Subcontractor’s Lien Rights May Be Terminated By The Contractor’s Abandonment

The construction and builder’s line statutes in Canada generally provide that a lien may be lost if an action is not commenced or a lien registered within a certain period of time within the “completion or abandonment” of the work. Usually, the word “abandonment” is applied to the party claiming the lien. But in Tervita Corp. v. ConCreate USL (GP) Inc., the Alberta Court of Appeal has held that the conduct of the other party to the construction contract may result in the contract being “abandoned”. In addition, the Alberta Court of Appeal held that more than one lien claim may be filed or registered for one lien. Both of these findings are significant for those engaged in construction disputes.

Background

Tervita was a subcontractor to ConCreate which had contracted with the owner. Tervita performed its last work in February 2012. In March and April 2012 a receiver was appointed for ConCreate and the receiver barred access to the site. In April 2012 Tervita filed its first lien. In July 2012, Tervita emailed the City’s consultant to say that its “contract was terminated with ConCreate prior to us being able to complete the work.” In July 2012, Tervita issued a Statement of Claim but it did not register a lis pendens against the land.

On October 2, 20121, the 180 day period for Tervita to register a lis pendens expired. On October 12, 2012, Tervita registered a second, identical lien. In November 1, 2012, a lis pendens was registered with respect to the second lien and the original Statement of Claim was amended to now refer to the second lien.

Decision of the Alberta Court of Appeal

The Alberta Court of Appeal held that the subcontract between Tervita and ConCreate was abandoned due to the conduct of ConCreate and its receiver, and that this fact was recognized by Tervita in its email of July 23, 2012 to the City’s consultant. The Court of Appeal held that the word “abandonment” includes abandonment by the party claiming the lien -in this case, Tervita – or by the general circumstances relating to the subcontract.

The Court of Appeal described the issues of subjective and objective abandonment as follows:

“In some cases a contract may be “abandoned” on an objective basis. The statute just requires abandonment, not necessarily abandonment by the lien claimant. Certainly a subjective abandonment by the lien claimant will be sufficient. However, when it becomes clear that the contract has been rendered un-performable by the conduct of either or both parties, by the actions of third parties, or as a result of external factors, the contract is essentially “abandoned”. Once it becomes impractical or impossible to perform the contract, no reasonable party would persist in saying they are “ready, willing and able” to continue performing……There comes a point in time when it is clear that the contract is at an end. That will also start the 45 days running. At some time between the date when ConCreate’s receiver posted guards and blocked access to the site, and the email of July 23, this contract was essentially abandoned.” (underlining added)

The trial judge had held that the subcontract had never been completed, that Tervita was always ready, willing and able to complete the work and that only in October 2012 did the City conclusively tell Tervita that it would not be allowed to complete the subcontract. Accordingly the trial judge held that the time to register the second lis pendens had not expired.

The Court of Appeal disagreed, finding that, by its email of July 232, 2012 Tervita had effectively admitted that the subcontract had come to an end and therefor the work was “abandoned”. It said:

“The test is when the lien claimant knew or should have known that the other party would not complete the contract. Once it would have been obvious to a reasonable contractor that the cessation of work caused by the receivership was not merely temporary, but represented a termination of the contract, the contract was effectively “abandoned”. An abandonment can occur without a formal communication from the other parties that the contract is terminated. Here the insolvency of ConCreate, the actions of its receiver in blocking access to the site, the discussion with the City about the possibility of doing the remaining work directly for the City, combined with the other surrounding factors, would cause a reasonable person to conclude that the contract was terminated. Tervita acknowledged that in its email of July 23. The fact that the City of Calgary might enter into a new contract for the same work was irrelevant to the ability to file a lien for the work done under the first contract.

….. To resolve this appeal, it is not necessary to determine exactly when the 45 days started to run. The contract had been abandoned, at the very latest, by the time of Tervita’s acknowledgment on July 23 that its contract had been terminated. In an objective sense, Tervita realized by that day that the cessation of work was not just temporary. The last day on which a lien could have been filed was approximately September 6, 2012, making the second lien ineffective.”

Notwithstanding tis finding that the time to file the second lien had expired, the Court of Appeal went on to find that the filing of a second lien is permissible. It said:

“Thus, the Act does not appear to preclude the filing of multiple liens. Since the lien right arises when the work commences, a subcontractor might theoretically file a separate lien at the end of each month, for all the work done that month and in all the previous months. If a statement of claim was subsequently issued later than 180 days after some of the early liens were filed, those liens would undoubtedly “cease to exist”. But it does not necessarily follow that all of the lien rights for early work that are also captured by later liens, or at the least those for work that is done later, would also “cease to exist”.

As noted, a liberal approach is to be taken in determining whether the claimant has lien rights. After that threshold is reached, a strict interpretation is required of the registration requirements. If it were not for the fact the second lien was filed after the passage of 45 days from the abandonment of the contract, that second lien would have been valid. The first “registered lien” had ceased to exist, but on a proper interpretation of the statute the underlying lien rights should not be taken to have been extinguished as well. If the lien claimant meets all of those requirements, a second lien that overlaps with the claims in a first lien is not per se invalid. On a proper interpretation, the expiry of the first lien does not undermine the fundamental validity of the second one.” (underlining added)

Discussion

The email from Tervita on July 232, 2012 seems to have doomed its later assertion that the subcontract had not been abandoned. But what if it had not written that email? Would its lien rights have continued for ever, since it was the contractor which precluded the subcontract from being completed? Probably not. At some point the objective facts would have established that the subcontract was abandoned even though the subcontractor wished to complete it.   The Court of Appeal appears to have been willing to find that the subcontract was not abandoned by reason of the appointment of the receiver for ConCreate, as long as there was a possibility that ConCreate’s receiver would continue with the contract and the subcontractor intended to do so.

There are a number of lessons to be learned from this decision. Contractors and subcontractors should be careful to determine whether the conduct of others on the site might be construed as an abandonment of the contract or subcontract. They should be careful when they, or others on the project, make definitive statements about whether the contract is abandoned. In either event, a lien claimant is well advised to immediately take all steps to preserve and protect the lien if the conduct on the project or statements of the parties on the project might lead to the conclusion that the contract or subcontract has been abandoned. Thus, if a party sends or receives a letter stating that the contract is terminated, then there is a distinct possibility that the contract is abandoned and immediate steps should be taken to register a lien.

Tervita Corp. v. ConCreate USL (GP) Inc. 2015 CarswellAlta 289, 2015 ABCA 80

Construction law – construction and builders’ liens – abandonment – time for registration of lien

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                              May 16, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Are There Exclusive and Inclusive Definitions Of “Improvement” In The Lien Statutes?

The Saskatchewan Queen’s Bench recently considered the definition of the word “improvement” in the Builders’ Lien Act of Saskatchewan. In Propak Systems Ltd. v. Grey Owl Engineering Ltd., that court held that the lien statutes of some provinces, like British Columbia, contain “inclusive” definitions and others, like Saskatchewan’s, contain an “exclusive” definition that also requires a determination of the parties’ intention to make a permanent improvement. Applying this approach, the court held that storage tanks resting on a pad were not an improvement.

This decision was over-ruled by the Saskatchewan Court of Appeal: see Grey Owl Engineering v Propak Systems Ltd., 2015 SKCA 108, 2015 CarswellSask 612; and my article about this Court of Appeal decision dated November 1, 2015.

Background

Grey Owl was hired by a lessee of land to provide engineering services relating to the lands. Grey Owl hired Propak to install three storage tanks on the land. The tanks rested upon a pad. Propak was not paid and filed a lien. The question in the lawsuit was whether the tanks and pad were an “improvement” to the lands which could give rise to a builders’ lien.

