrator held were part of the contract. There was thus a definition of the works which were the subject of the lump sum, from which the existence of additional or substituted work could be identified.” (underlining added)

d.  The Privy Council set forth a step-by step process for determining whether elements from the contract may be used to value the extra work. If some of those steps do not apply, the Privy council then identified when and to what elements the contract rates and pries, or an unjust enrichment analysis, should be applied:

“Under the [contract…..] additional or substituted work carried out within a lump sum contract may be measured and valued by use of the rates and prices set out in the contract bills if three conditions are met. First, the work must be of a similar character to the work set out in the bills; secondly, the work must be executed in similar conditions to those of the work in the bills; and, thirdly, the work must not significantly change the quantity of the work set out in the bills. If either or both of the second and third conditions are not fulfilled, the valuation can be based on the rates and prices on the bills but a fair allowance must be made for differences in conditions or quantity. If the work is not of a similar character to the work set out in the bills (ie the first condition is not fulfilled) the valuer must use fair rates and prices.” (underling added)

e.  Finally, the valuation of the extras in this fashion was not a contradiction to the contract being a fixed price contract:

“The use of measurement and value to ascertain the value of additional or substituted work is thus not inconsistent with a lump sum contract. In this case, [the quantity surveyor] treated the contract as a lump sum contract by preserving the preliminaries unchanged, but the sums attributed to each of the other components of the contract were significantly altered. Most of the significant works were measured and valued although some items (site works, professional fees and attendance and profit) were valued at figures which the parties had agreed as appropriate in view of the changes to the building and the allocation of work. While it is not correct to say, as the arbitrator did, that the contract was varied to become a measure and value contract, the bulk of the components of the contract were properly valued by measurement and valued in [the quantity surveyor’s] preparation of the final account statement as a consequence of the changes which MSC made to the building and the allocation of work since the signing of the written contract. Accordingly, in the Board’s view, the arbitrator’s mischaracterisation of the nature of the parties’ contract had no bearing on his decision that CCE was entitled to receive the [amount which the quantity surveyor] stated in his final account statement.” (underlining added)

Discussion

This decision contains a useful checklist of the issues which arise when a project is changed by the owner and the contractor incurs further costs. These events will not, without more, change a fixed price contract into a cost plus contract.

But they may entitle the contractor to extras, provided that the contractor has properly asserted and preserved its rights to extra payments. Unless the contract provides otherwise, the contractor is entitled to extra payment for work which does not fall within the express or implied work for which the lump sum is payable.

The Privy Council stated a process by which the extra work may be valued according to the contract values (if there are such values in the contract), or according to unjust enrichment.

-If the extra work is of similar character, conditions and quantity, the contract values may be used.

-If conditions and quantity are different than, but the character is the same as, contemplated in the contract, then the contract rates and prices may be used, but a fair allowance must be made for differences in conditions or quantity.

-If the character of the extra work is different than the contract work, then unjust enrichment principles must be use.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 6, parts 1(b) and 7.

Mascareignes Sterling Co Ltd v Chang Cheng Esquares Co Ltd (Mauritius), [2016] UKPC 21

Building contracts – fixed price contract – cost plus contract – extras

Thomas G. Heintzman O.C., Q.C., FCIArb                                                  January 8, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

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

 

 

Is A Notice Of Intention To Recover Costs A Proper Notice Of Claim Under A Building Contract?

In Ledore Investments Ltd. v. Ellis-Don Construction Ltd., the Ontario Superior Court has recently held that a letter from a contractor to a subcontractor stating that “we intend to recover these costs from you” was a sufficient notice to the subcontractor to satisfy the notice provision of the building contract. Accordingly, the court set aside an arbitrator’s decision holding that the letter was only a notice of intention to claim, not a notice of claim.

This decision highlights the uncertain state of the law with respect to notices and claims under building contracts. That uncertainty is due to the different circumstances in which such a notice may be given and the different approaches to those circumstances taken by different courts.

