Supplier May Recover Against The General Contractor Based Upon A Promise Not To Register A Construction Lien

The Alberta Court of Appeal has recently decided an interesting issue relating to the right of a supplier to a subcontractor to enforce payment against the general contractor. The supplier alleged that the contractor had promised to pay it in exchange for the supplier’s agreement not to register a construction or builder’s lien. In Sherwood Steel Ltd. v. Odyssey Construction Inc., the Court of Appeal held that such a claim is enforceable and is not barred by res judicata, merger or abuse of process.

Background

Sherwood was a supplier to the subcontractor, Edmonton Concrete. It obtained judgement against Edmonton Concrete and was not paid. Sherwood then sued the contractor, Odyssey, alleging that Odyssey had promised to pay Sherwood if Sherwood did not register a builder’s lien. Odyssey moved for summary judgment on the basis that any such claim was barred by the fact that Sherwood had already obtained judgment against Edmonton Concrete and that its cause of action “merged” in that judgment and could no longer be asserted. The motion judgment agreed and dismissed the action.

Alberta Court of Appeal’s decision

The Alberta Court of Appeal allowed the appeal on three grounds.

First, since Odyssey was not a party to the first action against Edmonton Concrete, and was not privy to Edmonton Concrete, the basic principles of res judicata did not apply.

Second, the claim by Sherwood against Odyssey was not based on the same cause of action. Sherwood’s claim against Edmonton Concrete was based upon a contract between that company and Sherwood. Sherwood’s claim against Odyssey was based upon an entirely different contract between Odyssey and Sherwood.

Third, Sherwood’s claim was not barred as an abuse of process.   Odyssey argued that Sherwood’s claim against it would lead to double recovery. The Court of Appeal said that this would depend upon the proper interpretation of the contract between Sherwood and Odyssey. If the contract was to pay the indebtedness only to the extent that Edmonton Concrete did not pay, then no double recovery would arise.

The Court of Appeal held that, even if Sherwood’s claim against Odyssey was a separate cause of action not affected by recovery against Edmonton Concrete, this would not support the dismissal of Sherwood’s claim as an abuse of process. It said:

“It is not the law that parties are precluded from obtaining two separate judgments for the same loss. For example, the general rule is that there is no bar to a creditor bringing separate actions against both the debtor and guarantors….This is a particularly apt analogy here, given Edmonton Concrete’s financial difficulties which left Sherwood Steel looking to file a builder’s lien against title to the project lands. Just as it is no abuse of process for a creditor to obtain judgment on the debt and then sue on the guarantee, it is no abuse of process for Sherwood Steel to obtain judgment against Edmonton Concrete and then, not having received satisfaction, sue Odyssey on its alleged promise to pay. While their obligations may (again, depending on the interpretation of the contract between Sherwood Steel and Odyssey) be co-extensive, they are each separate and distinct, and as such may be asserted in different actions.”

The Court of Appeal also held that the fact that the damages were identical in each claim was not a bar to the second action. It said that “Our civil procedure permits multiple suits for the same damage” and continued:

“Contractors, architects and engineers who caused the same damage through separate breaches of separate contracts can be sued separately. Owners of motor vehicles can be sued separately from the operator for the same damage. Where all potential defendants are known from the outset (which would not have been the case on the facts alleged here, since Odyssey’s breach is said to have occurred only after Sherwood Steel obtained judgment against Edmonton Concrete), separate actions for the same loss are obviously an inefficient use of litigants’ and court resources. But that can be addressed under rule 3.72 of the Rules of Court (“Consolidation or Separation of Claims and Actions”). The point is that the mere fact of multiple potential judgments for the same loss does not denote an abuse of process, or even a potential abuse of process.”

The Court of Appeal went on to hold that the trial court had ample procedural mechanism to avoid double recovery, in particular by crafting the final judgment to ensure that that did not occur. However, it warned against the court being too cautious about fully awarding judgments to Sherwood. Rather, double recovery could be dealt with during the judgment enforcement process or by the judgment debtors dealing with the problem between themselves:

“I see no impediment in contract law to dividing liability between two parties who have breached two different contracts, causing the same damages to a plaintiff. Indeed, those avenues of recourse for Odyssey make it preferable that a specific, unconditional judgment for the full amount of the award be stated on the order. In other words, civil enforcement, whether by way of contribution between judgment debtors or set-off as between a judgment debtor and its judgment creditor, is a better route for avoiding over-compensation than adding contingent language to an order.”

Discussion

Lawsuits arising from construction projects can be numerous and complicated. They may run into various rules or doctrines designed to avoid multiplicity of proceedings. But ultimately the court must look through the whole process and do what’s fair and not allow the doctrines to get in the way.

When suppliers and subcontractors are unpaid, then there must be very good reason before court procedural rules bar their claims. In this case, the Alberta Court of Appeal was not prepared to allow those rules to stand in the way of a trial of the merits of the claim.

Interestingly, the Court of Appeal had no concern about Sherwood giving up its claim for a builder’s lien in entering into the contract with the contractor. The supplier agreed not to exercise a statutory right, and one which was against the owner. Yet, the court considered that agreement to be good consideration for the contract with the contractor. That result seems appropriate since the filing of a lien would likely have had a negative effect on the contractor in the form of additional holdbacks by the owner.

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

Sherwood Steel Ltd. v. Odyssey Construction Inc., 2014 CarswellAlta 1750, 2014 ABCA 320

Construction and Builder’s liens  –  Merger  –  Res judicata  –  Abuse of process

Thomas G. Heintzman O.C., Q.C., FCIArb                                               February 18, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

 

 

Arbitration Award Enforced Through The Oppression Remedy

Arbitration law and corporate law are usually thought to be two separate legal categories. But when it comes to remedies, they can overlap, especially in Canada where the oppression remedy is available. In the recent decision in T.Films S.A. Future Films (Three) Ltd. v. Cinemavault Releasing International Inc., the Ontario Supreme Court of Justice relied upon the oppression remedy in the Ontario Business Corporations Act (OBCA) to enforce an arbitral award. Any parties coming to Ontario to enforce arbitration awards against Ontario corporations, or person or corporations affiliated with an Ontario corporation, should be aware of this means of enforcing the award.

Background

The applicants were Luxembourg and U.K. companies which in 2004 entered into a film sales agency agreement with the respondent Cinemavault, an Ontario company. That agreement provided that any disputes under it were to be resolved by arbitration in Toronto in accordance with rules and procedures established by the Independent Film and Television Alliance (IFTA).