Decision

The court held that the tanks and pad were not an improvement. However, it is the logic by which that result was reached that is interesting. The application judge held:

  1. The application judge held that at the “heart” of the issue was the following question: Is the statutory definition of “improvement” expansive in its meaning or exhaustive and restrictive?

The judge reviewed the lien statutes across Canada and concluded as follows:

“Courts have previously drawn a distinction between legislation that is “broad and inclusive” in its definition, and legislation that is “exhaustive and restrictive”. The British Columbia legislation, which the respondent seeks to rely on, has been characterized as inclusive, and thus, courts are more inclined to rule that the structures are improvements. In contrast, the legislation in Alberta, Ontario and New Brunswick has been characterized as exhaustive.”

The judge then concluded that the definition of “improvement” in the Saskatchewan Act is a restrictive and exclusive definition:

“British Columbia is the only province whose legislation does not include a specific exception to the definition. In this sense, it is much more broad and inclusive than other provinces, and the courts have accordingly held that broader instances of claims fall within the section. The Saskatchewan legislation does not share this feature. Although it may be more inclusive in terms of listing certain features that should be considered improvements, it also does contain an express exception for things that are “not affixed to the land or intended to become part of the land”. This feature is very similar to the legislative definitions found in the other proposed provinces which have been defined as exhaustive and restrictive….. It therefore appears to me that the inclusion of this exception in the Saskatchewan legislation strongly suggests that the definition is not broad and inclusive as suggested by the respondent.”

  1. The application judge also held that some lien statutes introduce an element of intention into the definition of “improvement”, particularly if the statute is of the “exclusive” type, while other provincial statutes do not. He said:

“Another distinction between the jurisdictions is the level of analysis devoted to the intention of the parties when determining whether something is an improvement. As the British Columbia legislation makes no provision for this in the wording of the statute, the courts have tended to base determinations of whether something in (sic) an improvement on the extent of affixation and duration of the object…Therefore, having determined that the Saskatchewan legislation is exhaustive, it must be determined whether the parties intended for the tanks to become affixed to the land or become part of the land.”

The judge then addressed the nature of the evidence relating to intention:

“[R]esort to prior case law seems to indicate that the threshold regarding ability to relocate the object is low. The threshold seems to be that as long as the object is capable of being moved, it indicates intention not to be affixed…..It is my view that based on the foregoing evidence in the matter at hand and in consideration of the related case law, the tanks were not intended to be permanently affixed and become an improvement, and I so find.”

The application judge then concluded as follows:

“The Saskatchewan legislation can most likely be characterized as “exhaustive” within the meaning of the case law. It expressly contains an exception to the definition of “improvement” and directs the Court to examine the intention of the parties in determining each matter. In order to determine whether the tanks in the matter at hand are improvements and, thus, be a thing capable of maintaining a builders’ lien, the Court must examine the intentions of the parties, including the degree of affixation and the ability of the tanks to be moved. Upon considering all of the material before me in this context, I have concluded that the tanks are not improvements within the meaning of the Act.” (underlining added)

Comments

The application judge has drawn a distinction between provincial lien statutes which are “inclusive” and those which are “exclusive”, and between lien statutes which are intention-based and those which are not. However, one has to question whether these distinctions are real or helpful. Virtually all of the definitions in the provincial lien statutes use the words “included” or “including”; certainly the B.C., Saskatchewan, New Brunswick and Ontario statutes quoted by the judge do so, albeit in different locations in the definition. Only the Alberta statute does not. All of these provincial statutes also use the word “intended”. In the absence of a clear indication that each province intended to adopt a different definition, one wonders whether it would be better to approach the definition of “improvement” from a consistent standpoint across Canada.

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

Propak Systems Ltd. v. Grey Owl Engineering Ltd. 2015 CarswellSask 91, 2015 SKQB 43

Building Contracts –Construction and Builders’ Liens – Definitions – Improvement

Thomas G. Heintzman O.C., Q.C., FCIArb                                           April 28, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Does Construction Insurance Apply To The Suppliers To The Project?

An important issue in construction projects is the identity of the persons covered by the insurance coverage which applies to the project. If one of the parties– say the owner or the contractor – takes out the insurance, does it cover subcontractors or suppliers? Typically the courts have been reluctant to find that the project insurance covers suppliers. And in Sable Offshore Energy Inc. v. Ameron International Corp., the Nova Scotia Supreme Court recently held that the construction insurance did not cover suppliers.

Background

Ameron was a supplier to the construction project. The Lloyds’ project insurance policy taken out for the project stated as follows with respect to “additional insureds”:

“Any other company…. including, but not limited to, project managers, contractors, sub-contractors of any tier or with whom the Insured(s) in (a), (b), or this paragraph (c) have issued a Letter of Intent or with whom the Insured(s) have entered into written agreement(s) or contract(s) in connection with the subject matters of Insurance, and/or any works, activities, preparations connected therewith which are included in the Insured values hereunder.

Also to include vendors and suppliers, in respect of contracts solely for supply of raw materials, but only in respect of physical loss or physical damage as may be covered under Section1 of policy wording relating to cargo transits covered hereunder.”

Ameron argued that as a supplier it had “entered into a written agreement or contract” with the insureds and therefore was an additional insured.

Decision

The application judge disagreed, for three reasons:

First, that submission would render the second part of the Additional Insured provision redundant: all suppliers would be covered by the first paragraph. Accordingly, suppliers were only entitled to the more limited insurance referred to in the second paragraph.

Second, a review of the decided cases led the application judge to the view that suppliers are not generally covered by project-related construction insurance policies. The court said:

“The purpose of project insurance in cases such as these is to provide coverage to those who work on the project. In my view, vendors and suppliers are not in the same position. They do not work on the project and are not participants in the construction of the project. This is recognized, I conclude, in the decisions to which I have just referred.”

Third, the background facts persuaded the application judge that suppliers were not intended to be covered by the facts. In addition, the contra proferentem rule was not useful since that rule has a “limited role” and was not applicable when the parties had actually negotiated the provision and when there was no ambiguity in the clause. In any event, Ameron was a stranger to the insurance contract and had no standing to apply the rule.

Commentary

This decision underlines how important it is to negotiate project insurance that each parties wants. This is especially so in the case of suppliers. The court will be reluctant to hold that project insurance is intended to cover suppliers unless that coverage is clear. If a supplier wants to be included within the insurance umbrella, it should ensure that that coverage is explicit.

The finding that Ameron did not have standing to submit that the contra proferentem rule applied seems rather odd. That rule is a rule of construction of contracts. It is used to interpret the contract whoever is relying on it. In particular, if it applies, then it applies against the person who prepared the contract, in this case the insurer. There does not seem to be a good reason why any party relying upon the contract should be precluded from relying upon that rule against the insurer, if the provision in question is ambiguous and the rule is otherwise applicable.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.) at chapter 14, part 3

Sable Offshore Energy Inc. v. Ameron International Corp., (2013), 337 N.S.R. (2d) 10, 2013 CarswellNS 878 (N.S.S.C.)

Building Contracts – Suppliers – Insurance- Additional Insureds

Thomas G. Heintzman O.C., Q.C. FCIArb                                                                  May 3, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

Is A Trustee Under Payment Bond Obliged To Advise Potential Beneficiaries Of The Existence Of The Bond?

The Alberta Court of Queen’s Bench recently considered an interesting issue relating to labour and material payment bonds. When a contractor requires a subcontractor to obtain such a bond, does the contractor have a duty to tell the subcontractors about the existence of the bond so that they can make a timely claim under it, particularly when the contractor is shown in the bond to be a trustee for those subcontractors? In Valard Construction Ltd. v. Bird Construction Co., the court said No. Is this the just result?