Background

Articles 15 of the subcontract between Ellis-Don and Ross Steel stated as follows:

“the contractor [Ellis-Don] expressly waives and releases the subcontractor [Ross Steel] from all claims against the subcontractor, including without limitation those that might arise from the negligence or breach of this agreement by the subcontractor, except one or more of the following:

(a) those made in writing prior to the date of the final certificate for payment of the prime contract and still unsettled. (underlining added)

The letter which Ellis-Don then sent to Ross Steel stated that:

– “there are a number of outstanding issues to be resolved between Ellis-Don and Ross Steel regarding Ross Steel’s performance on this project.” The letter recited a number of alleged defaults by the subcontractor causing the delay of the project. The letter asserted that the subcontractor’s slippages had caused “serious impact on the work of Ellis-Don and other subcontractors and affected the overall completion of the project” and “forced Ellis-Don to expend substantial monies to accelerate the work in an effort to recover the schedule. We are currently assessing the financial impact that Ross Steel’s schedule slippages have had on Ellis-Don and we intend to recover these costs from you.” (underlining added)

– Ellis-Don had received an interim assessment of the liquidated damages by the owner for the late completion of the project, and that these damages “are solely attributable to Ross Steel and on account of this we are withholding the release of any further monies to you at this time.”

Arbitrator’s Decision

The following contents of the arbitrator’s decision are taken from the decision of the court reviewing the arbitrator’s award.

The arbitrator acknowledged that there was considerable judicial authority dealing with the sufficiency of notice of claims under building contracts; and that Ellis-Don’s letter to its subcontractor met the requirements, set forth in those cases, for sufficient written notice of a claim under a construction contract.

However, the arbitrator held that those cases did not apply to the present situation. The arbitrator drew a distinction between provisions requiring written notice of a claim, (to which the Doyle decision, and others following it, applied); and provisions requiring the making of a claim in writing, which in his view Article 15 represented. It was the arbitrator’s view that the first line of cases did not apply to Article 15.

The arbitrator accordingly concluded that there was an absence of any legal authority on the point, and he was obliged to interpret and apply Article 15 as a matter of first impression. He held that the wording of the article required “more than simply notice of an intention”, and that “a demand must be made”, or “a right must be asserted with consequences or relief sought”.

The arbitrator held that Ellis-Don’s letter to Ross Steel failed that test. In his view, the language employed by Ellis-Don in its letters was prospective, and pointed “to an intention to make a claim but not to an actual claim“. [Emphasis added] In finding that Ellis-Don had not satisfied the requirements of Article 15.1 (a), the arbitrator found that Ellis-Don’s letter was merely “notice to Ross Steel of an Ellis-Don intention to make a claim”, and “threatened” and “contemplated” claim that was “never quantified nor pursued”. The arbitrator held that a mere “intention to claim is not the same as a claim”, [emphasis added], and that the Ellis-Don’s letters, even when taken together, did not rise to the level of a ‘claim in writing’ that was still unsettled before the date of the final certificate for payment, as required by Article 15.1.

Court’s Decision

A single judge of the Ontario Superior Court set aside the arbitrator’s award for the following reasons:

  1. The cases, and in particular the decision of the British Columbia Court of Appeal in Doyle Construction Co. v. Carling O’Keefe Breweries of Canada Ltd. [1988 CarswellBC 204, indicated that a notice provision will be satisfied if:
  • The complaint goes beyond “grumblings” to display or indicate an “intention to claim”;
  • The claimant gives some particulars as to what the complaint is, so that the other party has an opportunity to consider its position and the possibility of taking corrective measures; and
  • The complaint is timely; e.g. given “in enough time” to permit the other party to take “guarding measures” if it so desires.
  1. Doyle also provided legal authority for the general proposition that provisions requiring claims to be made in writing should be treated as provisions requiring written notice of claims, contrary to the approach taken by the arbitrator. Accordingly, the arbitrator erred in finding that ‘claims made in writing” should not be treated as provisions requiring written notice of a claim.

The court accordingly set aside the arbitrator’s decision.

Discussion

The decisions of the arbitrator and judge reveal a starkly different approach to notices, and claims under building contracts, and to the effect of decided case law in Canada on these matters. The author understands that this matter is being appealed to the Ontario Court of Appeal where, hopefully, this debate will be clarified.

  1. Is there a difference between notices of occurrences, notices of claims, and claims under building contracts? The arbitrator said yes, and the judge said no:
    1. The arbitrator says that the waiver clause requires the contractor to give notice of a claim; that a claim involves a present statement of a claim that contains the proper elements of a claim; and that a statement of intention to make a claim is not a notice of a claim.
    2. The court says that a claim under a building contract is no different than a notice of occurrence or a notice of a claim; and that a statement of an intention to make a claim is sufficient under either a notice requirement or a claim requirement.

It is interesting to note that the Ontario Court of Appeal just recently dealt with a claim procedure under a contract. In Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205, 265 A.C.W.S. (3d) 289, the Ontario Court of Appeal held that the claim was invalid because sufficient particulars of it were not provided. The claim provision in that case related to claims to be filed at the end of the project, and not during the project, similar to the situation in the Ellis-Don case. The Court of Appeal applied very strict requirements for the particulars of a valid claim, requirements would not seem applicable at all to a notice. It does not seem likely that a court would hold a contractor to such a high standard of particulars in a notice situation.