The applicants commenced an arbitration seeking to exercise contractual audit rights and for unpaid distribution revenues. The respondents failed to participate in the arbitration and ultimately the arbitrator awarded the applicants damages and costs in the total amount of about US $496,000.00.

The award was not paid and in May 2013, the applicants applied to the Ontario Superior Court to enforce the award. In their application the applicants also sought enforcement of the award by way of the oppression remedy in the OBCA. The applicants also asserted the monies received by the respondents were trust funds held for their benefit. In a prior decision, another judge of Ontario Superior Court had granted judgment enforcing the award and ordered that the balance of the application be dealt with in a separate hearing. In addition, in a further hearing another judge of the Superior Court had dismissed the respondents’ argument that the oppression and trust fund claims ought to have been asserted by way of arbitration.

The Decision

The Court found that the individual person behind the Cinemavault companies had:

“used the Cinemavault companies interchangeably to achieve whatever ends were thought desirable at the time. He cannot, under the law articulated in Sidaplex-Plastic and SCI, supra, treat his corporations’ contractual and financial obligations like an elaborate shell game where, unless the pea happens to sit under the shell selected by a creditor, [the principal] and his companies are judgment proof.”

The court concluded that the re-orgainzation of the Cinemavault companies was “carried out for the purpose, of denuding CRI of its assets such that it was not in a position to fulfill its financial obligations to the applicants under” the sales agreement. The court accordingly concluded that the respondents had acted in a manner which was oppressive and unfairly prejudicial to the applicants.

In making an order against Mr. S., who was a director of Cinemavault, the court said that person was:

 “the directing mind of the Cinemavault operating corporations and the corporations, ……. which held the controlling interest over the operating corporations. He derived a direct personal benefit from the reorganization of Cinemavault’s business operations. Funds that the arbitrator found ought to have been paid to the applicants were diverted within the Cinemavault group to [the director’s] ultimate benefit. I conclude, therefore, that qua director [Mr. S]….. through the control he exercised over the Cinemavault companies, acted in a manner which was oppressive and unfairly prejudicial to Cinemavault’s creditors, namely the applicants. I therefore find [the director] to be personally liable for the arbitration award as well.”

The court also found that the funds received from the film distribution were trust funds in respondents’ hands. The Court then found that the respondents had knowingly participated in a breach of trust and knowingly received trust funds which they knew to be the rightful property of the applicants and were therefore liable for the arbitrator’s award for knowing participation in a breach of trust.

Discussion

It is unusual to see an application to enforce an arbitration award combined with other remedies. But this decision demonstrates that there may be more than one arrow in the enforcement quiver.

The oppression remedy is a particularly useful remedy if an arbitral award has been made against a corporation incorporated in a Canadian province. Most of those provinces have a Business Corporations Act or other corporate statute that contains the oppression remedy. The oppression remedy is available if the corporation, or its directors, officers or affiliates have conducted themselves in a manner which is oppression of, or unfairly prejudices the complainant or unfairly disregards the complainant’s interests. In some provinces, such as Alberta, creditors are listed as potential complainants. In other provinces, such as Ontario, creditors are not so listed and the court has to determine that a creditor is a proper complainant.

The oppression remedy usually provides a substantive remedy. That is, it usually addresses the wrongful conduct or management of the corporation which leads to a substantive wrong and the institution of an action or arbitral claim. But it may also provide a remedy after a judgment or award has been obtained, if oppressive conduct occurs which renders the corporation unable to pay the judgment or award. If that occurs, then the oppression remedy may be available to recover against the directors and affiliates who engaged in that conduct.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 9.

T.Films S.A. Future Films (Three) Ltd. v. Cinemavault Releasing International Inc., 2015 CarswellOnt 112, 2015 ONSC 6608

Arbitration – Enforcement of Arbitral Award – Oppression Remedy

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                             January 31, 2015

 

 

 

No Appeal From Order Appointing An Arbitrator: Ontario Court of Appeal

In a recent decision, the Ontario Court of Appeal has held that there is no appeal from an order appointing an arbitrator. This decision highlights the legislative policy in Canada that the courts should take a hands-off approach to arbitration.

Background

In Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, the parties had entered into an agreement called the Complex Reciprocal Agreement (the “CRA”). The CRA related to the management of the common facilities, areas and services of a condominium in a development called Maple Leaf Square. The CRA contained an arbitration clause.

The Condominium Corporation issued a notice of arbitration seeking arbitration under the CRA and the Arbitration Act, 1991 and proposed a named arbitrator. The CRA required the respondents to give notice whether or not they accepted the proposed arbitrator. The responding parties failed to give such notice. The Condominium Corporation then applied to the court for the appointment of an arbitrator, nominating two persons.

Decision of application judge

Before the application judge, the respondents took no issue with the process of proposing an arbitrator and did not object to the individuals proposed by the Condominium Corporation to act as arbitrator. Rather, they submitted that the issues proposed to be arbitrated did not fall within the arbitration agreement, and so there was no point in appointing an arbitrator. The application judge held that there was at least one issue that arguably fell within the jurisdiction of the arbitrator and that an arbitrator should be appointed and determine his jurisdiction, and appointed one of the nominees as arbitrator.

Decision of Ontario Court of Appeal

In the appeal, the respondents sought to argue that the application judge was required to assess each of the issues raised in the notice of arbitration and to refer only those that she determined were arbitrable or at least potentially arbitrable under the arbitration agreement. However, they accepted that the application judge had authority to appoint an arbitrator. They only took issue with the scope of the matters to be referred to the arbitrator.

The Court of Appeal held that the respondents in the application were not entitled to appeal the order appointing the arbitrator. That is because section 10(2) of the Arbitration Act, 1991 states that “[t]here is no appeal from the court’s appointment of the arbitral tribunal.” Accordingly, the respondents appeal was quashed.

The Court of Appeal distinguished its prior decision in Brennan v. Dole (2005), 11 B.L.R. (4th) 169. There, the court held the purported arbitration agreement was not enforceable by the respondents against the appellants. Accordingly, there was no basis for an arbitration proceeding against the respondent, and accordingly jurisdiction at all to appoint an arbitrator.

Discussion

This decision highlights two features of the Ontario Arbitration Act, 1991.