Background

Bird was the general contractor and Langford was the subcontractor on a construction project. Bird required Langford to provide a CCDC 222-2002 payment bond. Valard was an unpaid sub-sub-contractor of Langford. It was unaware of the existence of the payment bond until after the notice period in the bond had expired, and its claim was accordingly rejected by the bonding company. It submitted that Bird, as trustee under the bond, had a duty to inform it of the bond’s existence within the relevant notice period in the bond.

Decision of the Application Judge

The judge hearing the application held that the trusteeship wording in the bond was solely for the purpose of avoiding the rule in contract law that third parties cannot sue on a contract and to enable the sub-subcontractors to sue on the bond even though they were not parties to it. The trusteeship wording did not create a fiduciary duty toward Valard obliging Bird to tell Valard of the existence of the bond. The judge noted as follows:

“In order to avoid the application of the third party beneficiary rule, the standard bond wording provided, and still provides, that the obligee is “trustee” for the benefit of all beneficiaries/claimants. Significantly, the bond expressly states that the obligee is not obliged to do or take any act, action or proceeding against the surety on behalf of any of the claimants to enforce the provisions of the bond. It provides, however, that claimants may use the name of the obligee to sue on and enforce the provisions of the bond….The express negation of any requirement on the part of the trustee to take action on behalf of the beneficiaries, combined with the ability of claimants to sue in the name of the trustee support the conclusion that the trustee wording is used in the Bond in order to avoid the obstacle raised by the third party beneficiary rule.

The court noted that this issue had been addressed by the Ontario county court some 45 years ago in Dominion Bridge Co v Marla Construction Co, [1970] 3 OR 125. In that case, Judge Grossberg asked the following questions:

“I asked in argument: when did the duty arise? At what point of time? What exactly was that duty? Must Sun Oil embark upon inquiries who were the labourers? Who were the creditors? Who were the suppliers? Must Sun Oil seek out the creditors and suppliers? If the contention of counsel for the plaintiff be upheld, Sun Oil would be obliged to acquire knowledge of all materials purchased, all labourers on the job from day to day and to keep a constant surveillance. The consequence of the submission must be that Sun Oil must seek out material, men, suppliers, labourers, subcontractors, etc., of Marla and acquaint each that there was a bond in existence. No such duty is imposed by the bond itself…”

In the Valard case, the court concluded that “the sole purpose of the trust wording in the Bond is to address the difficulties that the identities of the claimants cannot be ascertained at the time the bond is entered into, and that the third party beneficiary rule would otherwise prevent a claimant from suing the surety.”

The application judge was not impressed with the equities of the situation from the standpoint of Valard, the sub-subcontractor. He said:

“In any event, a simple standard inquiry by Valard would be a more reliable means of obtaining the information. While it may be that employees of subcontractors may not always be aware of the possibility of a bond, this does not explain why a large and sophisticated entity such as Valard would not have in place a mandatory protocol under which bond information is requested on all subcontracts, especially given the state of the law on the issue. In this case, we are not dealing with the disadvantaged and infirm, but rather with a large sophisticated company with five or six hundred employees in Canada which has its own surety or bonding company.”

Accordingly, the court held that Bird had no duty to advise the sub-subcontractors of the bond.

Valard had originally sought relief from forfeiture in respect of its claim against the bonding company. But during the application, that claim was withdrawn since the bonding company was able to establish actual prejudice arising from the delay in making the claim.

Discussion

The court seems to have been heavily influenced by the long period of time since the Dominion Bridge case was decided and the apparent acceptance of that decision in the construction industry. Yet, this decision seems hard to reconcile with the trustee obligations which contractors assume when they require a payment bond to be obtained by the subcontractor.

Which is the greater burden: if there is a payment bond, for the contractor to find out which sub-subcontractors are beneficiaries of the bond and notify them of the bond; or for every sub-subcontractor on every construction project to ask whether there is a payment bond?

Even though the latter seems to be the more burdensome approach, it seems to be the law based on the Dominion Bridge and Valard decisions.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 15, part 10

Valard Construction Ltd. v. Bird Construction Co., 2015 CarswellAlta 342, 2015 ABQB 141

Building Contracts – Bonds – Payment Bonds – Duties of Trustee – Rights of Subcontractors

Thomas G. Heintzman O.C., Q.C., FCIArb                                             April 15, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

Is A Pay When Paid Clause Applicable If The Contractor’s Account To The Owner Is Reduced For Reasons Unconnected With Subcontractor’s Work?

A pay when paid clause is one of the most contentious clauses in a building contract. Indeed, the clause is outlawed in most circumstances in the United Kingdom and some states of the United States. In Canada, there is conflicting case law about the application and interpretation of the clause. In Wallwin Electric Services Inc. v. Tasis Contractors Inc., the Ontario Superior court recently gave guidance as to when such a clause is applicable, and held that it does not apply if the contractor voluntarily reduces its account to the owner for reasons unconnected to the subcontractor’s work.

Background

A pay when pay clause purports to entitle the contractor to refuse payment to the subcontractor if the contractor has not been paid by the owner. In the Wallwin case, the payment clause read as follows:

“(3) Provided that, as a condition precedent, the contractor has been paid the certificate, in which such amount has been included, by the owner.”

The contractor, Tasis said that it had no obligation to pay the subcontractor since it, the contractor, had not been fully paid by the owner. The main contract had been certified to be substantially completed. There were no outstanding deficiencies with respect to the electrical work done by Wallwin and its work was included in the certificates that had been issued by the consultant.

The owner asserted that there were deficiencies in previously certified work. Accordingly, the contractor Tasis subtracted $150,176.65 from its invoice for these deficiencies. That work was unrelated to the work performed by Wallwin. Tasis was paid for this invoice.

As the judgment in the case recorded, the parties were agreed that

“1. Wallwin made regular applications for payment as provided for in the subcontract.

  1. At no time did Tasis or the project consultant make any changes to the amount of Wallwin’s applications for payment.
  2. At no time did Tasis or the project consultant give notice to Wallwin of any changes to the amount of Wallwin’s applications for payment.
  3. Tasis was paid by the owner for each certificate in the amount certified.”

Nevertheless the contractor Tasis submitted that “the subcontractors legal entitlement to payment is contingent upon the general contractor being paid, then the subcontractor must bear the risk of nonpayment by the owner to the general contractor; the only exception being where the reason for nonpayment by the owner is the default of the general contractor.”

Decision of the Ontario Superior Court

The application judge disagreed. He held that the proper interpretation of a “pay when paid clause is as follows:

“A contractor is obliged to pay a subcontractor when:

  1. the subcontractor makes application for payment,
  2. neither the contractor or certifier have given written notice to the subcontractor of a change in the amount the subcontractor has applied to be paid
  3. the amount the subcontractor has applied to be paid has been included in a Certificate for Payment, and
  1. the contractor has been paid that Certificate for Payment by the owner.”

In particular, the court held that a contractor cannot:

“avoid its obligation to pay a subcontractor by adjusting an invoice to allow for an owner to retain contract funds when a dispute arises over previously certified payments. The certification process creates the obligation to pay. Disagreements over subcontractor applications for payment may be resolved prior to Certificate for Payment being issued, as contemplated at the end of Article 4.2, or they may be resolved after payment, but once the above conditions have been satisfied payment must be made.”

Accordingly, the court held that the subcontractor was entitled to be paid by the contractor.

Discussion

This case is, perhaps, an easy one. It is hard to contemplate that a “pay when paid” clause could be interpreted to apply if the money held back by the owner is not in relation to the work undertaken by the subcontractor and the contractor has been paid in full for that work. The more difficult cases arise when the contractor is unpaid for all or part of the work done by the subcontractor because of, say, the owner’s insolvency or faulty work by the contractor.