That decision was reviewed by me in an article dated July 10, 2016 on my www.constructionlawcanada website.

  1. Do the prior cases decide this issue? Do they deal with the same clause in the contract?

Before reviewing the cases referred to in the Ellis-Don case, it is well to remember that notice and claims provisions appear in various parts of a building contract. Thus, in the CCDC-2 Stipulated Price Contract, the main notice/claims provisions are as follows:

6.4.1. Changed conditions. Notice in Writing is required of “such conditions” and in no event later than five working days after the first observance of the occurrence.

6.5.4 Delay. No extension of the time for performance may be granted unless a “Notice in Writing” is given within 10 days of the commencement of the delay.

6.6.1. Increase or decrease in (credit against) the cost of the work. If the owner or contractor “intends to make a claim” the claimant must give “timely Notice in Writing” and submit, within a reasonable time, a “detailed account claimed and the grounds upon which the claim is made.”

7.1.2 and 7.2. Default. The notice must be in writing. No period of time is specified in which to give notice.

8.2.2. Claims. Notice of dispute must be in writing and given within 15 working days of the receipt of the Consultant’s findings. The responding party has 10 working days to send a reply.

12.2.1.1 and 12.2.3.1 Waiver of claims. “Claims” arising prior to the date of Substantial Completion, are waived and released unless “Notice in Writing of claim” is given prior to the fifth or sixth day after the expiry of the applicable lien period.

12.3.3 Warranty. The owner shall promptly give contractor Notice in Writing of defects and deficiencies.

The first three notices apply during the course of the project. The claims provision applies to the dispute resolution procedures. The waiver and warranty provisions apply at the end of the project. Thus, these provisions apply in different circumstances and may be seen to have different purposes.

The following are the cases referred to in the Ellis-Don decision of the court:

  • Doyle Construction Co. v. Carling O’Keefe Breweries of Canada Ltd.

The plaintiff’s claim was dismissed on several grounds, one of which was that, under the claims procedures of the contract, GC 22.2, “Claims under this General Condition shall be made in writing to the party liable within reasonable time after the first observance of such damage” and the procedures required that there be notice of “any wrongful act or neglect” of the person against whom the claim is made. So, the notice provision in Doyle related to notice during the project, not a notice at the end of the project. In addition, the plaintiff’s claim in Doyle was dismissed because no notice of wrongful act or neglect was identified in any notice. The Doyle case seems very different than the Ellis-Don case on both accounts. Also the judges’ remarks in Doyle on the notice issue may arguably be obiter dicta. In fact, the Doyle judgments appear to be a strong endorsement of the need for the contractor to give effective notice of its claim. In that case the court found that the contractor did give a notice of intent to claim, but that was not sufficient. Justice Locke said:

“The grumblings of this contractor, recorded though they may be in site minutes, display no intention to claim until December 1983. Even then, no claim was actually advanced, but intent was indicated. But no details were given: an owner would be hard put to know exactly what it is to meet, and hence what it is to do. The purpose of the notice is to give the owner an opportunity of considering his position and perhaps taking corrective measures, and he is prejudiced by not being able to do it.” (underlining added)

–Northland Kaska Corp. v. Yukon Territory, 2001 CarswellBC 1477.

This was a changed conditions case, not a waiver-at-the-end-of-the-project case, as in Ellis-Don. Under the changed conditions provision, GC 35 of the contract, the contractor was required to give the owner “written notice…as soon as practicable and in any event no later than five Days following the occurrence thereof and shall give MCL subsequent written notice of the termination of any such lease.” Under GC 14, the claims provision, the contractor was required to submit a “Notice of a Claim …..in writing ….within seven Days after the Contractor first becomes aware of the events or circumstances giving rise to such Claim. As soon as practicable thereafter the Contractor shall submit full details of such Claim in order to permit MCL to review and evaluate it.” In holding that the contractor had not satisfied these requirements of the contract, and after quoting the words of Justice Locke referred to above, the court said:

