No Representation Clause Precludes Reliance On Pre-Contractual Representation

In Houle v. Knelsen Sand and Gravel Ltd., 2016 CarswellAlta 1582, 2016 ABCA 247, the Alberta Court of Appeal has recently held that a “no representation” clause precluded a party from relying on a pre-contractual representation to rescind the contract.

Background

Houle owned a parcel of land in which Houle believed there were substantial gravel deposits. Houle contacted Knelsen about the potential sale of the land and provided Knelsen with a report of Silvatech Resource Solutions which had assessed the deposits and estimated there might be 444,850 tons of gravel in the land. Based on the Silvatech data, Knelsen’s manager concluded that the lands would yield 457,000 tonnes of gravel. After a series of negotiations, a price of $800,000 was agreed upon for the gravel rights, calculated at $1.60 per tonne for 500,000 tonnes, plus $1 per tonne for tonnage over 500,000.

The formal contract between the parties included the following clause:

“The Purchaser acknowledges that he has inspected the property and that he is purchasing the property as is and that there is no representation, warranty, collateral agreement or condition affecting the property or this offer other than as expressed herein in writing.”

In fact, there was much less gravel in the lands than expected. Knelsen extracted 74,000 tonnes of gravel, and estimated there was 25,000 to 30,000 additional tonnes on site, but that extraction of this amount would not be economical. Knelsen failed to make the final payment under the contract, and Houle sued. Knelsen counterclaimed, alleging breach of contract, negligent and innocent misrepresentation respecting the amount of gravel available in the land, and seeking rescission of the contract.

The trial judge granted rescission of the contract based upon an innocent misrepresentation.

Decision of the Alberta Court of Appeal

The Alberta Court of Appeal allowed the appeal and dismissed the action. Its reasoning was as follows:

  1. The estimate in the Silvatech report was not a representation of “fact”, but an opinion. The Court said:

  “As the trial reasons recognized, no one knew, or purported to know, how much gravel was actually in the land ….Neither the appellants, the respondent, Wapiti or Silvatech ever claimed or represented that there were in fact at least 500,000 tonnes of gravel, and it would have been reckless for any of them to do so. The cases relied on by the respondent are distinguishable. It is one thing to represent that an orchard for sale has 600 trees… and quite another thing to represent the quantity of a mineral buried underground. The Silvatech report can only reasonably be read as stating that, in the opinion of Silvatech and based on its professional analysis, it was more likely than not that there would be about 444,850 tons of gravel in the land. This was clearly an opinion, not a “fact”. Neither Silvatech (nor the appellants, vicariously) ever represented as a fact that there was any particular quantity of gravel present.

  1. The court said that “there is nothing objectionable about the whole agreement clause. It was a legitimate provision (found in most commercial contracts) confirming the scope of the agreement, and allocating the risks between the parties….The risk surrounding the actual quantity of gravel was well known to the parties….The respondent agreed to buy the appellants’ interest in the land “as is”. The appellants insisted on the whole agreement clause, at least in part to confirm that the risk arising from these unknown factors fell on the respondent purchaser.”
  1. The “no representation” clause disclaimed any “representation … affecting the property”. Those words:

“must be a reference to pre-contractual representations; post-contractual representations cannot affect the formation or terms of the contract. The trial reasons appear to assume that the whole agreement clause excludes negligent misrepresentations, but not innocent misrepresentations. There is no basis in law for that interpretation. It deprives the parties of the certainty the whole agreement clause was intended to deliver.”

  1. The “no representation” clause was wide enough to catch the representation about the quantity of gravel present in the lands: “There would be no point in excluding liability for non-actionable representations, and no reason to distinguish between innocent and negligent actionable representations, or between relief in contract or equity. The point of the whole agreement clause is that the obligations of the parties will be determined in accordance with the written terms of the contract, not extraneous negotiations and discussions that have not been reduced to writing, and thus formally acknowledged by the contracting parties.”
  1. There was no substantial failure of consideration: “there was gravel and a right to extract it.”

Discussion

This decision reflects the trend of Canadian courts to hold parties to their contractual deal about limitation and exclusion clauses, absent egregious facts or dealings. In this case, the “no representation” clause directly addressed the commercial risk relating to the amount of gravel in the land, a risk that both parties were aware of. There was nothing unfair in holding that the clause addressed the very risk to which it obviously applied.

It seems doubtful that the “whole agreement” part of the clause (“there is no….collateral agreement or condition …..”) would have been effective in the present circumstances. It was the “no representation” part of the clause (“there is no ….representation, warranty…) that was really applicable. But the present decision shows how powerful a combined “whole agreement/no representation” clause can be: the first part ensures that, so far as contractual claims and remedies are concerned, the parties cannot go beyond the written contract; and the second part ensures that the parties cannot assert tort or other non-contractual rights and remedies that are inconsistent with the contract.

The court’s discussion about whether the pre-contract statements were factual or opinions seems somewhat odd. If the statements were opinions, then they did not amount to representations unless Houle did not believe in their accuracy (and there was no suggestion of that in the reasons of the court). So if the statements were opinions, then the discussion of the “no representation” clause was unnecessary. If the statements were facts, then the discussion about opinions was unnecessary. In either event, part of this decision appears to be obiter dicta.

It is well to remember that a “no representation” clause is not effective against fraud. If pre-contractual statements are made which are fraudulent then the remedies of rescission and deceit will still be available, no matter what the contract says.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 4, part 3(f)(iii) and chapter 8, part 7.

Houle v. Knelsen Sand and Gravel Ltd., 2016 CarswellAlta 1582, 2016 ABCA 247

Contract – whole agreement and no representation clauses – pre-contractual representations – statements of fact or opinion

Thomas G. Heintzman O.C., Q.C., FCIArb                               October 30, 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.

 

 

Tort And Fraud Claims Fall Within Arbitration Agreement: Ontario Court Of Appeal

In Haas v. Gunasekaram, 2016 ONCA 744, the Ontario Court of Appeal recently held that claims in tort and fraud, and resulting claims to set aside the agreement between the parties, were within the jurisdiction of the arbitral tribunal under an arbitration agreement. Accordingly, the court action between the parties was stayed.

This decision is important due to the pro-arbitration principles of contractual interpretation which the Court of Appeal adopted, and due to its finding that the claims in tort and fraud – which are often found to fall outside arbitration clauses – were properly within the jurisdiction of the arbitral tribunal.

Background

The four parties to the actions were shareholders in a company which started a restaurant. They entered into a shareholders agreement which contained an arbitration clause. The arbitration clause read as follows:

If at any time during the currency of this Agreement, or after the termination hereof, any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator to be appointed by the parties to the dispute within ten (10) days of such referral… [underlining added.]

The restaurant failed and Mr. Haas brought an action against the other three shareholders claiming that he had been induced to enter into the shareholders’ agreement by fraudulent misrepresentations. The defendants brought a motion to stay the action, submitting that the claim must be dealt by way of arbitration. The judge hearing the motion dismissed it on the ground that Mr. Haas’ claims fell outside the arbitration agreement. The Court of Appeal allowed the appeal.

Decision of the Court of Appeal

The decision of the Court of Appeal contains the following elements:

  1. A broad interpretation should be given to the arbitration agreement. The court said:

    “The law favours giving effect to arbitration agreements. This is evident in both legislation and in jurisprudence……the statutory language in s. 7 of the current Arbitration Act is directory, not equivocal. It strongly favours giving effect to an arbitration agreement. This policy direction is reinforced by s. 17 of the Arbitration Act [which authorizes the arbitral tribunal to rule on its own jurisdiction]….. The same pro-arbitration orientation is found in the jurisprudence….  It is now well-established in Ontario that the court should grant a stay under art. 8(1) of the Model Law where it is ‘arguable’ that the dispute falls within the terms of an arbitration agreement…. [quoting from the decision in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 (B.C.C.A.), at paras. 39-40]: ‘Only where it is clear that the dispute is outside the terms of the arbitration agreement or that a party is not a party to the arbitration agreement or that the application is out of time should the court reach any final determination in respect of such matters on an application for a stay of proceedings….Where it is arguable that the dispute falls within the terms of the arbitration agreement or where it is arguable that a party to the legal proceedings is a party to the arbitration agreement then, in my view, the stay should be granted and those matters left to be determined by the arbitral tribunal….’a deferential approach’ allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, ‘is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.’”