The present decision is interesting because it introduces two ingredients into the application of the “pay when paid” clause:

whether there has been a written notice of change in the subcontract and

whether the consultant has certified the payments due under the subcontract.

These ingredients appear to introduce two new hurdles that the subcontractor must get over before payment will be paid. It is unclear where those ingredients come from.

The Canadian law relating to “pay when paid” clauses is complicated by the conflicting decisions of the Ontario Court of Appeal in Timbro Developments v. Grimsby Diesel Motors Inc. (where the clause was applied) and the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd v. Alta Surety Co. (where the clause was not applied). Until the law is clarified by the Supreme Court of Canada, the proper scope and application of “pay when paid” clauses will be contentious.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 6, part 2(d)(i)

Wallwin Electric Services Inc. v. Tasis Contractors Inc, 2015 CarswellOnt 3177
2015 ONSC 1612

Thomas G. Heintzman O.C., Q.C., FCIArb                              April 10, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

What Damage Due To Faulty Workmanship Is Excluded From A Builders’ Risk Policy?

Last week I reviewed the decision of the Alberta court of Appeal in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance. In that decision, the Alberta Court of Appeal held that damage done by one contractor to the work of another was not recoverable under a Builders’ Risk policy because it fell within the exclusion for “faulty workmanship”.

This week, let’s review the decision in Acciona Infrastructure Canada Inc. v. Allianz Global Risks Insurance Co. In this decision, the British Columbia Supreme Court held that the “faulty workmanship” exclusion did not apply.

Background

Acciona was the design-build contractor for a hospital project. Campbell Construction Ltd. (“CCL”) was the principal sub-contractor for the construction of the concrete structure, including designing and building the concrete formwork, placing and finishing the concrete and undertaking the required shoring. During construction, there was cracking and over-deflection of the concrete slab.

The trial judge found that the over deflections and cracking were caused by the failure of the formwork/reshoring procedures to account for the unusually thin design of the slabs. The trial judge also found that the over deflection and cracking of the concrete slabs fell within the Policy and constituted damage that was fortuitous.

With respect to the exclusion for “faulty workmanship”, the trial judge found that the formwork and shoring/reshoring procedures constitute a defect in workmanship, which fell within the exclusion. The judge then considered what damages were so excluded: the entire claim, as submitted by the insurer, or only those costs that would have been incurred to remedy or avoid the resulting damage, those being the costs of implementing proper formwork and shoring/reshoring procedures, as submitted by the insured. The trial judge adopted the latter submission and set forth his reasons as follows:

 Read in its entirety, I find that the intent of clause 5(b) is to exclude those costs rendered necessary by one of the named defects, but is limited to costs “which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.” In other words, the excluded costs are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred, but the exclusion does not extend to exclude the cost of rectifying or replacing the damaged property itself; the excluded costs crystallize immediately prior to the damage occurring and are thus limited to those costs that would have prevented the damage from happening. … The approach is to exclude the cost that would have been incurred to rectify the defect if that effort had been put in hand immediately prior to the damage…..

The “damage” in issue here is the cracking and over deflection of the concrete slabs. The “defect in material workmanship” is the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs. Applying clause 5(b), the excluded costs are those that would have remedied or rectified the defect before the cracking and over deflections occurred i.e. the costs of implementing proper formwork and shoring/reshoring procedures or incorporating additional camber into the formwork. (underlining added)

Discussion

The contrast between this decision and that in Ledcor v. Northbridge could not be starker. In this decision, the court held that the insured was entitled to recover the full damages resulting for the mis-installation of the concrete slab. Certainly, the slab and the faulty work in installing it were connected, yet the B.C. court held that the purpose of the exclusion was only to eliminate the recovery of the cost of the faulty work, not the resultant damage. In Ledcor v. Northbridge, the Alberta court of Appeal disallowed the damages claimed in that case because they were connected, physically or systematically, to the faulty work.

It seems that the words in the Builders’ Risk policy providing for the exclusion for “faulty workmanship” and the exception for “resulting damages” are speaking like the Delphic oracle, and only the Supreme Court of Canada can solve the riddle.

Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.

(2014), 33 C.L.R. (4th) 210, 2014 CarswellBC 2471

Building contracts – Builders’ risk Insurance- Exclusion for faulty workmanship – Exception for resulting damages

Thomas G. Heintzman O.C., Q.C., FCIArb                                 April 1, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

When Is Faulty Workmanship Excluded From A Builders’ Risk Policy?

One of the most difficult issues in construction law is the proper interpretation of an exclusion for faulty workmanship in a Builders’ Risk policy. The amounts in issue can be huge and if the exclusion applies, the absence of insurance can be serious.

Take for example the recent Alberta decisions in Ledcor Construction Limited v Northbridge Indemnity Insurance Company. Window cleaners were hired to clean the windows of the newly constructed building in the final clean up of the site. The cleaners scratched the windows, which necessitated very expensive replacement of the windows. The trial judge held that the damage was covered by the Builders’ Risks insurance policy, and not excluded by the faulty workmanship exclusion. The Alberta Court of Appeal has just held that the damage was excluded by that exclusion. This decision raises serious questions about the viability of Builders’ Risk insurance with respect to damage to another contractor’s work. I wrote about the trial decision in this case on December 29, 2013.

Background

A company known as Station Lands retained Ledcor as the construction manager to coordinate the construction of the EPCOR Tower in Edmonton, Alberta. Station Land also contracted with various trades to construct the building. The owner obtained an All Risk Builders’ insurance policy from Northbridge. The policy covered all “direct physical loss or damage except as hereinafter provided”. The named insureds were the owner and Ledcor, and the additional insureds were the owners, contractors, sub-contractors, architects, engineers, consultants, and all individuals or firms providing services or materials to or for the named insureds. The policy was a “blanket” policy, designed to cover all actors and activities on the site.

The policy contained the “faulty workmanship” exclusion and “resultant damage” exception to that exclusion found in most Builders’ Risk policies. Those provisions read as follows:

“Exclusions…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. (underlining added)

The windows were supplied and installed by one of the trade contractors. Station Lands retained another contractor, Bristol, to do the “construction clean” of the exterior of the building, including the windows.

Station Lands’ contract with Bristol was in a standard CAA format which provided that the owner would maintain “all risks” property insurance for the project naming the owner and construction manager as insureds and the consultants, contractors and subcontractors as additional insureds.

The Court of Appeal’s Decision

The Court of Appeal went through the following logic to arrive at its conclusion that the damage to the windows did not fall within the policy:

  1. Cleaning involves workmanship

The court rejected the respondents’ argument that cleaning is not workmanship because it does not create some physical product. In Bristol’s contract, work included “services” and the contract refers to Bristol’s “workmanship.” In the court’s view the “construction clean” was as much a part of the construction of the building “as the designing of the foundations, the hammering of the nails, and the pouring of the concrete.”

  1. Multiple contractors do not create “resultant damage”

The respondents argued “that the exclusion does not apply to damage caused by one contractor to the work of another…. All other damage it is argued, particularly damage to the work of other contractors, is “resulting damage”. The “cost of making good” only relates to the making good by any contractor of its own work product.”

The court noted that “this argument contains echoes of the argument that what Bristol Cleaning was doing was not “workmanship”, because the exterior cleaning involved did not create any physical product or structure.” The court rejected this argument for many reasons.