“it is my opinion that any notice of a change in soil conditions must be unequivocal in stating the contractor’s intention that: (1) it has encountered what it considers to be a substantial difference in soil conditions than that indicated in the pre-tender information, or a reasonable assumption as to soil conditions based upon the pre-tender information, as the case may be; and (2) that it intends to make a claim under GC35.2 for any extra expense, loss or damage resulting therefrom. This does not mean that the written notice must be overly detailed, as the extent of the change in soil conditions nor the full impact upon the contractor’s planned schedule and budget might not yet be fully appreciated. However, the notice should contain such particulars so as to enable the owner to appreciate the contractor’s concerns, to consider its position, and to make an informed decision as to how to proceed. Timeliness and certainty of the notice is essential. The contractor may always withdraw its claim if it circumstances warrant, but it should not deprive the owner the opportunity to assess its options in light of the likelihood that contractor will make a claim for extra compensation under GC35.2.” (underlining added)

– Bemar Construction (Ontario) Inc. v. Mississauga (City), 2004 CarswellOnt 222 (affirmed in the Ontario Court of Appeal)

Bemar was a delay claim. The contractor, Bemar, sent a letter to the owner stating that it was giving “formal notice that the completion date for said project will be extended accordingly” but did not give notice of any delay claim for damages or compensation. Quoting Justice Locke in Doyle, the court dismissed the delay claim for failure to give proper notice of it.

–Technicore Underground Inc. v. Toronto (City), 2011 CarswellOnt 14960

This was an increase-in costs and a claims procedure case. GC 3.14.03 of the contract required the contractor to give “oral notice ….of any situation which may lead to a claim for additional payment immediately upon becoming aware of the situation and shall provide written notice to the Contract Administrator of such situation or of any express intent to claim such payment, within seven days of the commencement of any part of the work which may be affected by the situation or will form part of the claim.” Then, the contractor was required to “submit detailed claims as soon as reasonably possible and in any event no later than 30 Days after the completion of the work affected by the situation.” The detailed claim was required to: identify the items in respect of which the claim arose; state the grounds, contractual or otherwise, upon which the claim is made; and include the Records supporting such claim. The court referred to the Doyle and Bemar decisions and held that the contractor’s claim was limited to those items for which it had given notice during the contract, and could not include claims for which it gave notice three years later.

In all of these cases, the court dismissed the contractor’s claim because of a failure to give proper notice. Two of the cases involved claims procedures, one involved a delay claim and two involved changed condition claims. None were a waiver-at the end-of the contract case, such as Ellis-Don. All of these cases involved specific contractual provisions that influenced the court’s treatment of the notice/claim issue.

Not only do the claims in these cases arise in different circumstances, it is not obvious that they give rise to the three principles that the judge in Ellis-Don stated that they give rise to.

If the Ellis-Don case is appealed to the Ontario Court of Appeal, it is hoped that issues like the following will be considered:

  1. Should the same kind or detail of notice or claim be required for notices arising during the project – such as for delay, changed conditions, increase or decrease in the cost of the project – as opposed to claims in the dispute resolution process or at the end of the project through the waiver/release clause? Should the notice requirements during the project be less onerous than those at the end of the project or in the dispute resolution process, because during the project the parties are busy building the project, and do not have full knowledge of the consequences of the delay, changes or defaults?

Is the arbitrator’s approach more suitable to the waiver-at-the-end-of-the-project situation, which is the situation in Ellis-Don, and the judge’s approach more suitable to the notices given during the course of the project?

  1. Should a “notice of claim” be the same as a “claim”? What degree of “notice” is required for a “notice” or a “notice of claim” or a “claim”? Is it too complicated to have different standards applicable to these three situations? Or were the expressions – “claim” and “notice of claim” and “notice” –intended to be different, and an “notice” or “notice of claim” intended to be a less detailed document, just like, under the Rules of Civil Procedure, a Notice of Claim is less detailed than a Statement of Claim.
  1. What is the fair balance between burdening the claimant with filing a detailed claim and notice, and providing the respondent with reasonable notice of the claim and its repercussions? Should the amount, or lack, of detail that Ellis-Don put in its letter to its subcontractor be more or less important than its use of the word “intention”? And dealing, for instance, with notices in the dispute resolution procedures, is there a good reason to require a claimant in that procedure to provide as much information in its notice of claim as a Statement of Claim in a civil action, especially when the claim may go through a mediation and arbitration process when those details will be dealt with in the dispute resolution process?

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 6, part 9(d), chapter 7, part 5 and chapter 9, part 4.

Ledore Investments Ltd. v. Ellis-Don Construction Ltd., 2016 CarswellOnt 13567, 2016 ONSC 5441

Building contract – claim and notice of claim – waiver of claims at time of completion

Thomas G. Heintzman O.C., Q.C., FCIArb                                   December 3,2016

www.heintzmanadr.com

www.constructionlawcanada.com

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