First, the Act states in a number of places that there is no appeal from an order made by the court relating to arbitration. Thus, as noted in this decision section 10(2) says there is no appeal from an order appointing an arbitrator. Section 7(6) says that there is no appeal from a court decision about staying an action when there is an arbitration agreement between the parties. Section 15(6) says that there is no appeal from an order removing an arbitrator (except for an order concerning fees or compensation). Section 17(9) says that there is no appeal from the court’s review of a preliminary decision by the arbitral tribunal as to its jurisdiction.

Clearly, these sections represent a policy that the courts should not be involved in the arbitral process. So if there is to be a review of the arbitral decisions mentioned in these sections, then there is to be only “one kick at the can”, and no more. Since these sections do not involve matters going to the merits of the dispute, the policy is to let the matter rest with no more than one level of court review.

Second, this decision reflects another feature of arbitral law in Canada, namely deference to the arbitral tribunal’s jurisdiction, and respect for the tribunal’s competence to decide its own competence – known as the competence-competence principle. In the present case, the Ontario Court of Appeal held that, as long as it was arguable that the arbitral tribunal had authority over something in relation to the dispute, it was the arbitral tribunal – and not the court – which should first decide what that authority was. Then, a party could seek review of that decision by the court. But in the first instance, the respondent could not require the court to define the jurisdiction of the arbitral tribunal during the arbitral-appointment process.

There is a limit to that deference, however. The courts have allowed appeals if the legal issue or jurisdictional issue is clear. Thus, if a stay of a court proceeding is refused on the ground that no arbitration agreement is in place, then an appeal may be taken since the issue is entirely legal or jurisdictional. And as the Brennan v. Doyle case shows, if on a correct view of the facts and law there is no arbitration agreement applicable to the dispute, then an appeal may be taken from an order appointing an arbitrator.

All of which shows that in Ontario, both the statute and judicial policy are in favour of letting the arbitrator make the first decision about the jurisdiction of the arbitrator, but only if there is an arguable basis for that jurisdiction.

Toronto Standard Condominium Corporation No. 2130 v. York Bremner Developments Limited, 2014 ONCA 809

arbitration – appointment of arbitrators – appeal – competence-competence

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

www.heintzmanadr.com

www.constructionlawcanada.com

What Is An “Organizing Principle”, a “Duty” And A “Term” Of A Contract?”

In the last two articles I have been considering the recent decision of the Supreme Court of Canada in Bhasin v. Hrynew. In its decision, the Supreme Court of Canada established two fundamental principles for the Canadian common law of contract.

First, it is an “organizing principle” of contract law that the parties must perform the contract in good faith.

Second, the parties have a duty to act honestly in the performance of contracts.

In its decision the Supreme Court said that this “organizing principle” and “duty” are not “terms“of the contract, so the parties cannot contract out of them. Yet, the court found that the defendant had breached the contract by acting dishonestly. How could the defendant breach the contract if this obligation or duty are not terms of the contract?

Background

A reminder about the facts which were found by the trial judge. Bhasin and Hrynew were both retail dealers who marketed education savings plans developed by Canadian American Financial Corp. (“Can-Am”). Bhasin’s agreement with Can-Am was for a term of three years and automatically renewed unless one of the parties gave six months’ notice of termination.

Hrynew was a competitor of Bhasin and wanted to take over Bhasin’s agency. He campaigned with Can-Am to direct such a merger of the agencies. Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew. Bhasin sued Can-Am and Hrynew.

The trial judge held that a term of good faith performance should be implied based on the intentions of the parties in order to give business efficacy to the agreement. The trial judge found that Can-Am had breached that implied term in its contract with Bhasin. He found that Can-Am had dealt dishonestly with Bhasin.

The Supreme Court of Canada restored the trial judge’s finding that Can-Am had breached its contract with Bhasin by dealing with him dishonestly.

Decision of the Supreme Court relating to Organizing Principles and Terms of the Contact

Speaking for a unanimous court, Justice Cromwell stated the following propositions:

“…good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. …a further manifestation of this organizing principle of good faith…is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.” (underlining added)

The Supreme Court explained what it meant by “an organizing principle.” Such a principle “states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations.”

Having recognized the organizing principle of good faith performance of contracts, Justice Cromwell held that the court should now recognize a contractual duty of honest performance:

“I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step.”

Justice Cromwell then summarized the position:

“(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.” (underlining added)

Justice Cromwell then discussed the nature of these duties and organizing principles. He held that:

“a new duty of honest performance….should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.”

He then noted that;

“There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law… I do not have to resolve this debate fully, which…casts a shadow of uncertainty over a good deal of the jurisprudence.  I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties……. Viewed in this way, the entire agreement clause in cl. 11.2 of the Agreement is not an impediment to the duty arising in this case. Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it.” (underlining added)

In any event, he concluded that since “the duty of honest performance interferes very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance of their obligations.” However, Justice Cromwell did not discount the possibility that the parties might try to limit their obligations of good faith and honesty. He said:

“I would not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.”

When it came time to apply these principles to the actual facts, Justice Cromwell found that “Can-Am breached its duty to perform the Agreement honestly.” He concluded that:

“this dishonesty on the part of Can-Am was directly and intimately connected to Can-Am’s performance of the Agreement with Mr. Bhasin and its exercise of the non-renewal provision. I conclude that Can-Am breached the 1998 Agreement when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause.”

Discussion

This decision leaves us asking a number of questions:

Did Can-Am breach a term of the contract? If it didn’t, how could it be in breach of the contract? If it did, what term did it breach?

Is the “organizing principle” of good faith performance a term of the contract?

Is the duty of honest performance a term of the contract?

The answer to the last two questions seems to be No. The Supreme Court differentiated between an “organizing principle” and a duty and a term. It held that good faith performance fell into the first category, an organizing principle. It held that honesty fell into the second category, a duty. It held that neither the “organizing principle” of good faith nor the ”duty” of honest performance amounted to a term, with the result that the parties cannot contract out of them and the entire agreements clause does not apply to them.

If that is so, it is hard to see how a breach of these non-terms can amount to a breach of the contract. In addition, how should drafters of contracts deal with these non-terms? The parties may want to define what is permissible conduct so that no argument can be made that it is in bad faith or dishonest. While Justice Cromwell said that the parties are entitled to “relax the requirements of the doctrine” of honest performance as long as they respect the “core requirements” of the doctrine, how do they do so since these concepts are, according to the Supreme Court, not part of the contract? Will the terms that the parties write into the contract be effective, and to what degree?