First, it held that:

“it is artificial (especially in the context of an all risks blanket insurance policy) to try to draw a dividing line between the product created by the work of other contractors, and the work to be done by Bristol Cleaning. GC 2.4 requires Bristol Cleaning to repair any damage it does to the work of other contractors. In effect Bristol Cleaning’s “Work” included replacing the damaged glass, even if it was installed by another trade contractor. To say that the exclusion in the policy only applies to a trade contractor “making good” its own work seeks to sever that replacement work. The “cleaning” work that Bristol Cleaning was required to do under the contract is said to be of a different character than the “repair of damage” work that is also required to be done by GC 2.4. Yet all this work had to be done before Bristol Cleaning could claim substantial completion.”

Second, the court noted that the respondents conceded that the exclusion is not limited to the cost of re-doing the cleaning and that there must be some “physical damage” caught by the exclusion. But, applying their theory, they could not point to any physical damage excluded in a case like the present one.

Third, this policy was a “blanket” wrap-around policy covering the entire project and all participants in the project. In this context, it was the court’s the view “it does not make sense to interpret the policy such that the damage would be covered by the insurance if the work was done by two trade contractors, but not if it was all done by one trade contractor.

Fourth, this policy was a multi-year policy. It does not make sense, in the opinion of the court, that activities occurring later in the project would be covered merely because they damaged work done earlier in the project. In its words: “Whether something is the “cost of making good faulty workmanship” for the purposes of a multi-year insurance policy, related to a single construction “Project”, does not depend on the exact sequence or timing of the various constituent tasks required to build such a complex building.”

Fifth, “the scheme of the insurance policy is that all activities on the site are to be covered by one policy. There is nothing in the policy wording to suggest that coverage varies depending on the contractual relationships of the parties; the coverage depends on the type of “damage”.

Sixth, there was “nothing in the wording of the policy to support the respondents’ argument that the key to the exclusion is the identity of the person who performed the work that is subsequently damaged.”

The court’s problem with the respondents’ position was summed up in the following paragraph:

“The respondents’ argument leads to the conclusion that coverage under the policy depends on how the work is divided up. Under the respondents’ theory, if a single contractor is retained to supply the glass, install the glass, and do the construction cleanup, the scratches on the windows would not be covered by the insurance. However, because some other contractor supplied the windows, the very same damage caused by Bristol Cleaning is covered. This approach might create an incentive to artificially divide up the work as finely as possible, as then the maximum amount of damage would be covered by insurance. On the other hand, it would be dangerous for the owner to hire a single contractor to do all the work, as then nothing would be covered. That cannot have been the expectation of the parties, and is not a commercially reasonable outcome. It is, as noted, inconsistent with the philosophy behind a “wrap-up” policy covering all contractors.

  1. The physical or systemic connectedness between the work and damage underlies the coverage and exclusion

The court accepted a variant of the insurer’s approach to defining the ambit of the coverage and the “faulty workmanship” exclusion. In doing so it relied upon the provision in Bristol’s contract requiring it to repair damage caused by it to the work of other contractors. It said:

“If the workmanship itself directly causes the damage, then both re-doing the work and fixing the damage from the first attempt easily fall into the expression “making good faulty workmanship”. This test identifies a class of physical damage that is excluded from coverage by the exclusion clause, while recognizing a significant class of physical damage that would be “resulting” and therefore covered. It is also consistent with GC 2.4, which requires Bristol Cleaning to repair any damage it does to the work of other contractors. While that covenant is expressly found in this construction agreement, it would likely be implied in any construction contract; it is natural that if a contractor causes damage while doing its work, it should be required to repair that damage as the consequence of its own poor workmanship. The appellants’ interpretation is consistent with commercial expectations.” (underlining added)

However, the court slightly altered the test proposed by the insurer as follows:

“The proper test can more properly be described as a test of the connectedness between the work, the damage and the physical object or system being worked on. The application of the test will depend on an examination of the factual context, but the primary considerations will be:

(a)        The extent or degree to which the damage was to a portion of the project actually being worked on at the time, or was collateral damage to other areas. The test will be relatively easy to apply when the damage is caused directly by the work to the very object being worked on. There may be cases where several parts of the project work together as one system. Work on one part of the system may cause damage to another part, but repairing that damage might still properly be characterized as the cost of making good faulty workmanship if there is sufficient systemic connectedness;

(b)        The nature of the work being done, how the damage related to the way that work is normally done, and the extent to which the damage is a natural or foreseeable consequence of the work itself. If the damage is a foreseeable consequence of an error in the ordinary incidents of the work, then it presumptively results from bad workmanship; and

(c)        Whether the damage was within the purview of normal risks of poor workmanship, or whether it was unexpected and fortuitous.” (underlining added)

The court concluded this analysis by saying that the “degree of physical or systemic connectedness is the key to determining the boundary between “making good faulty workmanship” and “resulting damage”. (underlining added)

Here, the court said:

“the scraping and wiping motions that caused the damage were the actual “Work”. The damage was not “accidental” or “fortuitous”. The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done. Fixing the resulting damage is “making good the faulty workmanship” that caused the damage.”

The Court of Appeal acknowledged that the test it was propounding might lead to “extreme results in extreme cases”. It posed the situation of the window cleaner using a flammable solvent and causing the building to burn down. It acknowledged that such a loss would normally fall within the policy but said that “[e]xtreme cases should be decided when they arise. Whether these extreme situations call for a separate test, or are merely an exception to the connectedness test, need not be explored in this decision.”

The Court of Appeal concluded its analysis with this over-all approach:

“The key is to find the dividing line between physical damage that is excluded as “making good faulty workmanship”, and physical damage that is “resulting damage” which is covered by the policy. As demonstrated in the previous discussion, the wording of the policy and the weight of the case law supports the test for physical or systemic connectedness. The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.

“The principle just stated reflects the proper interpretation of this wording of the insurance policy. The presumptive test is that damage which is physically or systemically connected to the very work being carried on is not covered. Whether coverage is nevertheless extended under that test in the factual context of any particular case will depend on the consideration of the factors listed above (supra, para. 50). Those factors all engage elements of “causation” and “foreseeability”, concepts which are well known in the common law, when applying the policy wording to particular factual situations. The presumptive test stated above reflects the proper interpretation of the policy, but these collateral factors will come into play in applying the policy wording to particular factual situations, especially in extreme cases.”

On this basis, the Court of Appeal held that the damage to the windows did not fall within the policy.

  1. Contra Proferentem did not help

The Court of Appeal held that there was no need to resort to this rule of interpretation. These provisions of the Builders’ Risk policy had been interpreted many times and their meaning did not become ambiguous just because the circumstances raised difficult questions of the application of the policy to the particular facts.

Discussion

This decision is a very important one and will take some time to digest. On a first reading, however, some of the remarks and the basis of the decision raise some apparent conflicts with prior decisions and raise fundamental issues about Builders’ Risk insurance.

  1. The Court of Appeal relies upon the provision of Bristol’s contract, requiring it to repair the work of others which Bristol damages, to supports the court’s “physical or systemic connectedness” test. Yet, that submission appears to be similar to the one which was rejected by the Supreme Court of Canada in the Commonwealth Insurance v. Imperial Oil There, the Supreme Court explained that the contractor’s obligation to repair work might well require it to perform work within the deductible but did not disentitle the contractor to protection under the policy. As the Supreme court said at paragraph 39 of that decision:

“That paragraph [in the building contract] does not negate the basic proposition that everyone involved in the construction of the project will be insured under a policy issued to all as a group. The reference to fault occurs because this policy stipulates a deductible of $10,000 and because it contains a number of exclusions, e.g., error in design and latent defect; that reference has no other purpose.”