  2. The court’s review of the misrepresentations alleged by Mr. Haas showed that they largely related to the defendants’ failure to perform their obligations under the shareholders’ agreement. There was only one alleged misrepresentation relating to conduct before the shareholders’ agreement, that the proposed location had a proven track record of successful restaurants. To establish his case, Mr. Haas would be relying on the contractual documents.
  3. The court considered that the arbitration agreement was “broad in scope.” It particularly referred to the words “if any dispute, difference or question shall arise, or any failure to agree as specifically hereinabove referred to, shall occur among the parties hereto or certain of them, respecting this Agreement or anything herein contained.”
  4. The court held that tort claims do not automatically fall outside an arbitration agreement. As long as “either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it” or “the matter in dispute is referable to theinterpretation or implementation of some provision of the Agreement” or “the claim …relie[s] upon a breach of the contract as the source of the unlawfulness to ground” the claim, then a broadly based arbitration agreement applies. The court also echoed the caution cited in other cases that the court should “be wary of cases in which a party to an arbitration agreement seeks to avoid it by pleading a common law tort”
  5. The court also held that the plaintiff’s claim that fraud vitiated the agreement between the parties did not mean that the arbitral tribunal lacked jurisdiction. It just meant that the tribunal had the authority to decide that issue under section 17 of the Arbitration Act, 1991. That section enacts the competence-competence principle, namely that the arbitral tribunal has authority to decide its jurisdictional competence. In conclusion, the court said:

    “Put simply, in cases involving arbitration agreements, fraud does not necessarily vitiate everything. It is a matter of interpretation. The arbitration agreement in this case contains broad language, referring to “any dispute, difference or question…or any failure to agree…respecting this Agreement or anything herein contained then every such dispute, difference or question or failure to agree shall be referred to a single arbitrator. There is no exclusion for tort claims, misrepresentation or fraud.”

Discussion

The Court of Appeal’s finding that the arbitration agreement was a “broad” one is useful to those relying on arbitration agreements. The court might have taken a different view. The word “arise” is not as broad as, say, “relating to”, and the words “respecting this Agreement or anything herein contained” could arguably limit the arbitration to contractual disputes, and nothing more. Nevertheless, the court held that these words established a “broad” arbitration clause.

The Court of Appeal’s conclusion that tort and fraud claims fall within the arbitration clause – at least to the extent of the arbitral tribunal’s entitlement to first determine whether they do – is very significant. This decision effectively over-rules or calls into question prior lower court decisions that, in less arbitration-friendly days, held to the contrary.

The key to the decision is, of course, the competence-competence principle. Once the tort and fraud claims arguably fall within the arbitration agreement, then the court must allow the arbitral tribunal to first decide whether they do or not. At that point, the court’s work is done, until the tribunal makes a decision on that issue which is brought back to the court for review. It is the direction of the legislature in section 17 of the Act – adopting the competence-competence principle –and the obligation of the court to apply that principle that results in the modern “hands off” attitude of courts toward arbitration. That attitude is one of the defining elements of the modern law of arbitration.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, parts 7 and 8.
Haas v. Gunasekaram, 2016 ONCA 744

Arbitration – jurisdiction of the arbitral tribunal – competence-competence – stay of court proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                      October 23, 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.

Standard Form Contracts Are To Be Reviewed On A Standard Of Correctness: Supreme Court Of Canada

In, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37, the Supreme Court of Canada has held that the interpretation of a standard form contract is a matter of law alone, and not a matter of mixed fact and law. Accordingly, it is not sufficient for a judge to arrive at a reasonable interpretation of a standard form contract: the interpretation must be correct or it may be set aside by an appellate court.

In this respect, the Supreme Court has decided that a different standard of review applies to standard form contracts than for contracts generally. In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court held that a decision of an arbitrator interpreting a contract amounted to a matter of mixed fact and law, and not just a question of law. Accordingly, the Supreme Court held that the B.C. Court of Appeal had no jurisdiction to grant leave to appeal on a matter of law from a decision of a trial court upholding the arbitral award.

So, in Canada there are two kinds of contract which involve two different kinds of contractual interpretation:

General contracts; The interpretation of these contracts amounts to a question of mixed fact and law. Appellate courts will show great defence to a trial judge’s decision interpreting the contract.

Standard form contracts: The interpretation of these contracts amounts to a question of law alone. Appellate courts may reverse the trial judge’s decision if that decision is not correct.

For those involved in arbitration, the question is whether these two standards will be imported into the review of arbitral decisions.

The Supreme Court’s decision in Ledcor v. Northbridge also contains an extremely important ruling with respect to the exclusion for faulty workmanship contained in most Builders’ Risk insurance policies. This aspect of the decision was discussed by me in an article dated September 17, 2016. The present article addresses the “standard of review” issue.

Background

As discussed in my previous article, the Ledcor v. Northbridge case arose from damage done to the windows of a building under construction. Before the project was completed, the owner hired cleaners to clean the windows. The clearers used improper tools and methods and scratched the windows. The windows had to be replaced and the building’s owner and the general contractor claimed the replacement cost under the Builders’ Risk insurance policy covering the project. The insurers denied coverage, asserting that the claim fell within the policy’s exclusion for the “cost of making good faulty workmanship”.

The Alberta trial judge held that the clause was ambiguous and applied the contra proferentem rule to find that the claim was not excluded. The Alberta Court of Appeal reversed the trial judge’s decision. It concluded that the damage to the windows was excluded because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.

Accordingly, the appeal before the Supreme Court of Canada involved the application of two sets of principles.

First, the principles relating to the interpretation of contracts – in this case, an insurance contract.

Second, the principles to be applied to an appellate court’s review of a lower court’s decision interpreting a contract. It is this second aspect of the Supreme Court’s decision which is notable because the court applied a different standard of review than it had very recently pronounced in Sattva.

The Sattva Decision

In Sattva, the Supreme Court held that the interpretation of a contract is a question of mixed fact and law. Because a contract is negotiated in a factual setting, the interpretation of the contract is not just a matter of examining the words of the contract, but also examining the facts which gave rise to the contract.

Under s. 31(2) of the British Columbia Arbitration Act, the arbitrator’s award could only be appealed if the appeal raised “questions of law”. The judge of the B.C. trial division dismissed the appeal from the arbitral award, holding that the interpretation of the contract by the arbitrator raised a question of mixed fact and law, not a question of law. The Supreme Court agreed with that view. Accordingly, the Supreme Court held that the B.C. Court of Appeal erred in hearing the appeal since there was no question of law properly before the Court of Appeal over which that court had jurisdiction.

The Ledcor decision

In Ledcor, the majority of the Supreme Court held that the reasons for its decision in Sattva do not apply to the interpretation of a standard form contract, for several reasons.

First, there is no relevant factual matrix in which a standard form is signed. A standard form contract is prepared by one party and presented to the other side on a “take it or leave it” basis, with little or no negotiation between the parties. In the absence of a relevant factual matrix that could influence the proper interpretation of the contract, the interpretation should be characterized as a matter of law.

Second, the interpretation of a standard form contract applies to all users of that contract. The contract cannot have a different meaning for some parties than for others. For this additional reason, the interpretation of the contract should be seen as a matter of law. This is particularly so for insurance contracts which are usually prepared as “standard form policies” and are provided by the insurer to the insured without negotiation, except as to the amount of the premium.

Third, a standard of correctness properly sorts out the responsibilities of trial judges and appellate courts. The function of trial judges is to make factual finding. The function of appellate courts is to decide legal principles that will be applied by and to society at large, and not just those who are parties to the immediate dispute. In this setting, it is more appropriate that the review by an appellate court of a trial judge’s interpretation of a standard form contract be conducted on a standard of correctness. As the majority said, “ensuring consistency in the law and reforming the law” is the function of appellate courts.   By “selecting one interpretation over the other as correct” the appellate court provides “certainty and predictability.” For all these reasons, there is one correct interpretation of a standard form contract, and if the trial judge does not come to the correct conclusion, then the appellate court may set it aside.

Justice Cromwell dissented. In his view, all contracts have a factual matrix. Even standard form contracts involve surrounding facts, including the market, industry or setting in which they exist, their purpose, the parties’ reasonable expectations and commercial reality, etc. For this reason, there is not a sufficient generality associated with a standard form contract to turn its interpretation into a question of law.

Discussion

There are a number of interesting aspects to the Ledcor decision.

First, one may ask whether it is a practical or commercially sensible to differentiate between general contracts and standard form contracts. What if the contract is partly standard form and partly negotiated? Does the “correctness standard apply to part of the contract, or part of the judge’s decision, but not to the balance? Can the two parts be separated?