The concept of “organizing principles” has been adopted by the Supreme Court in various areas of the law. For instance, it has been used by that court in the law relating to conflict of laws, criminal law, constitutional law and employment law. But contract law is very different from those areas of law because, in their contract, the parties can make their own law and contract out of other legal principles, unless precluded by some principle of law from doing so.

In those other areas of law, there has been a tension between “organizing principles” and the substantive law. In the Provincial Judges’ Reference (1997), Chief Justice Lamer noted that the preamble to the Constitution Act, 1867 “recognizes and affirms the basic principles which are the very source of the substantive provisions of the Constitution Act, 1867.” He continued:

“although the preamble is clearly part of the Constitution, it is equally clear that it has no enacting force…In other words, strictly speaking, it is not a source of positive law, in contrast to the provisions which follow it. …But the preamble does have important legal effects. Under normal circumstances, preambles can be used to identify the purpose of a statute, and also as an aid to construing ambiguous statutory language…. The preamble to the Constitution Act, 1867, certainly operates in this fashion. However, in my view, it goes even further……It recognizes and affirms the basic principles which are the very source of the substantive provisions of the Constitution Act, 1867. As I have said above, those provisions merely elaborate those organizing principles in the institutional apparatus they create or contemplate. As such, the preamble is not only a key to construing the express provisions of the Constitution Act, 1867, but also invites the use of those organizing principles to fill out gaps in the express terms of the constitutional scheme. It is the means by which the underlying logic of the Act can be given the force of law.” (underlining added)

If the “organizing principles” of contract law are of this nature, can a breach of them amount to a breach of contract?

A further question arises. Does the decision in Bhasin v. Hrynew re-introduce, in one form or another, the doctrine of fundamental term or fundamental breach that the Supreme Court of Canada discarded in the Tercon v. British Columbia decision (2010)? Is the Supreme Court saying in Bhasin v. Hrynew that there are some core elements of contractual conduct –now defined more by morality than by the terms of the contract – which the parties cannot contract out of?

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Performance – Good Faith –  Honest Performance

Thomas G. Heintzman O.C., Q.C., FCIArb                                        December 20, 2014

tgh@heintzmanadr.com

constructionlawcanada.com

 

 

 

The Supreme Court Of Canada Avoids The Open Windows Issue

In my last article, I dealt with the recent decision of the Supreme Court of Canada in Bhasin v. Hrynew. In that decision, the Supreme Court of Canada established two fundamental principles for the Canadian common law of contract:

First, that the parties are under a general obligation to perform contracts in good faith; and

Second, that the parties have a duty to act honestly in the performance of contracts.

There was a third issue before the court, and that was whether the plaintiff had suffered any recoverable damage. The Alberta Court of Appeal had held that, whether or not the defendants had acted honestly or in bad faith, the defendant Can-Am had the right to not extend the contract and had chosen not to. Therefore, Bhasin had no right to recover any damages. The Alberta Court of Appeal said:

[Can-Am] had a right to end the contract at the end of three years. The law of damages presumes that a party will use the least expensive method to perform. So (for example) employment contracts do not yield damages beyond the date at which the defendant could have ended the contract. See Hamilton v. Open Window Bakery Ltd. (2003), 2004 SCC 9, [2004] 1 S.C.R. 303, 316 N.R. 265(S.C.C.) (paras 11-20). Therefore, since the contract was performed up to its expiry date, in law there was no loss, and no damages are payable. That is an additional reason to dismiss the suit.”

In its decision in Bhasin v. Hrynew, the Supreme Court did not mention its decision in Open Windows Bakery and the principle stated in that case. Accordingly, it is necessary to determine if any hints can be derived from the Bhasin case about how to deal with the principle in Open Windows Bakery.

Background

The following facts were found by the trial judge in Bhasin v. Hrynew. Bhasin and Hrynew were both retail dealers who marketed education savings plans developed by Canadian American Financial Corp. (“Can-Am”).   Bhasin’s agreement with Can-Am was for a term of three years and automatically renewed unless one of the parties gave six months’ notice of termination.

Hrynew was in effect a competitor of Bhasin and wanted to take over Bhasin’s agency and he campaigned with Can-Am to direct such a merger of the agencies. Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. When Bhasin continued to refuse to allow Hrynew to review his records, Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew.  Bhasin sued Can-Am and Hrynew.  The trial judge held that Can-Am breached the implied term in its contract with Bhasin that the contract would be performed in good faith. He found that Can-Am had dealt dishonestly with Bhasin.

The Supreme Court of Canada restored the trial judge’s finding that Can-Am had breached its contract with Bhasin by dealing with him dishonestly. It was then a question of determining the damages to which Bhasin was entitled.

Supreme Court’s Decision re Damages

The Supreme Court referred to the trial judge’s finding that, even though Can-Am had a right to not extend the term of the agency, the agency still had value and Bhasin could have sold it. The Supreme Court said:

“The trial judge specifically held that but for Can-Am’s dishonesty, Mr. Bhasin could have acted so as to “retain the value in his agency”: paras. 258-59. In reaching this conclusion, the trial judge was well aware of the difficulties that Mr. Bhasin would have in selling his business given the “almost absolute controls” that Can-Am had on enrollment directors and that it owned the “book of business”: para. 402.  She also heard evidence and made findings about what the value of the business was, taking these limitations into account.  These findings, in my view, permit us to assess damages on the basis that if Can-Am had performed the contract honestly, Mr. Bhasin would have been able to retain the value of his business rather than see it, in effect, expropriated and turned over to Mr. Hrynew.”

The Supreme Court then referred to the evidence of Can-Am’s expert who said that the value of Bhasin’s agency around the time of non-renewal was $87,000. The court was satisfied that the trial judge had found that Bhazin’s business was worth $87,000 at the time that his agreement with Can-Am expired. In the appeal to the Supreme Court, Can-Am argued that the evidence of their expert established that the value of Bhazin’s agency was $87,000. Accordingly the Supreme Court concluded that Bhazin’s damages were $87,000.

Discussion

It is, perhaps, not very useful to discuss what the Supreme Court of Canada did not decide, but any chance to discuss the Open Windows Bakery decision must be taken. That case presents a challenge to those trying to understand and fairly apply the Canadian law of contract damages.