  1. The Court of Appeal makes reference to the insurance contract not being a “construction warranty agreement.” That submission is one often relied upon by insurers, but was rejected in the Progressive Homes v. Lombard Insurance decision of the Supreme Court of Canada, where the court said that the proper approach is to interpret the policy, not arrive at a presumption as to what it means by saying that it will convert the policy into something else. At paragraph 45 of its decision, the Supreme court said:

“Lombard argues that interpreting accident to include defective workmanship would convert CGL policies into performance bonds. In my opinion, these general propositions advanced by Lombard do not hold upon closer examination.”

  1. The Court of Appeal equated Bristol’s work (“the scraping and wiping motions that caused the damage”) with intentional harm (“The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done.”) and then concluded that “fixing the resulting damage is “making good the faulty workmanship” that caused the damage.” This is a curious conclusion because it does not seem possible that Bristol intended to damage the windows. The damage occurred negligently, but fortuitously; otherwise the policy would not apply at all. As the Supreme Court said in Progressive Homes v. Lombard;

“Fortuity is built into the definition of “accident” itself as the insured is required to show that the damage was “neither expected nor intended from the standpoint of the Insured”. This definition is consistent with this Court’s core understanding of “accident”: “an unlooked-for mishap or an untoward event which is not expected or designed” ….When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.

  1. The basic proposition of the Court of Appeal appears to be that a Builders’ Risk policy does not cover damage caused by one contractor to the work of another contractor on the site. One must ask: where does the policy say that? Damage by one contractor to the work of another contractor seems such a foreseeable event. If the policy does not apply to that damage, should the policy clearly say so? And is this proposition consistent with the purpose of Builders’ Risk insurance as described by the Supreme Court in the Commonwealth v Imperial Oil decision:

“On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in court. By recognizing in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements opening the doors of the job site to the tradesmen, the courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, e.g. ,the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.” (underlining added)

Based upon this decision, contractors and subcontractors may want to obtain additional insurance to cover damage to each other’s work and property during the project. It appears that a Builders’ Risk policy may not cover that damage.

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

Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 ABCA 121

Building contracts – Insurance – Exclusion for faulty workmanship – Exception for resultant damage

Thomas G. Heintzman O.C., Q.C., FCIArb                                  March 30, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

Waiver During A Bidding Process Held To Bar Claim Arising From The Tender

The Ontario Superior Court recently dealt with the troubling issue of whether an owner can rely upon a waiver of claims signed by a bidder during a tender to defeat a contractor’s claim arising from the tender. In Todd Brothers Contracting Ltd. v. Algonquin Highlands (Township), the court held that the owner was entitled to do so. The court also dealt with two other issues relating to tenders: whether there was a contract between the owner and the bidder; and whether the limitation period to assert a claim arising from the tender had expired.

For these three reasons this decision is an important one in relation to the law of tenders. .

Background

Todd Brothers was the lowest bidder in an invitation to tender which closed in April 2009. The invitation to tender had been issued by the Township for the construction of a new runway and the rehabilitation of an existing runway at the Township’s airport. An environmental assessment of the project was undertaken of the project by the federal environmental agency. Todd Brothers then agreed to extend the time for acceptance of its tender to July 15, 2009. The municipality decided to proceed with the project in phases because some phases did not require environmental approval. Todd Brothers agreed to the phasing of the project, and to a further extension of the time for acceptance of its tender.

In September 2009, Township council passed a resolution accepting Todd Brothers’ tender in accordance with the tender documents, subject to the Canadian Environmental Assessment Act.

Prior to the Township council resolution accepting its tender, Todd Brothers signed a “Compensation Waiver Acknowledgment” which provided that Todd Brothers would:

“not seek any compensation for … work identified but not completed … in the event that the Township cannot proceed to any of the phases as a result of matters beyond the control of the Township of Algonquin Highlands, or delays resulting from the review being completed by the CEAA … any other public issues/concerns or the withdrawal of funding from applicable sources.”

The Canadian Environmental Assessment Agency (CEAA) completed its review in December of 2010. However, the new municipal council decided not to proceed with the project. Ultimately, the Township proceeded with a joint project with the provincial government which resulted in the first three parts of the original project not proceeding.

Todd Brothers started an action against the Township on July 10, 2013, asserting that the Township’s failure to proceed with the full project was a breach of contract. The limitation issue was whether Todd Brothers had discovered or ought to have discovered its claim prior to July 10, 2011. If so, its claim was barred by the two year limitation period in the Limitations Act, 2002.

Decision of the Ontario Superior Court

The first question was whether any contract had come into existence between Todd Brothers and the Township. The Township submitted that although the Township council passed a resolution accepting Todd Brothers’ tender, the tender documents said that an award of the contract required the Township’s “written confirmation mailed to the successful bidder”, and no such confirmation was mailed; and that no acceptance of the tender was ever communicated to Todd Brothers.
The court rejected that submission, stating:

 “This provision does not, as argued by the Township, make an award of the contract conditional upon the Township’s “written confirmation mailed to the successful bidder”. Rather, it provides an obligation on the part of the contractor to sign the contract contained in the RFT, within seven days of being advised that its tender was accepted. If the Township failed to mail written notice of the award to Todd Brothers, it cannot rely upon that failure to argue that acceptance of the tender did not create a binding agreement.”

In arriving at this conclusion, the court relied upon the Contract A/Contract B analysis of the Supreme Court of Canada in the Ron Engineering decision. The court in the present case explained the application of Ron Engineering as follows:

“Contract A is formed when a contractor submits a compliant bid in response to an invitation to tender. The principal terms of Contract A are the irrevocability of the tender during the acceptance period provided for in the RFT, and the obligation of both parties, if the tender is accepted, to enter into a contract (Contract B), on the terms set out in the RFT. The obligation of the parties to enter into Contract B arises from Contract A, and is not dependent upon communication of the acceptance from the owner to the contractor.”

The second question was whether the waiver signed by Todd Brothers barred its claim. The court held that it did. The circumstances fell within the wording of the waiver. The court concluded that the Township was unable to proceed with the first three parts of the project due to the ongoing CEAA review. Once that process was finished, then the Township was:

“unable to proceed with those parts of the original project after December of 2010, because of the joint airport improvement proposal made by MNR. Had the Township failed to pursue the joint project with MNR, as required by the OMAFRA contribution agreement, it risked withdrawal of provincial funding.”

The third issue was the limitation question. The court held that Todd Brothers did not discover nor ought to have reasonably discovered its claim before July 2011. Its claim only arose when “Todd Brothers discovered that this work would no longer be made available to it.” In July 2012, the discussions with the environmental authorities were still ongoing and Todd Brothers had reason to believe that they would work out. It was not reasonable to insist that Todd Brothers commence an action at that point when discussion between the parties were still unfolding.

Discussion

Each of these three issues are of interest. The first point raises two questions:

What events give rise to a contract under an invitation to tender?

And if a contract arises, did it oblige the Township to enter into Contract B-the building contract?

The court answered the first question. It concluded that Contract A was formed when Todd Brothers submitted its bid and the tenders closed. At that point there was a Contract A between Todd Brothers and the Township governing the bidding process. That contract came into being automatically and without any need for a communication from the Township to Todd Brothers.

The court did not apparently answer the second question. Under the Ron Engineering regime, Contract A required the Township to enter into Contract B – the construction contract – unless there was a justifiable reason not to do so. But the court did not consider whether there was justification for the Township not to enter into Contract B. Why were the CEAA process and the dealings with the province of Ontario not a sufficient justification for the Township not to proceed with the contract with Todd Brothers? Indeed, in its discussion of waiver, the court appears to have concluded that the CEAA process and the dealings with the provincial government did justify the Township in not entering into the building contract with Todd Brothers.