Second, what amounts to a “standard form contract” for the purposes of Ledcor? This is an important issue in the construction industry. “Standard form” construction contracts, such as the CCDC contracts prepared by the Canadian Construction Document Committee, are not prepared by one party or one side of the industry and presented to the other on a “take it or leave it” basis. Rather, they are prepared by the consensus of the participants on all sides of the construction industry. Are these contracts “standard form contracts” within Ledcor?

Third, does the Ledcor decision apply to the review of arbitration awards involving standard form contracts? The Ledcor decision involved appellate review of a trial court decision, and the majority of the Supreme Court decided that that review should have been conducted on a correctness standard. One of the factors in its decision was the relationship between trial judges and appellate courts which, in the Supreme Court’s view, supported a correctness standard of review. In Sattva, the original decision being reviewed was an arbitral award that was appealed to the superior court. The Supreme Court ultimately decided that appellate review of the superior court’s decision did not involve a pure question of law, but a question of mixed fact and law. Does the fact that Sattva originally involved an arbitration decision and Ledcor originally involved a court decision make a difference? And if an arbitrator is dealing with a standard form contract, as opposed to a negotiated contract, does that make a difference?

Some provincial arbitration statutes allow the parties to appeal an arbitral award on a question of law, sometimes by agreement of the parties or with the court’s leave. Sattva involved such a statute, and the Supreme Court of Canada held that leave to appeal the trial court’s decision reviewing the arbitral award should not have been granted under the B.C. arbitration statute since the interpretation of the contract in question did not involve a question of law, but rather a question of mixed fact and law. If the contract had been a standard form contract, would the interpretation of the contract now be a matter of law under Ledcor?

In addition, are the roles of a judge and arbitrator in interpreting a contract, and is the relationship of a judge and arbitrator to an appellate court, the same? Is the arbitrator, even though selected by the parties and selected because of his or her expertise and knowledge of the industry, bound to approach the interpretation of the contract in exactly the same way as a judge?

In the net result, is a decision of an arbitrator under a CCDC contract reviewable by a court on a standard of correctness? If so, the “hands off” approach of courts toward arbitration, which has been the trend in arbitration law over the last twenty years, may be changed by Ledcor.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 11, part 11.

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37

Contracts – interpretation of contracts – standard of review – questions of law and mixed fact and law

Thomas G. Heintzman O.C., Q.C., FCIArb                             October 10, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

Is The Charge Or Lien Against The Holdback Separate From The Lien Against The Land?

Summary

In the recent decision in Brook Construction (2007) Inc. v. Blackwood Contractors Ltd, the Newfoundland and Labrador Court of Appeal held that the charge against the holdback under s.12(5) of the Newfoundland and Labrador Mechanics’ Lien Act (the NL Act) is the same as, and “parasitic” to, the lien against the land.

Accordingly, since the subcontractor did not have a lien against the land – because the land was owned by the Crown – the subcontractor also did not have a lien against the holdback held by the owner.

The British Columbia Court of Appeal arrived at the opposite result in its 2003 decision in Shimco Metal Erectors Ltd. v. Design Steel Constructors Ltd.

In that decision, the B.C. Court of Appeal held that under s. 4(9) of the B.C. Builders Lien Act (the BC Act), the lien against the holdback is a separate and distinct lien and might be asserted even though the subcontractor had not commenced an action within the time to assert a lien against the land.

Can these decisions be rationalized? What is the law on this subject in the other provinces?

Reasoning of the Newfoundland and Labrador Court of Appeal

In Brook Construction, the majority of the Newfoundland and Labrador Court of Appeal arrived at its decision for the following reasons:

  1. Section 12(5) of the NL Act, which creates the charge upon the holdback, starts with the words “Where there is a lien under section 6”. In the view of the majority of Newfoundland and Labrador Court of Appeal:

“Section 6 is the provision that creates the statutory lien. Without its operation, there would be no claim on the land benefitted by the work. The right to the lien on the holdback is parasitic upon the existence of a lien on the benefitted land.” (underlining added)

  1. The NL Act does not contain a trust fund section. Accordingly, the rationale for imposing a charge against the holdback is not as persuasive in Newfoundland and Labrador as it is in provinces, such as New Brunswick, in which a trust fund provision exists. In provinces like New Brunswick, the trust fund section was introduced into the lien statute precisely because the charge upon the holdback was dependent on the lien against the land. So in Newfoundland and Labrador, where there is no trust fund section, the parasitic nature of the charge upon the holdback must be recognized.
  1. Accordingly, since Crown land is not subject to a lien in Newfoundland and Labrador, a lien against the holdback cannot arise if the building is on Crown land.

The majority of the Newfoundland and Labrador Court of Appeal also held that, even if a charge against the holdback could arise under the NL Act, the subcontractor was obliged to sue the Crown which held the holdback. Even if (contrary to the majority’s conclusion) the lien against the holdback might otherwise exist, that lien was discharged since the subcontractor did not sue the Crown.

Justice Welsh dissented. He held that the combined effect of sections 5 and 12(5) of the NL Act is that the Crown is subject to that Act. This conclusion flowed from the exception to lien rights stated in those sections for roads and highways. That exception in the NL Act necessarily meant that Crown land was otherwise subject to the Act. Due to this conclusion, Justice Welsh did not determine whether the holdback charge is a separate or a “parasitic” lien.

Neither the majority nor minority of the Newfoundland and Labrador Court of Appeal referred to the decision of the BC Court of Appeal in the Shimco case.

Reasoning Of The BC Court Of Appeal

In Shimco, the BC Court of Appeal arrived at the opposite conclusion to that reached by the majority of the Newfoundland and Labrador Court of Appeal, for the following reasons:

  1. Sub-section 4(9) of the BC Act states that “a holdback required to be retained under this section is subject to a lien under this Act. “ The sub-section does not say “the lien under the Act.” The use of the words “a lien” suggests that the lien against the holdback is different than the lien against the land created by section 2.
  1. If the lien against the holdback was dependent on the lien against the land, then the second part of sub-section 4(9) would not have been necessary or inserted. That part reads: “…each holdback is charged with payment of all persons engaged, in connection with the improvement, by or under the person from whom the holdback is retained.”
  1. The lien against the holdback is of a different nature and potentially benefits a different group of persons than the lien against the land.

The lien against the holdback is a monetary and trust remedy. That lien is for the benefit of all persons who have improved the land and applies to all persons, including the owner or contractor, who hold a holdback under the project.

The lien against the land is a real estate remedy and applies to the owner.

When the owner acts as its own contractor, the lien against the land could have different consequences than the lien against the holdback: there will be as many holdbacks as there are contractors because there will be a separate holdback under each contract, but all of the subcontractors will have a lien against the land irrespective of which contractor engaged them.

  1. Sub-section. 8(4) of the BC Act reinforces the existence of a separate lien upon the holdback. That sub-section states as follows:

“8(4) Payment of a holdback required to be retained under section 4 may be made after expiry of the holdback period, and all liens of the person to whom the holdback is paid, and of any person engaged by or under the person to whom the holdback is paid, are then discharged unless in the meantime a claim of lien is filed by one of those persons or proceedings are commenced to enforce a lien against the holdback.” (underlining added)

The underlined words acknowledge that there is a separate lien against the holdback which is not otherwise extinguished if a timely action to enforce the lien against the holdback is commenced.

  1. There is nothing awkward or impractical about the conclusion that the holdback lien is different than the lien against the land. Subject to the other provisions of the Act, owners and contractors holding amounts falling within the lien regime can (so far as the holdback lien is concerned) pay them out until an action is commenced to enforce the holdback lien. While, under the holdback lien provision, the subcontractors under a particular contractor will have to share the holdback with all subcontractors who have commenced actions to enforce their holdback lien, and not just with those who have preserved and protected their lien against the land, there is nothing inherently unfair in that result.

Discussion

It seems inherently impracticable to have different regimes across Canada for the holdback charge or lien. It also seems unlikely that the provincial legislatures intended to have different regimes. However, each provincial lien statute must be individually interpreted to determine whether the holdback charge or lien stands or falls with the lien against the land. Until the Supreme Court of Canada considers this issue or provincial legislatures make the holdback lien provision uniform across Canada, different holdback lien regimes may continue to exist.