The Alberta Court of Appeal correctly stated that, in Open Windows Bakery, the Supreme Court held that contract damages are to be calculated on the basis that the defendant was entitled to use the least expensive method to perform. If the defendant could have terminated the contract in another way which would have entitled the plaintiff to no damages, then that is the amount to which the plaintiff is entitled. Apparently, that formula is to be applied no matter how unlikely it would have been for the defendant to have so acted. To what extent the defendant is entitled to unscramble events which have actually occurred, and which involved third parties, tax implications and other facts totally outside the contractual performance itself, is as yet unclear.

In Bhazin v. Hrynew, the Supreme Court held that because the Bhazin agency was worth a certain amount at the time of the breach of contract, therefore Bhazin was entitled to that amount of damages. However, the connection between the two – the value of the agency and the entitlement of the plaintiff to damages in that amount – is not clear. If Can-Am was entitled to allow the agency to terminate, what difference does it make how much it was worth?

The Supreme Court did not mention Open Windows Bakery in its decision, so we are left to draw the conclusions ourselves. It is clear that the Supreme Court held that the dishonesty of Can-Am was a separate breach of contract, quite apart from the termination of the contract by expiry of its term. Based upon that holding, it may be that the Supreme Court has held that damages for dishonesty may be assessed without regard to the principle in Open Windows Bakery. Or that a breach of contract arising from dishonesty gives rise to separate causation, and therefore the entitlement of the defendant to terminate the contract is not relevant. Or it may be that Open Windows Bakery does not apply to contracts which expire but only to contracts which are terminated in a less onerous way by the defendant.

Other possible explanations about why Open Windows Bakery did not apply will certainly be drawn from the decision in Bhazin v. Hrynew. There seems little doubt that the latter decision will be relied upon in the future to narrow what some argue is the unfair rule in the former.

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Damages – Least Onerous Performance  – Honest Performance

T.G. Heintzman O.C., Q.C., FCIArb                                             December 7, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Contracts Must Be Honestly Performed Says The Supreme Court of Canada

In its recent decision in Bhasin v. Hrynew, the Supreme Court of Canada has established two fundamental principles for the Canadian common law of contract.

First, parties are under a general obligation to perform contracts in good faith.

Second, the parties have a duty to act honestly in the performance of contracts. These contractual obligations can no longer be relegated to some kinds of contracts or situations. Rather, they are principles that apply to every sort of contract.

It is, perhaps, somewhat surprising that these principles were still in dispute under Canadian contract law and that the Supreme Court had not previously ruled on them. Having now done so in Bhasin v. Hrynew, this decision is of great importance to the common law of contract in Canada and should be well understood by anyone concerned with the performance of contracts.

Background

The following facts were found by that trial judge:

Bhasin and Hrynew were both retail dealers who marketed education savings plans developed by Canadian American Financial Corp. (“Can-Am”).   Bhasin’s agreement with Can-Am was for a term of three years and automatically renewed unless one of the parties gave six months’ notice of termination.

Hrynew was in effect a competitor of Bhasin and wanted to obtain capture Bhasin’s market. On many occasions, Hrynew had proposed to Bhasin that they merge their dealerships and he campaigned with Can-Am to direct such a merger. Bhasin had resisted any such merger. Can-Am appointed Hrynew as the officer to review dealership compliance with securities laws, but Bhasin object to Hrynew reviewing his business records.

Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. When Bhasin continued to refuse to allow Hrynew to review his records, Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew.

Decisions of the Trial Judge and Alberta Court of Appeal

Bhasin sued Can-Am and Hrynew.  The trial judge held that Can-Am breached the implied term in its contract with Bhasin that the contract would be performed in good faith. He found that Mr. Hrynew pressured Can-Am not to renew its Agreement with Mr. Bhasin and that Can-Am dealt dishonestly with Mr. Bhasin and ultimately gave in to that pressure.

The Court of Appeal allowed the appeal and dismissed B’s lawsuit. The court held that there was no self-standing contractual duty of good faith in Canadian law. In addition, the court found that Bhasin had suffered no recoverable damages because, quite apart from any alleged bad faith conduct by it, Can-Am was entitled in any event to give notice of non-renewal of the contract.

Decision of the Supreme Court of Canada

The Supreme Court forthrightly stated that it was necessary to clarify – or some might say, reform – the Canadian common law relating to the performance of contracts. Speaking for a unanimous court, this is how Justice Cromwell approached the matter:

“In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.” (emphasis added)

The Supreme Court explained what it meant by “an organizing principle.” Such a principle “states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations.”

Having recognized the organizing principle of good faith performance of contracts, Justice Cromwell held that the court should now recognize a contractual duty of honest performance:

“I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step.”

Justice Cromwell then summarized the position in three paragraphs which should be duly noted for application in future cases:

“A summary of the principles is in order:

(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.” (emphasis added)

Having stated the legal principles, Justice Cromwell found that Can-Am had breached its contractual duty of honest performance. Can-Am wanted to force a merger of the Bhasin and Hrynew agencies, effectively giving Mr. Bhasin’s business to Mr. Hrynew. To accomplish that end, it acted dishonestly with Bhasin throughout the period leading up to its exercise of the non-renewal clause. It told the Alberta Securities Commission that Bhasin’s agency was to be merged under Hrynew’s but it said nothing of this to Bhasin. Can-Am was working to forestall the Commission’s termination of its license in Alberta and was prepared to do whatever it could to forestall that possibility.  When questioned by Bhasin about Can-Am’s intentions with respect to the merger, it equivocated and did not tell him the truth. Nor was it truthful with Bhasin about its dealings with the Commission and the Commission’s intentions, and repeatedly misrepresented to Bhasin that he was bound by duties of confidentiality. Can-Am continued to insist that Hrynew audit Mr. Bhasin’s agency, on the supposed basis that it required to do so by the Commission, even though it arranged for its own employees to conduct the audit of Hrynew’s agency.

The Supreme Court noted that the trial judge had found that this dishonesty on the part of Can-Am was directly and intimately connected to Can-Am’s performance of its agreement with Bhasin and its exercise of the non-renewal provision. The court concluded that “Can-Am breached the 1998 Agreement when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause.”

Discussion

The decision in Bhasin v. Hrynew is significant on three levels.