The court’s conclusions about waiver also seem problematic. What was the consideration for the waiver? Todd Brothers was the low bidder and, under the Ron Engineering analysis, the Township was obliged to enter into the building contract with Todd Brothers, absent reasonable justification for not doing so. It does not seem open to the Township to say that it awarded the contract to Todd Brothers in consideration of receiving the waiver: as the court said, the Township was obliged to award the contract to Todd Brothers due to the Ron Engineering regime. So what was the consideration that made the waiver enforceable? Why was it not a gratuitous promise or unilateral offer that Todd Brothers was entitled to withdraw?

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

Todd Brothers Contracting Ltd. v. Algonquin Highlands (Township), 2015 CarswellOnt 3045
2015 ONSC 1501

Building Contracts – Tendering – Contract A-Contract B- consideration – waiver – limitation periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                     March 24, 2015

www.heintzmanadr.com

constructionlawcanada.com

 

Grounds For Reviewing Arbitration Decisions Are Narrow: B.C. Court of Appeal

A recent decision of the British Columbia Court of Appeal warned that the grounds for reviewing an arbitral award are narrow. In Boxer Capital Corp. v. JEL Investments Ltd., the court noted that arbitral dispute had gone through two separate arbitrations and nine (yes, nine) judicial proceedings already. The Court of Appeal said: “Surely that procedural history is inconsistent with the objectives of commercial arbitration.” The court held that the motion judge had no basis to over-turn the last arbitral award and re-instated that award.

Background

The issue in the appeal was whether the second arbitrator was bound by principles of res judicata arising from the award of the first arbitrator or the decision of the judge who heard an appeal from that first award. The second arbitrator held that he was not bound by those decisions by reason of res judicata. The judge hearing an appeal from that decision held that the second arbitrator was so bound. I wrote about that decision in my article of February 17, 2014.

From that latter decision an appeal was taken to the British Columbia Court of Appeal.

The B.C. Court of Appeal’s decision

The B.C. Court of Appeal agreed with the arbitrator. The issue turned upon whether the issue before the second arbitrator was the same as the issue before the first arbitrator or the court which heard the appeal from the first award. The Court of Appeal held that it was not:

“Respectfully, Mr. Justice Abrioux erred in characterizing the issues so broadly, and in finding that they had been the same throughout. When the issues are properly framed, it becomes apparent that they are quite different. The issue before [the firs] Arbitrator….., as defined by the parties who chose to submit their dispute to him, was whether the shotgun purchase price under the [Co-Owner’s Agreement, or COA] was $1.425 million or $2.19 million. The issue before[the court on appeal from the second arbitral award], as defined by this Court’s decision granting leave to appeal, was whether [the second] Arbitrator “erred in failing to have regard to established principles of law in deciding that a term should be implied”. Finally, the issue before [the second] Arbitrator, again as defined by the parties, was whether the Boxer Parties had a continuing interest in the venture. These are different issues.”

  The B.C. Court of Appeal then concluded:

“It was open to [the second] Arbitrator to construe the COA afresh on the continuing interest issue. It is not for this Court to review the merits of his decision in this regard. His decision is the last word on the interpretation of the COA.”

In the course of making its decision the court made a number of comments about the decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53.

First, it distinguished the role of a court in an appeal from an arbitral award from its role in an appeal from another judicial decision; the former role is much more limited than the latter. It said:

Like the present appeal, Sattva dealt with an issue of contractual interpretation. Mr. Justice Rothstein explained that in most cases, issues of contractual interpretation will be important only to the parties themselves, and will not have a broader impact….. However, the role of appellate courts (including the B.C. Supreme Court, when sitting on appeal from an arbitral award) is generally not to provide “a new forum for parties to continue their private litigation” but rather to ensure “the consistency of the law” and decide legal issues of public importance (ibid.). Accordingly, “our legal system leaves broad scope to tribunals of first instance to resolve issues of limited application”…. In sum, “the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings … weigh in favour of deference to [arbitrators] on points of contractual interpretation”.”

Second, it said that if the principles in Sattva had been applied in the present case, there might have been no appeal from the first arbitral award and the matter might have ended there:

“Sattva held that questions of contractual interpretation should almost always be regarded as questions of mixed fact and law…. (Historically they were seen as questions of law.) This means that, after Sattva, leave will rarely be granted to appeal an arbitral award on a question of contractual interpretation. (If Sattva had been decided earlier, leave arguably would not have been granted to appeal the parties’ initial arbitral award and this lengthy saga would have been avoided.)”

Discussion

As in most debates, defining the question largely defines the answer. The Court of Appeal said this about the exercise involved in defining the question in an appeal from an arbitral award:

“This appeal serves as a reminder of the importance of judicial restraint in the review of arbitral awards, at least in the commercial context. When sitting on appeal from an arbitral award, a court’s jurisdiction is narrow. The inquiry differs fundamentally from a trial, and even from a judicial review of an administrative decision.”

As a result of the new test in Sattva for reviewing arbitration decisions, and the narrow definition of the question involved in the appeal from the second arbitral award, the Court of Appeal held that that question was not the same as the questions in the first arbitration or the appeal from the first arbitral award.

This decision does not mean that the doctrine of res judicata should be applied narrowly by arbitral tribunals. It means that, in reviewing a decision by an arbitrator about that doctrine, the court has a very narrow jurisdiction. If the arbitrator has the jurisdiction to determine whether the doctrine applies or not – and that was not doubted in the present case – then the conclusions of the arbitrator must be accepted, unless the arbitrator’s errors about those matters result in a complete loss of jurisdiction or an error on a pure question of law.

In any event, this decision can go down as Exhibit A about how arbitration can lead to expense and delay if the procedures get out of hand. As I said in my February 12, 2014 article about the lower court decision in this case, “proponents of arbitration may wonder if there are better ways to find speedy justice. The parties selected arbitration presumably to avoid the costs and delays of the court system. That objective was not achieved in the present case.”

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 3.

Boxer Capital Corp. v. JEL Investments Ltd., 2015 CarswellBC 96, 379 D.L.R. (4th) 712

Arbitration – Appeal – Res Judicata – Standard of Review – Shot-gun agreements

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                March 13, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Owner Awarded Nominal Damages For Deficient Construction Not Affecting Market Value

What is the appropriate remedy when a contractor fails to build the building in accordance with the specifications but the deficiencies are not proven to affect the market value of the property? Should the answer to that question depend on the sort of building being constructed: a home as opposed to an office building? Should the answer be the same if the contractor’s work is deficient rather than not in accordance with the specification?

These were the issues dealt with recently by the New Brunswick Court of Appeal in Diotte v. Consolidated Development Co. The court upheld an award by the trial judge of nominal damages in the amount of $2,000 when the owner claimed $54,000 to correct the deficiency. This area of the law is largely unexplored in Canada so this important decision will be of interest to all those involved in building contracts.

Background

Diotte agreed to build an office building and garage for the owner, Consolidated. The building was to be built to the specifications of the federal Department of Fisheries and Oceans, which had agreed to lease the building. The specifications called for a garage of 150 sq. meters. The garage as built was 6.5 sq. meters, or about 4 percent, less than the specified size. The owner sought about $54,000 to pay for the remedial work to make the garage comply with the specifications. The trial judge awarded $2,000 and the award was upheld by the New Brunswick Court of Appeal.

Decision of the New Brunswick Court of Appeal

The Court of Appeal reviewed the seminal decisions of Cardozo J. in Jacob & Youngs Inc. v. Kent, 129 N.E. 889 (U.S. N.Y. Ct. App. 1921) (where the failure was the installation in a country residence of pipe which was of identical quality but a different brand than the contractually specified pipe) and the House of Lords in Ruxley Electronics & Construction Ltd. v. Forsyth, [1995] UKHL 8 (U.K. H.L.) (where the failure was the construction of a household swimming pool to a depth of 6 feet 9 inches instead of the specified 7 feet 6 inches). In both cases, the courts discussed what approach a court should take when the contractor installs something which does not meet the specifications but causes no economic damage to the property or the owner.