The Supreme Court of Canada did consider the charge against the holdback in Westeel-Rosco Ltd. v. South Saskatchewan Hospital Centre, 1976 CarswellSask 114, [1977] 2 S.C.R.. There, the Supreme Court held that a waiver of the lien did not constitute a waiver of the holdback charge, but only of the lien against the land. The waiver read as follows:

“do hereby renounce and waive any right, which …….. have or may have to any lien for work done, services rendered or to be rendered, or materials supplied or to be supplied, for or in connection with the building now in course of construction upon the said land hereinafter described and any and all right to register a claim of Lien against the said land or building,…” (underling added)

Despite the apparent all-inclusive wording of the underlined words, the Supreme Court held that this waiver did not affect the holdback charge, only the lien against the land. Does this holding suggest that the holdback charge and the lien against the land are separate encumbrances? This decision was not referred to in either the Brook Construction or Shimco decisions.

In this state of affairs, what regime will be held to apply in provinces other than B.C. and Newfoundland and Labrador?

It should be first noted that the BC Act is the only provincial lien statue in which the relevant section (section 4(9) in the BC Act) states that the holdback is subject to a “lien” on the holdback. That sub-section then states that “each holdback is charged” with payment of all persons engaged on the improvement. In the other lien statutes, the relevant section states that the holdback is subject to a “charge” on the holdback. This wording may distinguish the BC Act from all the other lien statutes. However, In Brook Construction, the Newfoundland and Labrador Court of Appeal referred to the holdback charge as a “lien against the holdback”, so this distinction in the statutory wording between “charge” and “lien” may not be significant.

The result arrived at in BC may most likely apply in the Northwest Territories, Nunavut and the Yukon where the holdback lien is stated to be “In addition to all other rights or remedies given by this Act.” It might also apply in Manitoba where the holdback lien section states that a person who has “a lien” has “a charge” on the holdback, thereby using the “a lien” wording upon which the BC Court of Appeal relied. In some provinces, such as New Brunswick, the definition section states that “lien” means “a lien created by this Act”, thereby possibly introducing the concept that there is more than one lien created by the Act. Other lien statutes, such as Nova Scotia and Ontario, use the words “the lien”, suggesting that there is only one lien, of which the holdback charge is a part. In those provinces or territories which do have a trust fund section in their lien statute, it may also be more likely to be found that the holdback charge is a self-standing charge.

The issue of whether the holdback charge or lien is a separate lien or a lien dependant on the lien against the land, has a number of consequences.

First, if the project involves land against which no lien may be asserted, then if the holdback lien is dependent on the lien against the land, no holdback lien can be asserted for that project unless the legislation provides to the contrary. That is what the majority of the Newfoundland and Labrador Court of Appeal held in Brook Construction.

Section 16(3) of the Ontario Act deals with this situation by providing that where “the lien” does not attach to the land (because the Crown is the owner or the land is a public street or highway owned by a municipality or a railway right of way), the lien constitutes “a charge” on the holdback, and section 34(1)(b) then provides for the preservation of the lien –so far as the charge on the holdback – by notice to the owner of the land, rather than registration of the lien.

A similar provision to section 34 of the Ontario Act is found in other provincial lien statutes. In Newfoundland and Labrador, it is found in section 22(5) of the NL Act, which reads as follows:

(5) Where there is no lien on the land by virtue of section 5, a person who is asserting a claim under subsection 12(5) for work done or materials placed or provided shall give written notice of his or her claim to the owner, to every person in whose hands sums are retained under section 12 to which his or her claim may relate and to the municipal authority in whose area of authority the land is situated within 30 days after the completion or abandonment of the work or the placing or providing of the materials.

The majority of the Newfoundland and Labrador Court of Appeal in Brook Construction referred to section 22(5) in support of its conclusion that the owner must be sued in order for the holdback charge to be operative. However, section 22(5) did not apply to the case since section 5 precludes a lien in respect of public streets, roads and highways, not other Crown land as was involved in that case (a school). The underlined words recognize that a holdback charge may exist when the improvement is to a public street, road or highway even if there is not a lien against the land.

Second, if the holdback lien is dependent on the continued existence of the lien against the land, then unless the lien legislation provides otherwise the lienholder may have to protect the holdback lien by registering the lien against the land, and may have to preserve the lien against the land by starting an action (and include the owner as a party). If this is the situation, a person seeking to enforce the charge against the holdback will not be able to ignore the lien registration and preservation stages.

Furthermore, if the holdback lien is not dependant on the lien against the land, there is the further question of whether the holdback lien action must be commenced within the time specified in the provincial lien statue, or the time provided in the general limitations statute for the commencement of a civil action. Logically, it would seem to be the latter, but that might cause real problems for the cash flow on a construction project.

In Shimco, the plaintiff had registered a lien and started its action within the one year period provided in the BC Act for the commencement of an action in relation to a lien against the land, but had failed to register a certificate of pending litigation within that one year period with the result that the Land Title Office had removed its lien claim of lien from the title to the property. Nevertheless, the BC Court of Appeal held that the holdback claim was valid.

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

Brook Construction (2007) Inc. v. Blackwood Contractors Ltd., 2015 CarswellNfld 100, 47 C.L.R. (4th) 1 (N.L.C.A.)

Shimco Metal Erectors Ltd. v. Design Steel Constructors Ltd., 2003 CarswellBC 649, 2003, 23 C.L.R. (3d) 163 (B.C.C.A.).

Construction and Builders’ Liens –Lien against the hold back – whether the holdback lien is a separate lien from the lien against the land

Thomas G. Heintzman O.C, Q.C., FCIArb                             October 2, 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.

 

 

Is A “No Oral Variation” Clause In A Contract Binding?

Summary

In MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 and Globe Motors Inc v. TRW Lucas Varity Electric Steering Ltd. [2016] EWCA CIV 396, the English Court of Appeal has recently held that a contractual provision stating that the contract may only be amended by a written document signed by the parties is not enforceable. The court held that if it is proven that the parties actually have amended the contract by an oral agreement, then the contract is validly amended.

These decisions are of great importance to construction and other commercial contracts which contain “no oral variation” clauses.

There are lower court decisions in Canada which hold that a ”no oral variation” clause is enforceable. There does not appear to be any authority on this point in the Supreme Court of Canada. Should Canadian courts uphold such a clause, or hold that it is unenforceable?

Recent English Decisions

In MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 and Globe Motors Inc v. TRW Lucas Varity Electric Steering Ltd. [2016] EWCA CIV 396, the English Court of Appeal considered whether a contractual provision stating that the contract may only be amended by a written document signed by the parties is enforceable. For example, in the MWB case the provision read as follows: “All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” The Court of Appeal held that the provision was not enforceable.

In these lengthy judgments, the members of English Court of Appeal dealt with conflicting decisions on this issue in that court. The judges held that there was no binding precedent requiring them to decide either way. In the result, the judges in both appeals concluded that, on policy grounds, the “no oral variation” clause was not binding.

The policy ground for these decisions is party autonomy. In the MWB decision, the court quoted from one of the judgments in the Globe Motors decision as follows:

“The governing principle, in my view is that of party autonomy. The principle of freedom of contract entitles parties to agree whatever terms they choose, subject to certain limits imposed by public policy ……. The parties are therefore free to include terms regulating the manner in which the contract can be varied but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties. If there is an analogy with the position of Parliament, it is in the principle that Parliament cannot bind its successors.”

The English Court of Appeal in MWB also quoted from a decision of Justice Cardozo in in the USA:

“Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again… “

The English Court of Appeal recognized that there are considerations on the other side: no oral variation clauses may “promote certainty, avoid false or frivolous claims of an oral agreement and can usefully prevent a person in a large organisation producing a document which unwittingly and unintentionally is inconsistent with a provision in a contract between the organisation and a counterparty.”

Nevertheless, the English Court of Appeal accepted the basic principle that a party cannot contract out of its ability to make a new contract in the future, even one amending a past contract.

The English Court of Appeal noted that a “no oral variation” clause may still have an impact as a matter of proof of the alleged variation. One of the judges in MWB quoted from one of the judgments in Globe Motors as follows:

“It does not follow that clauses like the second sentence of Article 6.3 have no value at all. In many cases parties intending to rely on informal communications and/or a course of conduct to modify their obligations under a formally agreed contract will encounter difficulties in showing that both parties intended that what was said or done should alter their legal relations; and there may also be problems about authority. Those difficulties may be significantly greater if they have agreed to a provision requiring formal variation.”