First, it firmly establishes good faith performance as an organizing principle in the common law of contract in Canada. From now on, the interpretation of all contractual obligations of performance involves asking this question: is this interpretation consistent with good faith performance? Similarly, the actual performance of contracts can be analyzed by asking this question: does this conduct amount to the good faith performance of the contract?

Second, every contract will now have an implied term that the contract will be performed honestly. In Bhasin v. Hrynew, the Supreme Court noted that Bhasin was not a franchisee of Can-Am. Nor was there any fiduciary obligation between the two parties. Bhasin’s claim was dealt with on the basis of the general law of contract. Accordingly, the court’s conclusions will apply to all contracts.

It appears that the parties cannot contract out of these duties. In the Bhasim decision, the Supreme Court said that “because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it”. However, Justice Cromwell did say that he would “not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.” In any event, it’s hard to imagine parties to a contract expressly agreeing that ‘dishonest performance of this contract shall be permitted” or words to that effect.

Third, the facts in the Bhasin v. Hrynew case provide good examples of the kind of circumstances that may constitute dishonest contractual performance. Misleading or acting untruthfully toward the other party, particularly in the lead-up to the termination of the contract or contractual rights; misrepresenting the intentions of a regulatory tribunal or dealings with the tribunal; and preferring one contracting party over another in a like position; all have the potential to amount to dishonest performance of the contract.

Honesty is, however, a word which may have different meanings in different circumstances. It may mean one thing for the principles of equity and another thing for the principles of criminal law. Using the conclusions in Bhasin v. Hrynew, Canadian courts will now, through actual cases, develop the scope of that word for Canadian contract law, just like they have with the words “reasonable”, and “good faith”. This is a serious matter for building contracts and one which American courts have wrestled with. Thus, for a cost plus contract, what sort of unjustified additions to the costs amount to “dishonesty”? What sort of mis-management of a project site amount to “dishonesty”? Perhaps we just know it when we see it.

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Performance – Good Faith – Honest Performance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                              November 30, 2014

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www.constructionlawcanada.com

 

 

 

A Mediation Obligation Is Enforceable Says The Ontario Court of Appeal

Is a person bound to mediate before commencing an action or arbitration if the contract or applicable statute requires mediation? Or should an obligation to mediate only become effective after an action or arbitration has been commenced? And if mediation is a pre-condition to suing or arbitrating, does the limitation period run before the mediation occurs?

In Madder v. South Easthope Mutual Insurance Co., the Ontario Court of Appeal recently held that if a statutory claims regime states that claimant must seek mediation of the dispute, then the claimant has no claim unless mediation has been attempted. The court also held that, under the applicable no fault insurance regime in question, the claimant had no claim unless the claimant had returned the funds already paid to her.

While this decision was made in the context of no fault automobile insurance legislation, it has real implications for all claims, particularly arbitration claims or claims involving the limitation period.

Background

In July, 2002, Ms. Madder was involved in a motor vehicle accident. She was insured by South Easthope under a no-fault policy for accident benefits governed by the Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, O. Reg. 403/96 (the “SABS”). She immediately applied for accident benefits pursuant to the SABS and in August, 2002, she began receiving income replacement benefits.

In April, 2003, South Easthope gave Ms. Madder notice that it was terminating the benefits claiming that Ms. Madder was able to resume her employment duties, and in May 2003 South Easthope stopped paying income replacement benefits to Ms. Madder.

In July 2003, before a DAC assessment could take place, and in exchange for a lump sum payment of $3,000, Ms. Madder signed a release in which she released South Easthope from any obligation to pay accident benefits.

The circumstances in which that release was signed were disputed. Ms. Madder said that South Easthope’s adjuster showed up at her apartment and convinced her to sign the release in exchange for the $3,000 and that she felt compelled to accept the settlement. According to South Easthope, Ms. Madder initiated the discussions due to her financial difficulties.

In April 2005, Ms. Madder commenced an action against South Easthope. In August, 2005 South Easthope advised Ms. Madder that she had a statutory obligation to repay the settlement funds received and to mediate the dispute through the Financial Services Commission of Ontario (“FSCO”) before commencing her action. In its defence, South Easthope pleaded that the action should be dismissed because, inter alia, Ms. Madder had not satisfied the statutory prerequisites to litigation.

Motion Judge’s Decision

Each side brought summary judgment motions. The motion judge dismissed Ms. Madder’s motion and granted South Easthope’s motion. The motion judge held that Ms. Madder was obligated to repay the settlement funds and proceed to mediation before she could commence litigation. The motion judge also held that Ms. Madder could not bring the claim as a stand-alone action not subject to the statutory requirements. Her claim was about her right to rescind the settlement agreement and claim accident benefits since the settlement date and such a claim was subject to the mandatory mediation provisions. Her claims of mental distress and bad faith were not independent causes of action but, rather, arose from South Easthope’s alleged breach of the insurance policy.

Court of Appeal’s Decision

The Court of Appeal held that Ms. Madder’s claims, whether asserted in an action or by way of FSCO arbitration, were subject to the statutory obligation to first seek mediation. “Without mediation”, the court said, “the court had no jurisdiction to hear the appellant’s claim.”

The court also held that, before Ms. Madder could assert a claim to rescind the settlement agreement, she was obliged to return any settlement moneys, pursuant to s. 9.1(7) of the automobile Insurance Regulation; and under s. 8.1(8) of the same Regulation she was not entitled to commence a mediation unless she returned the settlement funds.

The court held that Ms. Madder’s claims for conspiracy and bad faith also fell within the statutory regime and could not be asserted in the absence of Ms. Madder instituting mediation and returning the settlement funds.

Discussion

This decision raises, once again, the nature of an “obligation” to mediate. Is it an enforceable obligation, and is it a precondition to the existence of a cause of action? In this decision, the Court of Appeal has answered Yes to both of these questions. But is this the right legal and public policy result?

There is a body of law holding that an obligation to mediate is not an enforceable obligation because it is no more than an obligation to negotiate, which is too uncertain to constitute a legal obligation. The decision of the English Court of Appeal in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A., [2012]EWCA Civ. 648 is the leading decision to that effect. That decision was discussed in my article dated July 9, 2012 and this issue was also addressed in my articles dated July 27, 2014, Feb. 2013 and July 2014. However, in Madder v. South Easthope Mutual Insurance Co., the Ontario Court of Appeal has concluded, or proceeded on the assumption, that the obligation to mediate is enforceable and disentitles the claimant from commencing proceedings.