The New Brunswick Court of Appeal set out the four basic ways in which damages can be assessed in these circumstances: the cost of re-instatement:

the diminution in the value of the property:

the savings by the contractor by the breach; or

the loss of amenities to the owner.

In selecting the appropriate measure of damages, the N.B. Court of Appeal referred to the classic words of Justice Cardozo in the Jacob & Youngs decision:

“It is true that in most cases the cost of replacement is the measure. The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value. Specifications call, let us say, for a foundation built of granite quarried in Vermont. On the completion of the building, the owner learns that through the blunder of a subcontractor part of the foundation has been built of granite of the same quality quarried in New Hampshire. The measure of allowance is not the cost of reconstruction. “There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable”. The rule that gives a remedy in cases of substantial performance with compensation for defects of trivial or inappreciable importance, has been developed by the courts as an instrument of justice. The measure of the allowance must be shaped to the same end.” (underlining added)

The court then devoted fourteen lengthy paragraphs to a discussion of the Ruxley decision, and concluded with this summary:

“To summarize, their Lordships are in agreement that for breach of contract, the assessment of damages begins with measuring the actual loss suffered from the unfulfilled bargain. The damage award is to place the claimant in as good a situation as if the contract had been performed. Thus, as stated by Lord Lloyd with respect to building cases, the loss is “almost always measured in one of two ways: either the difference in the value of the work done or the cost of reinstatement” ….. Reasonableness informs the assessment, resulting in cases such as Ruxley, where it would “fly in the face of common sense” to award the cost of reinstatement, but where the difference in the value of the work done amounts to nil. It is in such cases of contract deviation that their Lordships diverge somewhat in approach. However, whether referred to as a personal preference, a consumer surplus, or the loss of an amenity, each judgment rendered in Ruxley recognizes that a non-monetary loss, arising from a deviation from contract specifications, is real and deserving of compensation, despite not being easily measurable in economic terms. Taken together, the various approaches make it evident that the law of damages allows some flexibility in constructing an appropriate award.” (underlining added)

Writing for the New Brunswick Court of Appeal, Justice Robertson emphasize that this case was one of “first impression” and that “care must be taken not to lay down rules or frameworks that are too distant from the trial judge’s factual determinations.” He expressed his view about the importance of the decision as follows:

“the substantive issue at hand forces the writer to make general observations with respect to matters that may become relevant in future cases. Experience teaches that the articulation or development of legal rules or principles or legal frameworks is rarely achieved with the issuance of a solitary set of reasons. These reasons for decision should be interpreted accordingly. As they are to be released on the eve of my retirement, the task of ensuring a solid foundation to the law of New Brunswick is left with my colleagues.”

Justice Robertson then went on to make the following points:

  1. The case did not ‘raise allegations that the work performed was defective in the sense that it involved shoddy workmanship, below the “industry standard”. ‘ Accordingly the court did not have to decide whether the same approach to damages ought to be taken in the case of shoddy workmanship as opposed to a failure to meet the specifications. On the one hand, Justice Robertson was of the view that in the former case, “one is driven to expect that the law would expect the contractor to redo the work or, alternatively, provide the owner with compensation equal to the cost of reinstatement.” On the other hand, “the distinction between contract deviation and defective workmanship may be one without a difference. An appraiser may well conclude that it is not difficult to justify a diminution in value of property, due to slapdash workmanship, by reference to the cost of reinstatement. I say no more of the perceived distinction other than to point out that the law should be careful not to craft rules that serve as an incentive for builders to depart from their contractual obligations.”
  1. A different damage rule could possibly be justified when “the innocent party is a consumer who complains of contract deviation,” as opposed to the situation when “both the owner and builder are commercial parties.” Justice Robertson did not hold that there should always or necessarily be a different approach in the two cases, saying:

“Fortunately, this is not a case where breach of the contract specifications has deprived the owner of an amenity or personal preference. This is a commercial case in which the owner (Consolidated) lost 4.33 percent of the garage’s leasable floor space because of the builder’s (Diotte’s) failure to adhere to the contract specifications. The broad issue is whether it would have been reasonable to award damages equal to the cost of reinstatement ($54,000) or some lesser sum ($2,000). Evidence was led to demonstrate that Diotte had offered to undertake renovations that would have eliminated some of the deficiency in the size of the garage, but that Consolidated was unwilling to provide Diotte with access to the building. Evidence was also led at trial to establish that the tenant, who leased the property from Consolidated and for whom the property was being constructed, was prepared to enter into possession without compensation for the deficiency. In response, Consolidated argued that future tenants might not be as obliging.”

Justice Robertson also noted that the trial judge had found that Consolidated had not effected any of the repairs recommended by any of the experts and had not allowed Diotte to make the repairs that it had offered to make, leaving the trial judge with the “strong suspicion that even if the Court is to grant compensation to Consolidated to reinforce the garage or increase the usable space, the work will never be done.”

  1. Justice Robertson was strongly influenced by the absence of evidence about the impact of the deviation on the value of the property. Since the building was for rental purposes, in his view it would have been a “relatively simple matter to assess damages based on the lower of the cost of reinstatement or diminution in value of the work done. Had the appraisal revealed the fair market value of the property to be lower, because of the contract deviation, and by an amount less than the cost of the reinstatement, the court would be compelled to award damages based on the property’s diminished value. On the other hand, had the cost of reinstatement been lower than the diminished value of the property, the court would normally be compelled to award damages equal to the former….In the absence of expert evidence regarding the impact of the contract deviation on the property’s value, it cannot be assumed that an award of damages equal to the cost of reinstatement is reasonable.”
  1. However, Justice Robertson was satisfied that Consolidated was entitled to an award of nominal damages, either for lost expectations or a presumed diminishment in value. He pointed out that, to date, Consolidated has experienced no loss as a result of this missing square footage since the tenant had accepted the building as provided, and paid the rent as negotiated. Consolidated’s view that a future tenant might not be so accommodating was speculative, and Consolidated had not allowed Diotte to rectify the problem. In these circumstances, the trial judge’s award of $2,000 nominal damages was reasonable.

Discussion

This fascinating decision should definitely be put in the top drawer to be pulled out the next time we have to deal with the proper measure of damages when a contractor fails to adhere to the specifications. It contains a discussion of the relevant principles and the leading U.S. and U.K. decisions. It raises the key issues of whether damages should be assessed in a different way in the case of a commercial property as opposed to residential property, or in the case of defective work as opposed to work which deviates from the specifications.

Ultimately, however, the decision was based on the facts and the absence of evidence: the willingness of the tenant to take the building with the smaller garage; the refusal of the owner to allow the contractor to remedy the situation; the absence of any impact on market value; the absence of any savings by the contractor; and the failure of the owner to spend any money to correct the deficiency. All of these factors led both the trial judge and the Court of Appeal to conclude that it would not be fair to award the cost of correcting the deficiency to the owner.

But a decision based on facts is just as useful as one based upon law. This decision helps us provide advice to the owner or contractor about what to do or not do to support or avoid a claim for substantial damage award arising from defective work or work which does not meet the specifications. And it helps counsel decide what evidence ought to be led at trial to establish or negate the claim.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 9, part 6(m)(i)(B)

Diotte v. Consolidated Development Co. 2014 CarswellNB 410, 32 C.L.R. (4th) 282

Building Contracts – Damages – Measure of Damages – Breach of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                       February 28, 2015

www.heintzmanadr.com

www.constructionlawcanada.com