Canadian Decisions And Discussion

There are a number of lower court decisions in Canada holding that a “no oral variation” clause is enforceable. For example, in Toronto Dominion Bank v. Turk 1997 CarswellOnt 2054, [1997] O.J. No. 2669, Justice Cumming of the Ontario Superior Court of Justice stated:

“Even if the said representations were to be considered as made, the provisions of the guarantee at paragraph 3 provide that no subsequent alteration or waiver of the guarantee or of any of its terms is binding on the Bank unless made in writing over the signature of a specific officer…Subsequent oral alterations or waivers of the provisions of the guarantee would be ineffective.”

Justice Cumming then cited six decisions which supported that conclusion. All of them were decisions of superior court judges or masters.

None of the cited cases contain any apparent analysis of the public policy issues which are relevant to the enforceability of a “no oral variation” clause, and in particular the autonomy of the parties to enter into a new agreement.

The validity of a “no oral variation” clause was recently upheld by Master Prowse of the Alberta Court of Queen’s Bench in Becker v. Jane Doe No. 1, 2015 CarswellAlta 351, 2015 ABQB 144.

In dealing with this issue in an earlier decision in Toronto Dominion Bank v. Turk, 1992 CarswellOnt 3185, [1992] O.J. No. 2053, Justice Lane of the Superior Court of Ontario relied upon a decision of the Supreme Court of Canada upholding and applying an “entire agreement” clause: Hawrish v. Bank of Montreal, 1969 CarswellSask 9, [1969] S.C.R. 515. An “entire agreements” clause states that no representations or agreements prior to or at the time of the contract are binding on the parties, and that the sole agreement between the parties is that which is contained in the contract they are signing. Justice Lane’s decision was upheld by the Ontario Court of Appeal but without any consideration of the validity of or public policy behind the “no oral variation” issue: Toronto Dominion Bank v. Turk, 1994 CarswellOnt 2646, [1994] O.J. No. 353, 46 A.C.W.S. (3d) 72.

Similarly, in Sportsco International, L.P. v. Rogers Blue Jays Baseball Partnership, 2003 CarswellOnt 90, [2003] O.J. No. 189, Justice Pepall of the Superior Court of Ontario held that a “no oral agreement clause” was binding. In doing so, she relied on the Ontario Court of Appeal decision in Gutierrez v. Tropic International Ltd., 2002 CarswellOnt 2599, 63 O.R. (3d) 63. The contract in the Gutierrez case contained an “entire agreement” clause, not a “no oral variation” clause and the case concerned the enforceability of agreements made at the time of or before the written agreement in question, not a later varying agreement.

The Ontario Court of Appeal gave some consideration to this issue in Shelanu Inc. v. Print Three Franchising Corp., 2003 CarswellOnt 2038, 64 O.R. (3d) 533. There, the Court of Appeal refused to apply a “no oral variation” agreement on the ground that the new agreement was separate from, and could stand with, the original agreement, and because it would be unfair to apply the “no oral variation” clause. The court did not directly deal with the public policy issue, but it did say:

“Indeed, J.M. Perillo, ed., Corbin on Contracts (St. Paul, MN: Western Publishing Co., 1993) states at para. 1295 that an express provision in a written contract forbidding oral variation of the terms of a contract or its discharge is generally unsuccessful with respect to subsequent agreements. The reason he gives is that:

‘Two contractors cannot by mutual agreement limit their power to control their legal relations by future mutual agreement. Nor can they in this manner prescribe new rules of evidence and procedure in the proof of facts and events.’”

And in Colautti Construction Ltd. v. Ottawa (City), 1984 CarswellOnt 731, 46 O.R. (2d) 236, the Ontario Court of Appeal found that the contract was amended by the parties’ conduct notwithstanding the existence of a “no oral variation” clause.

An “entire agreement” clause is, or course, very different than a “no oral variation” clause. The “entire agreement” clause assures the parties that no past or present agreements exist at the time that the contract is signed, and that the only contract is the contract which the parties are then signing. That clause is really just an affirmation of the parole evidence rule which prohibits the admission of evidence that contradicts the wording of a written contract. The “no oral variation” clause purports to prohibit the parties from making a new agreement in the future that would vary or amend the written contract.

Obviously, there are good public policy reasons to support “entire agreement” clauses. However, the public policy that would support “no oral variation” clauses is more difficult to ascertain, and the English Court of Appeal and Justice Cardozo have eloquently expressed the public policy to the contrary.

In light of the frequent use of “no oral variation” clauses, it is hoped that this issue will be dealt with shortly by Canadian appellate courts, including the Supreme Court of Canada.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 1, part 3(d)

Amendment of Contracts – Variation and Amendment – Validity of “no oral variation” clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                 September 25, 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.

 

Faulty Workmanship Exclusion In A Builders’ Risk Policy Excludes Only The Cost Of Re-Doing The Faulty Work: Supreme Court Of Canada

In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, the Supreme Court of Canada has issued a definitive decision about the scope of the “faulty workmanship” exclusion in Builders’ Risk insurance policies. The Supreme Court has held that the clause only excludes coverage for the cost of re-doing the faulty work, and does not exclude the cost of repairing the damaged work.

In this landmark decision, the Supreme Court has set at rest the ongoing debate about the proper interpretation of this clause, a debate which has embroiled the construction and insurance industries for many years.

Background

During the construction of a building, the windows which had been installed were dirtied. Before the project was completed, the owner hired cleaners to clean the windows. Because the cleaners used improper tools and methods, they scratched the windows. The windows had to be replaced and the building’s owner and the general contractor made a claim for the replacement cost under the builders’ risk insurance policy covering the project. The insurers denied coverage, asserting that the claim fell within the policy’s exclusion for the “cost of making good faulty workmanship”.

Proceedings Below

The trial judge in Alberta held that the clause was ambiguous and applied the contra proferentem rule to find that the claim was not excluded.

The Alberta Court of Appeal reversed the trial judge’s decision. It applied a test of physical or systemic connectedness to decide if the physical damage was excluded as the “cost of making good faulty workmanship” or covered as included within the exception for “resulting damage.” The Court of Appeal concluded that the damage to the windows was excluded because it was directly caused by the intentional scraping and wiping motions involved in the cleaners’ work.

These decisions were reviewed by me in my articles dated December 27, 2013 and March 30, 2015.

The Supreme Court reversed the Court of Appeal’s decision and re-instated the trial judge’s decision.

The Exclusion and Exception

In the policy in question, the Exclusion for “faulty workmanship” and the Exception to that exclusion for “resulting damage” read as follows:

“This policy section does not insure:

…(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.”

The Supreme Court’s Reasoning

Justice Wagner delivered the judgment for all the judges of the Supreme Court of Canada on this issue. Justice Wagner arrived at his decision through the following reasoning:

  1. The Court of Appeal had held that the Exclusion must relate to physical damage since the policy covers physical damage. The Court of Appeal then went on to develop a new theory about how the Exclusion should be construed in light of that requirement.

The Supreme Court held that this conclusion by the Court of Appeal was wrong. The mere fact that the policy covered physical damage did not require that the exclusions also relate to physical damage. The Supreme Court pointed to several other exclusions in the policy that clearly did not relate to physical damage.

  1. There were two competing interpretations of the Exclusion. The Insureds said that only the cost of redoing the faulty work — in this case, cleaning the windows — is excluded from coverage. The Insurers said that the Exclusion covers not only the cost of redoing the faulty work, but also the cost of repairing that part of the insured property or project that is the subject of the faulty work.

On balance, and while the Supreme Court was of the view that the clause was ambiguous, the Supreme Court favoured the Insured’s interpretation, stating its reasons as follows:

“The word “damage” figures only in the exception to the Exclusion Clause; it is not included in the language setting out the exclusion itself, i.e., the “cost of making good faulty workmanship”. As such, “making good faulty workmanship” can, on its plain, ordinary and popular meaning, be construed as redoing the faulty work, and “resulting damage” can be seen as including damages resulting from such faulty work. “

  1.  Any ambiguity in the Exclusion should not, in the first instance, be resolved by reliance on the contra proferentem rule, as that is a rule of last resort. Rather, the ambiguity should be resolved by reference to the true purpose of the policy. The Supreme Court expressed its conclusion on this point as follows:

“…the purpose of these polices is to provide broad coverage for construction projects, which are singularly susceptible to accidents and errors. This broad coverage — in exchange for relatively high premiums — provides certainty, stability, and peace of mind. It ensures construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst the various contractors involved. In my view, the purpose of broad coverage in the construction context is furthered by an interpretation of the Exclusion Clause that excludes from coverage only the cost of redoing the faulty work itself — in this case, the cost of recleaning the windows.”