Even if the obligation to mediate is enforceable, what is the effect of that obligation? Does it mean that the claimant has no cause of action until mediation occurs, as the Court of Appeal has apparently found? Or does it mean that there is a cause of action but the court or arbitrator can stop it from being further prosecuted until the obligation to mediate is fulfilled? If this is second approach is adopted the result, then the action or arbitration is properly commenced but may be stayed pending a mediation.

There are a number of reason for questioning the approach adopted by the Court of Appeal. If mediation must be sought before a cause of action arises, then Ms. Madder’s cause of action remains suspended. The limitation period has not yet started to run because the mediation has not occurred. That means that Ms. Madder can now seek mediation and pay back the settlement money and go on with her claim. That approach allows actions or arbitrations to be continued long after the events in question have occurred. That, it could be argued, is not a good public policy result.

The other view of the matter is that the cause of action accrued when the insurer terminated payment. It was then that the claimant could start the action. Mediation is an element in the court’s or arbitrator’s jurisdiction to deal with the action, not a pre-condition to the existence of a cause of action. That view reflects the fact that mediation is part of, and not a precursor to, the court’s jurisdiction under the rules of civil procedure. That view would enable the court or arbitrator to stay the action until mediation occurs, if that is appropriate in all the circumstances.

If Ms. Madder, or another claimant, seeks to argue that the limitation period has not run until mediation has occurred, it will be interesting to see what decision the court arrives at. In the meantime, it will be important to pay close attention to a mediation obligation and the limitation period. Proceed with mediation if there is an obligation to do so, but be ready to commence an action or arbitration if the limitation period is expiring based on the events giving rise to the claim, even if the mediation hasn’t been completed.

Madder v. South Easthope Mutual Insurance Co., 2014 CarswellOnt 14500, 2014 ONCA 714

Mediation – Limitation Period – Commencement of proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                 November 16, 2014

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Eight Rules of Tender Law Pronounced By The Ontario Court Of Appeal

In Rankin Construction Inc. v. Ontario, the Ontario Court of Appeal recently made a number of significant rulings in a tender case. While the rulings were based upon the specific wording of the tender in that case, they were made in the context of a major Ontario highway tender and appear to have wider application.

Factual Background

The Ministry of Transportation of Ontario (MTO) issued an invitation to tender for the widening of Highway 406. The invitation to tender required a bidder to declare the value of imported steel in its bid. The invitation stated that a 10 percent preferential allowance would be granted for domestic steel but that allowance did not apply H-Piles. Rankin did not declare the value of H-Piles as imported steel, believing that its steel qualified as domestic steel even though manufactured outside Canada. A competitor complained that Rankin’s bid was non-compliant and Rankin’s bid was disqualified and the contract was awarded to the second lowest binder.

The trial dismissed Rankin’s claim against Ontario and that dismissal was upheld by the Ontario Court of Appeal but for different reasons.

Rulings of the Ontario Court of Appeal

The Court of Appeal made the following rulings:

  1. Under the formula set forth in Ron Engineering, Contract A governing the tender process arose when bidders submitted their tenders.

This point may seem obvious but other decisions have raised doubts as to when Contract A is formed: Is it the moment before a bid is submitted; or when the bid is submitted, or when the bids are opened or when the bids are published? In this decision the Court of Appeal has said that “Contract A arose when the appellant submitted its tender.”

  1. Contract A was formed with any bidder who submits a bid, not just with a compliant bidder

This is an important point since some decisions, including that of the trial judge in this case, have held that Contract A is only formed between the person issuing the invitation and a compliant bidder. That approach does not make sense since if it is only Contract A that requires the issuer to deal fairly with the bidder in determining compliance. So there must be a Contract A in order for the treatment of compliance to be a binding factor between the issuer of the tender and the bidder. The Court of Appeal was clear that Contract A is formed with any bidder who submits a bid:

“The significance of the appellant’s non-compliance with the tender documents is that, pursuant to the express or implied terms of that Contract A, it may not be awarded Contract B, even if it is the lowest bidder — not that no Contract A is formed. I come to this conclusion based on the language of the Instructions to Bidders, which form part of the tender documents. In this case, the tender offer contemplated that tenders submitted might not be compliant….Paragraph 7.3 of the Instructions to Bidders specifically requires that a bidder include a tender deposit with its tender. This requirement is clearly material. However, para. 11.2 of the Instructions to Bidders also provides that “Tenders not accompanied by a Tender Deposit in the required amount may be rejected.” The fact that the MTO specifically addresses the consequences of the submission of a materially non-compliant tender — when viewed in conjunction with the other provisions in the Instructions to Bidders discussed below — is evidence that it intended that a Contract A come into effect, even if the tender submitted is non-compliant.

Respectfully, the trial judge erred in concluding that the necessary consequence of Ron Engineering… referred to in Tercon, is that no Contract A can come into existence where a bid is not materially compliant with the tender documents, without considering the effect of the tender documents. In other words, the terms of the offer to consider bids made by the request for tenders, as reflected in the tender documents, must be scrutinized to determine whether the parties intended contractual relations to arise on the submission of a tender: see M.J.B. Enterprises…. In my view, subject to the governing documentation, contractual relations would usually come into existence on the submission of a bid. This is a desirable result: it provides greater certainty as to the rights and obligations of the bidders and the owner, and may reduce the frequency of litigation arising out of the award of tenders.”

  1. The person issuing the invitation to tender has a right, but not an obligation, to investigate the bids

The trial judge had held that in the decision in Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, the Supreme Court had found that the owner issuing an invitation to tender does not have an implied duty to investigate allegations of non-compliance by a rival bidder, but that the owner has a right to do so. The Court of Appeal agreed:

“…the tender documents do not preclude the MTO from conducting an investigation. They do not expressly provide that the MTO will not investigate any complaints, and I see no basis for implying such a term….Like the trial judge, I reject the appellant’s argument that an owner cannot investigate allegations of non-compliance unless the bid documents specifically give the owner the right to do so or the owner has a written policy that it will do so.

  1. The effect of non-compliance clause and the privilege and discretion clause was that the owner might, but was not obliged to, waive the non-compliance and accept the bid

The privilege clause said that “the Ministry reserves the right to reject any or all tenders, and to waive formalities as the interests of the Ministry may require without stating reasons, therefore, the lowest or any tender may not necessarily be accepted.”