The Supreme Court was of the view that the Insurers’ interpretation of the Exclusion would re-introduce the very uncertainty that the insurance was intended to eliminate:

“Consequently, an interpretation of the Exclusion Clause that precludes from coverage any and all damage resulting from a contractor’s faulty workmanship merely because the damage results to that part of the project on which the contractor was working would, in my view, undermine the purpose behind builders’ risk policies. It would essentially deprive insureds of the coverage for which they contracted.

[71] In my opinion, therefore, the Insureds’ position on the meaning of the Exclusion Clause better reflects and promotes the purpose of builders’ risk policies. In the words of this Court in Commonwealth Construction, it keeps “to a minimum the difficulties . . . created by the large number of participants in a major construction project” and “recognizes the realities of industrial life” (p. 328). Their position finds additional support in some of this Court’s other comments in that case, at pp. 323-24, where it was emphasized that these policies exist to account for the fact that work of different contractors overlaps in a complex construction site and “there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole”. (underlining added)

  1. The contract between the owner and the window cleaning company was irrelevant to the proper interpretation of the insurance policy, and the Court of Appeal erred in referring to that contract in interpreting the policy. After all, the window-cleaning contract was between different parties than the policy, and was entered into years after the policy was placed.

Moreover, the fact that the cleaners’ contract provided that the cleaners accepted responsibility for its work and agreed to pay for damages arising from its work did not preclude coverage under the policy. As in the present case, insurance contracts often have deductibles or limits, and the contractor may be responsible within those features of the policy.

  1. The Court of Appeal’s new “physical and systemic connectedness test” did not solve the alleged disconnect between the policy’s coverage and the cleaners’ obligation for damages under its contract with the owner. The cleaners would be liable for collateral damage to areas where it was not working, yet there would still be coverage under the policy for this damage. In these circumstance, the Supreme Court said: “In effect, there would be dual responsibility for payment, under both the Policy and the service contract, even though, as discussed above, the Court of Appeal stated it would be artificial to draw the dividing line where such dual responsibility would result.”
  1. The Insureds’ interpretation of the policy was commercially sensible, best reflected the reasonable expectations of the parties and did not result in an unreasonable result:

“As already discussed above, the interpretation advanced by the Insureds in these appeals best fulfills the broad coverage objective underlying builders’ risk policies. These policies are commonplace on construction projects, where multiple contractors work side by side and where damage to their work or the project as a whole commonly arises from faults or defects in workmanship, materials or design. In this commercial reality, a broad scope of coverage creates certainty and economies for both insureds and insurers. In my opinion, it is commercially sensible in this context for only the cost of redoing a contractor’s faulty work to be excluded under the faulty workmanship exclusion. Such an interpretation strikes the right balance between the two undesirable extremes… “ (underlining added)

  1. The Insureds’ interpretation “did not transform the insurance policy into a construction warranty. It does not inappropriately spread risk, nor would it allow or encourage contractors to perform their work improperly or negligently.” The Supreme Court noted that the cleaners were “precluded from receiving initial payment for its faulty work and then receiving further additional payment to repair or replace its faulty work” and that the “cost of redoing faulty or improper work is excluded from coverage.”
  1. The Insurers argued that Insureds’ interpretation of the policy would create an incentive for the owner or contractor to divide up the work, in order to maximize the amount of damage that would be covered under the policy. To this suggestion, the Supreme Court said:

“With respect, I do not find this persuasive. It is premised on a theoretical concern that does not reflect the commercial reality of construction sites on the ground. In my view, it is unreasonable to expect that the owner of a property or the general contractor on a construction site will divide up work exclusively on the basis of potential coverage under their insurance policy. Many other considerations, such as costs, subcontractor expertise and the risk of delay, will likely be more relevant in deciding how to allocate work.”

  1. The Supreme Court undertook a lengthy review of the cases dealing with the Exclusion for faulty workmanship. It concluded that the case law was consistent with its present decision once the facts in each case were understood. In each case, it is necessary to determine exactly what work was undertaken by the contractor or sub-contractor whose work was allegedly faulty. The Exclusion only excludes that work. In the present case, the cleaners were responsible for cleaning the windows, not installing them. Accordingly, the Exclusion applied to the work of re-cleaning the windows, not installing replacement windows.
  1. The Supreme Court pointed out the necessity to distinguish between cases dealing with Exclusion clauses relating to “faulty workmanship” and those relating to “faulty design.” In the latter cases, a contractor’s obligation to provide the design (and therefore the scope of the Exclusion) may be much broader than would be the case for a contractor’s obligation to provide work, and the factual circumstances that have been found to fall within the Exclusion for “faulty design” are not necessarily a guide to the circumstances that fall within the Exclusion for “faulty workmanship”.
  1. Interpreting the Exclusion Clause as precluding coverage for only the cost of redoing the faulty work was consistent with the accepted approach to interpreting similar exclusions to comprehensive general liability insurance policies. These policies usually contain a “work product” or “business risk” exception, which excludes from coverage the cost of redoing the insured’s work.
  1. If the general rules of contractual interpretation had not clarified the meaning of the Exclusion clause, and the clause still remained ambiguous, then the court would have reached the same conclusion on the basis of the contra proferentem rule.

In its decision, the Supreme Court also dealt with the standard of review to be applied by an appellate court when reviewing (as in this case, by the Court of Appeal or the Supreme court of Canada) the decision of a lower court interpreting a standard form contract such as a construction contract. A majority of the Supreme Court held that the review should be conducted according to a standard of correctness, not reasonableness. This important part of the Ledcor decision will be reviewed by me in a future article.

Discussion

It will take some time to digest the full ramifications and impact of this seminal decision. This article has sought to identify the ingredients in the decision as a basis for further discussion.

Clearly, the decision results in a much narrower interpretation of the ”faulty workmanship” Exclusion than insurers have been arguing for, and one that does not depend upon the “resulting damage” Exception to achieve that interpretation.

This decision requires the parties to exactly determine the scope of the defaulting contractor’s work. The “faulty workmanship” Exclusion is limited to the cost of making good that work, and not the cost of correcting damage to the subject matter of that work.

How far this decision will impact the faulty “construction materials or design” elements of the Exclusion will have to await future cases. However, the logic of the Supreme Court’s decision would seem to apply to all three elements of the Exclusion: once the defaulting contractor’s work, materials or design is determined, the Exclusion applies no further.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 14, paras. 3(b), 4(b)

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37

Insurance – Exclusions and Exceptions- Builders’ and All Risk Insurance – Exclusion for faulty workmanship

Thomas G. Heintzman O.C., Q.C., FCIArb                                     September 18, 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.

Lien For Work Done Before The Certificate Of Substantial Completion And Payment Of The Major Lien Fund Does Not Attach To The Minor Lien Fund

Summary

In Chandos Construction Ltd. v. Twin Peaks Construction Ltd., a Master of the Alberta Court of Queen’s Bench has held that a lien for work done prior to the filing of a certificate of substantial completion and payment of the major lien fund does not attach to the minor lien fund.

Background

Chandos was the general contractor and Twin Peaks was the structural steel supplier and installer on the project. Chandos posted a certificate of substantial performance and delivered it to the owner. At that time, and within 45 days afterwards, no relevant lien was registered. The owner paid to Chandos the 10% holdback up to the date of the issuance of the certificate of substantial performance. The owner retained $45,000 being 10 % of the remaining final cost of construction, which under the Alberta lien statute is the minor lien fund.

After that, Twin Peaks registered a builders’ lien. Almost all of the work referred to in the lien related to work done prior to the date of substantial performance.

Chandos asserted that Twin Peaks no longer had a valid lien claim. It said that Twin Peaks failed to file a lien claim referable to its work done before the issuance of the certificate of substantial completion, and accordingly its lien claim for that work no longer existed. It asserted that Twin Peak’s lien claim for that work did not “migrate” to the minor lien fund.

The Alberta Builders’ Lien Act

Sections 18 to 27 of the Alberta Builders’ Lien Act (the Act) create a major and minor fund regime. Under section 18, the major lien fund provides security for the payment of liens up to the date of substantial completion by requiring the owner to withhold 10% of the value of the work and materials provided to the lands in question. Under section 23, the minor lien fund provides security for the payment for work done after that date by requiring the owner to retain 10% of the value of the work and materials after the date of the issuance of the certificate of substantial completion. .

In sections 34 and following, the Alberta Act contains the normal regime for the registration of builders’ liens. Section 41 provides that the time for the registration of the lien expires 45 days after the last material or work is furnished or completed or the contract is abandoned.

Decision Of The Alberta Queen’s Bench

Master Robertson of the Alberta Queen’s Bench held that Chandos’ view of the operation of the Act was correct. He held that:

  1. “A builder’s lien is initially against the interest of the owner in the land, but if the owner pays the lien funds the owner is required to retain into court, then there is a claim against the funds, which stand in place of the land.”
  1. “Pursuant to section 25, an owner is not liable for more than the total of the major lien fund and the minor lien fund. If the owner follows the requirements of the Act, there is no further claim to be had against the owner’s land or the fund.”
  1. The Act deals “with the major lien fund and the minor lien fund as two separate funds, but the basic concept remains the same: once the owner has paid the major lien fund properly to the general contractor, no liens having been filed within 45 days of the applicable date, then the major lien fund is gone. So long as the owner still has that money in his hands, the liens attach the land until funds are paid into court in place of the land.”
  1. “Therefore, a lien properly registered within 45 days of completion or abandonment is properly registered, and if it is done after the 45 days following the date of the certificate of substantial performance, but the owner has not yet paid the major lien fund to the general contractor, then it still attaches it. That is the effect of section 18(3)(b), section 23(2) and section 23(5). But if the money has been paid, there is nothing to attach.” (emphasis added)
  1. While the subcontractor may no longer have a lien claim, it still has its contractual claim against the contractor and, possibly, a trust claim under Section 22 of the Act.

The Master made the following declaration:

Accordingly, I declare that the lien claimed by Twin Peaks is not a valid claim against the minor lien fund to the extent that it claims for work done and material supplied before the date of issuance of the certificate of substantial performance.

Discussion

This decision is a helpful clarification of the operation of the Alberta Act. That Act does not expressly resolve the timing issue between the two regimes: the major and minor fund regime, and the regime relating to the registration of liens against the land.

The Master effectively held that the proper interpretation of the Act must coordinate the two regimes. The Act must mean that, even though a claim is registered in a timely fashion in relation to the completion or abandonment of the contract, a claim against the major lien fund comes to an end when the 45 day period expires after the issuance, posting and deliverance of a certificate of substantial performance, and the owner pays the monies held by it in the major lien fund. The only sensible interpretation is that the lien claim against the land for work done to that date must also expire at the same time. Otherwise, the whole purpose and operation of the major lien fund would be frustrated. In these circumstances, a lien for that work cannot survive and attach to the minor lien fund. That fund exists to deal with lien claims after that date.

Chandos Construction Ltd. v. Twin Peaks Construction Ltd., 2016 CarswellAlta 987, 2016 ABQB 296

Construction and builders’ liens – major and minor lien funds –expiry of liens against the land

Thomas G. Heintzman O.C., Q.C., FCIArb                                   September 11, 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.

 

Faulty Materials Or Workmanship Exclusion In Insurance Policy Does Not Exclude Resulting Damage: Ontario Court Of Appeal

Summary

In its recent decision in Monk v. Farmers’ Mutual Insurance Company (Lindsay), the Ontario Court of Appeal has held that the exclusion for faulty materials or workmanship in an owner’s property insurance contract does not exclude the insured’s right to recover the resulting damage that the faulty materials or workmanship has caused.

This is a significant decision because owner’s insurance policies often contain an express exception for resulting damage arising from faulty materials or workmanship. The Court of Appeal has held that this exception may be read into the exclusion for faulty materials or workmanship itself.

The Policy

The policy contained the following relevant provisions:

We do not insure: 2. the cost of making good faulty material or workmanship;

We do not insure loss or damage to: 4.   Property (ii) while being worked on, where the damage results from such process or work (but resulting damage to other insured property is covered);

The Claim And Lower Court Decision

Monk made a claim under an insurance policy issued by Farmers for damage caused by a contractor during work on the exterior of her home. Farmers asserted that the claim was excluded under the “faulty workmanship” and “property being worked on” exclusions in the policy.

A motion was brought to interpret the policy. The motion judge held that the “faulty workmanship” provision excluded damage caused both directly and indirectly by the contractor. Although the “property being worked on” exclusion preserved coverage for indirect “resulting damage”, the motion judge held that it was “trumped” by the general “faulty workmanship” provision. The motion judge granted summary judgment to Farmers and dismissed Monk’s claim.

The Court of Appeal’s decision

The Court of Appeal reversed the lower court decision. It held that, on a proper interpretation of the “faulty material or workmanship” clause, that clause did not exclude resultant damage. It arrived at that conclusion by the following reasoning:

  1. Based on general principles of contract interpretation, an exclusion clause should be narrowly construed. It was not obvious that a clause excluding the cost of making good faulty workmanship precludes coverage for resulting damage. The court said:

“Insurers draft insurance policies knowing that exclusions of coverage will be interpreted narrowly and that ambiguity will be resolved in favour of the insured party. If an insurer wants to exclude particular coverage, especially for something as well-known as resulting damage, it should do so specifically rather than by implication”.

  1. While the motion judge considered it significant that “faulty workmanship” exclusions in insurance policies typically include an exception for resulting damage, this fact was “irrelevant to the proper interpretation of this insurance contract.”
  1. An interpretation of “faulty workmanship” that denies coverage for resulting damage is an “overly broad interpretation of the exclusion clause”. The Court of Appeal considered that the proper interpretation of that clause only excludes direct damage and not the resulting damage flowing from faulty workmanship. The Court of Appeal said:

“ It is not a matter of reading an exception into the exclusion, as the respondents submitted; it is a matter of interpreting the “faulty workmanship” exclusion narrowly in accordance with established principle.”

  1. The motion judge’s interpretation of the “faulty workmanship” exclusion resulted in an inconsistency or conflict with the ”property being worked on” exclusion. The former would exclude resulting damage from coverage, while the latter would include it within coverage. The motion judge solved that conflict by having the former clause over-ride the latter. This approach was wrong on a number of accounts. It did not resolve the ambiguity between the two clauses in favour of the insured, and it did not attempt to give meaning to both clauses, as it ought to have.

Discussion

This decision will provide considerable guidance in the interpretation of owner’s insurance policies applicable to building projects. Normally, Builders’ Risk policies contain a “faulty material or workmanship” exclusion and a “resulting damage” exception to that exclusion. But the present case holds that the exclusion itself should be interpreted to not exclude resulting damage, at least if the exclusion is worded as the one in this case was worded.

It may be argued that this decision was due to the existence of the “property being worked on” exclusion in the policy, and the resulting damage exception in that exclusion. The contrary argument will be that the court’s conclusion was based upon its narrow interpretation of the faulty workmanship exclusion, and its reference to the “property worked on” exclusion was a supporting consideration.

See Heintzman and Goldsmith on Canadian Building Contracts, chapter 14, part 3(b0(ii)

Monk v. Farmers’ Mutual Insurance Company (Lindsay), 2015 ONCA 911,

Insurance – Exception for faulty workmanship or material – Exception for resulting damage

Thomas G. Heintzman O.C., Q.C., FCIArb                                      September 5, 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.

 

Contract Claim In Lien Action May Be Continued Even If Not Set Down Within Two Years: Saskatchewan Court Of Appeal

Summary

In Livingston v. Span West Farms Ltd, the Saskatchewan Court of Appeal recently held that, when a lien claimant includes a claim for contract monies owing and remaining unpaid, but fails to set the lien action down for trial within the statutory period – so that the lien portion of the action must be dismissed – the claimant may still proceed with the contract portion of the claim.

The Saskatchewan Court of Appeal arrived at this conclusion even though section 55 of the Saskatchewan Builders’ Lien Act (the Act) refers to “the action” in relation to the lien claim and requires the action to be set down for trial within two years of being commenced.

The Legislation

Section 55 of the Act reads as follows:

“Subject to subsection (2), a lien, for which an action has been commenced, expires where an action in which that lien may be realized is not set down for trial within two years of the day the action was commenced.

(2) The court may extend the time mentioned in subsection (1).

(2.1) An order pursuant to subsection (2) extending the time for commencing an action may be registered as an interest in the Land Titles Registry.

(3) Where a lien has expired under subsection (1), the court shall, on application, make an order dismissing the action if there is no other registered claim of lien at the time of the application, otherwise the court shall make whatever order it deems appropriate for continuation of the action.” (underling added)

Decision of the Saskatchewan Court of Appeal

The court noted that an application to extend the time to set the action down for trial pursuant to s. 55(2) may be made after the two year period has expired. That issue had been decided by the same court in Axcess Capital Partners Inc. v. Allsteel Builders(2) Ltd., 2015 SKCA 33, 383 D.L.R. (4th) 334.

In the present case, the court concluded that the contract or debt claim did not fall within Section 55 for the following reasons:

  1. The Act should be interpreted in a broad and liberal fashion in favour of lien claimants.
  1. Section 55 is within the part of the Act dealing with lien claims. It should be interpreted to apply to the claim for the lien itself, not to the portion of the action dealing with the claim for the amount owed to the claimant arising from the contract itself, nor to trust fund claims. The court said:

“Third, s. 55 is found in Part V of the Act, which deals solely with the expiry, registration and discharge of liens. None of the provisions in that Part refer to the trust remedies created by the Act or to a supplier’s common law rights in contract. The trust remedies created by the Act and a supplier’s common law right to sue for breach of contract are both remedies, which exist separate and apart from the lien remedies created by the Act. They are not dependent upon the lien for their existence and, thus, the lien’s expiration or discharge should have no effect on the pursuit of those claims. Absent clear language, a supplier’s right to pursue those remedies should not be tied to the enforceability of the lien.”

  1. The claimant could have brought the contract claim in a separate action, in which case section 55(3) of the Act would not apply to that claim. Section 89 of the Act allows the contract claim to be brought in a lien claim. Accordingly, the claimant should not be prejudiced, in respect of its contract claim by bringing it in the lien claim.

In concluding, the court said:

“Section 55(1) refers to a lien “for which an action has been commenced,” thus the entire section easily lends itself to the word “action” being interpreted to mean a cause of action relating only to a lien.”

Accordingly, the Court of Appeal set aside the motion judge’s dismissal of the debt claim.

Discussion

This decision is consistent with decisions in some but not all of the provinces. The decision appears to apply to both contract claims and trust fund claims and clarifies the law in Saskatchewan and perhaps for other provinces having similarly worded lien statutes.

Livingston v. Span West Farms Ltd., 2016 CarswellSask 152, 2016 SKCA 33, 263

Construction and builders liens – contract claim– time for setting action down for trial

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

Trust Fund Set Off Rights Are Not Available If No Trust Fund Is Maintained and No Lien Claim Is Made: Ontario Court Of Appeal

The Ontario Court of Appeal recently considered the scope of the right of set-off under the trust fund sections of the Ontario Construction Lien Act (the Act) and under equitable set-off under a contract claim.

In Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., the Court of Appeal held that the owner could not rely on the trust fund set off provisions contained in section 12 of the Act because neither party was relying upon the Act, nor had they proven that trust funds were in existence. The defendant contractor could not assert an equitable set-off because the claims allegedly resulting in the set off arose on other projects and did not qualify as equitable set-offs.

Effectively, the Court of Appeal proceeded on the basis that the right of set-off under the trust fund sections of the Act is broader than the equitable right of set-off. If so, this raises important issues about the nature of setoff in both situations.

Background

Provincial Store hired Architectural Millwork to install millwork manufactured by Provincial Store at an OLG Casino construction project. Provincial Store did not raise any complaint about Architectural Millwork’s work on the OLG Casino Project and admitted that the monies claimed by Architectural Millwork on that project were owed. However, Provincial Store claimed a right of set-off arising from claims on another unrelated construction project.

The motion judge rejected the Provincial Store’s claim for set-off and Provincial Store appealed that decision to the Court of Appeal. The Court of Appeal dismissed the appeal.

Court Of Appeal’s Decision

As it had before the motion judge, Provincial Store asserted that it could rely on the set-off provision in section 12 of the Act. That section reads as follows:

“Subject to Part IV, a trustee may, without being in breach of trust, retain from trust funds an amount that, as between the trustee and the person the trustee is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of all outstanding debts, claims or damages, whether or not related to the improvement. (underlining added)

While the word “set-off” is not contained in section 12, the title to the section is Set-off by trustee. The section does create a sort of set-off in favour of a trustee – be it the owner, contractor, or other person down the contractual chain in a construction project – in respect of monies payable by that person under a contract to the next person down the chain – the contractor, subcontractor or supplier.

Provincial Store was saying in its argument that the monies it had not paid to Architectural Millwork on the OLG Casino project were trust monies and that, by virtue of section 12, it could set off against those monies all outstanding debts, claims or damages, including its claim against Architectural Millwork on another project. The problem was that it had not asserted that position in its pleading nor proven it with facts, and neither had Architectural Millwork. Neither had relied on or referred to the Act in their pleadings or led substantial evidence on this point. In these circumstances, the Court of Appeal held that Provincial Store could not rely upon section 12.

The Court Said:

“The availability of the right of set-off under s. 12 of the CLA requires the party seeking to exercise it to prove the existence of specific circumstances and particular considerations, including the existence of trust funds against which set-off can be applied. If no trust funds are retained or all the monies are spent, the purpose of the trust provisions is defeated and any right of set-off is extinguished. In the present case, neither party pleaded the existence or breach of a trust fund. The respondent did not assert any claim to trust funds. The appellant did not allege there was a trust fund under the CLA or at all. Rather, the appellant pleaded that it had not been paid by the owner for the work performed by the respondent and therefore had no obligation to pay the respondent’s invoices, negating the existence of a trust fund….While there was evidence from the appellant’s representative, Regina Dee, that the appellant had received monies from the owner, there was no evidence that those monies were held in trust or retained at all. In a subsequent answer to undertakings, the appellant admitted that it did not maintain a separate bank account for the OLG Brantford Casino Project….As a result, the appellant has no right under s. 12 of the CLA to set-off against the monies that it admits are owed…” (underlining added)

The Court of Appeal also affirmed the motion judge’s decision that Provincial Store could not assert an equitable right of set-off “because payment on one project was not tied to the other, funds were segregated, and the projects were undertaken at different times, in different cities and for different owners.”

Discussion

This decision underlines how broad the right of set-off is under trust fund sections of the lien statutes. The Court of Appeal effectively acknowledged that the statutory set-off right could be asserted in circumstances in which an equitable right of set-off – itself a very broad form of set-off – could not be asserted. There is no apparent limit on the right of setoff contained in the trust fund section, although the Court of Appeal did say that it does not allow the trustee “to put some or all of the trust funds retained to general use.” Apparently, Provincial Store did not argue that the set-off in section 12 should be limited to a set-off otherwise recognized in law or equity, and Court of Appeal did not place that limit the ambit to the section.

The decision also underlines the fact that if a party relies on the trust fund section, then it must make a pleading to that effect and prove the facts that establish that a trust fund exists. The Court of Appeal may have been somewhat skeptical about a contractor asserting that it owed a trust fund obligation, and then asserting rights in its favour because of that obligation. Be that as it may, the next time that a party seeks to use the trust fund right in this reverse fashion, that party would be best to allege and prove that a trust fund has actually been retained and exists.

One may wonder why a set off against statutory trust funds should be wider than the set-off allowed either at law or in equity. One would have thought that trust funds mandated to be retained by the Construction Lien Act should be more vigilantly protected than other funds, and that any right of setoff under that Act should be no wider than what the law and equity otherwise provide. But, in section 12, the legislature has said “all outstanding debts, claims or damages” whether or not they arise under the project in question, and “all” does seem to mean “all”, at least apparently under this decision. The rationale may be that, having imposed a trust fund obligation on a party to a construction project when one otherwise would not exist, the legislature felt that the trustee should be entitled to take into account any other possible countervailing obligation that the beneficiary may owe.

This decision will likely be relevant to other set-off section contained in the Act, sub-section 17(3). That section permits a set-off against the value of the lien, subject again to Part IV, being the holdback. Sub-section 17(3) uses the same words that appear in section 12, namely, “all outstanding debts, claims or damages, whether or not related to the improvement.” So it appears that the same broad effect will be given to sub-section 17(3) as the Court of Appeal has given to section 12.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, parts 4(h) and 6.

Architectural Millwork & Door Installations Inc. v. Provincial Store Fixtures Ltd., 2016 CarswellOnt 6796, 2016 ONCA 320

Construction liens – trust fund obligation – set-off against trust fund obligation – equitable set-off

Thomas G. Heintzman O.C., Q.C., FCIArb                               August 7, 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.