As the Court of Appeal noted, this paragraph “constitutes both what are often referred to in cases involving the law of tender as a “privilege clause” (the right not to accept the lowest or any tender) and a “discretion clause” (the right to waive formalities as the interests of the MTO may require).”

The Court held that this paragraph allowed, but did not require, the MTO to waive a “formalities”:

“In my view, where an owner has the discretion to waive formalities and exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a “formality” and entering into a Contract B with a non-compliant bidder.”

In arriving at this conclusion, the Court of Appeal apparently considered that “formalities” are what might be called “informalities”, that is, something that is a mere formality and not significant.

Accordingly, the Court of Appeal held that the MTO had the right not to waive the non-compliance in Rankin’s bid.

  1. A formality which could be waived was one which arose honestly and which does not substantially affect cost or the resulting comparative bids and maintains the integrity of the bidding process.

The Court of Appeal gave two reasons for its decision that the non-compliance was in respect of a formality which could have been waived by the MTO.

First, it applied what it called the ‘generous view of “informality”’ of the Supreme Court of Canada in Double N Earthmovers and then held that the non-compliance could have been waived:

“because of the appellant’s honest intention to use Canadian steel and the fact that the outcome, and the cost to the MTO, would have been the same had it declared that the H-Piles are imported steel. The price preference for Canadian steel was a mechanism for evaluating the competing bids. It did not affect the actual price to be paid by MTO to the successful bidder. And the MTO expected that American H-Piles would be used in the project. The appellant’s non-compliance “did not materially affect the price or performance of Contract B” [quoting from Double N Earthmovers], and therefore amounts to an informality….”

The Court of Appeal then gave a second reason: waiving the non-compliance maintained        the integrity of the bidding process. It said:

“I would add the following. Maintaining the integrity of the public bidding process is thought to encourage more bidders to participate in the process. And increased competition, in turn, promotes the public’s interest in the government obtaining the best price possible. Here, the tender process was essentially fair and the appellant’s bid was materially less costly to the public purse. Given this, in my view, a balancing of the public interest in promoting the integrity of the public bidding process so that the government can generally obtain the best prices, against the public interest in the MTO obtaining the best price possible in this particular case for widening Highway 406, also weighs in favour of the conclusion that the appellant’s non-compliance was a formality”.

  1. The owner could not waive a material non-compliance

On its interpretation of the invitation to tender, the Court of Appeal held that the MTO could not waive a non-compliance that was not a mere formality:

“In my view, a requirement that the MTO would not accept bids that were non-compliant, if the non-compliance amounted to more than a “formality”, can in this case be implied in Contract A on the basis of the presumed intention of the parties.”

The Court of Appeal held that, by not waiving the non-compliance in Rankin’s bid, the MTO had adopted the more cautious route in a sensible effort to avoid litigation.

  1. The owner was not obliged to notify bidders of non-compliant bids within 10 days

The tender documents contained two stipulations, as follows:

6.3         Bidders whose Tender has been rejected by the Ministry will be notified of the reasons within 10 days of Tender Opening.

12.1       The Ministry will notify the successful bidder that the Tender has been accepted within 30 days of the Tender Opening.

Paragraph 6.3 appeared in Part 6 of the tender documents headed Unbalanced Bids and Discrepancies. Paragraph 12.1 appeared in Part 12 of the tender documents headed Contract Award Procedures. MTO did not advise Rankin that its bid was non-compliant within the 10 days. Accordingly, Rankin argued that the rejection of its bid was invalid and MTO was obliged to award the contract to it as the lowest bidder.

The Court of Appeal rejected Rankin’s arguments for a number of reasons.

First, it held that paragraph 6.3 only applied to unbalanced bids, not non-compliance:

“….given that para. 12.1 gives the MTO 30 days to determine the successful bidder, I agree with the trial judge that interpreting para. 6.3 to require the MTO to determine whether it will waive “formalities” and, if not, notify non-compliant bidders, within 10 days of tender opening, makes no sense. To require the MTO to notify all unsuccessful bidders of the reasons why it will not accept their bids within 10 days of Tender Opening, would effectively require the MTO to determine the successful bidder within 10 days, rather than 30 days as expressly provided for under para. 12.1.”

Second, paragraph 6.3 did not convert an invalid and non-compliant bid into a valid and compliant bid. As the court said, the clause “does not provide that a “rejection” is invalid if the bidder is not notified of the reasons for the rejection within 10 days of Tender Opening.”

  1. The Exculpatory clause excluded all liability

Paragraph 11.3 of the tender documents said:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of a Tender, except as provided in the tender documents”.

The Court of Appeal applied the tests in the Supreme Court of Canada’s decision in Tercon to determine the proper interpretation and enforceability of this exclusion clause. It found that the paragraph was a complete defence to any claim in the present circumstance. Rankin did not argue that the clause was unconscionable or unenforceable due to public policy. Rather it argued that the paragraph did not apply if MTO breached the conditions of tender. The court rejected that argument:

“The language is in my view clear — both in the paragraph itself and in the context of the Instructions to Bidders as a whole. A bidder presumably would not sue unless it alleged that the MTO had breached a term — express or implied — of the tender documents by accepting another’s bid, or not accepting its bid. To interpret para. 11.3 as not applying where a breach by the MTO of the tender documents is alleged would effectively render it meaningless. Paragraph 11.3 is a commercial response to the increased litigation faced by owners arising out of the acceptance, and corresponding non-acceptance, of bids.”

The court did say that in some circumstances the “the conduct of the owner in the bid process is so aberrant that it would justify a court’s refusal to enforce an exculpatory provision in the tender documents on public policy grounds. This is not such a case.”

Comments

The first three principles adopted by the Court of Appeal are helpful clarifications of the tender law relating to Contract A.

Principles 4 to 6 are more contentious since they involve three possible layers of discretion. The first layer involves the determination of the boundary between the two categories. Clearly, the court is hesitant to interfere with the owner’s determination that the non-compliance is a mere formality or is a substantial non-compliance. The second layer of discretion is introduced by the court’s finding that the tender documents allow the owner to waive something which is a mere formality. But the third level of possible discretion goes the other way. The court interpreted these tender documents as not giving the owner the discretion to waive material non-compliances. Differently worded tender documents might change either of these latter two discretions, requiring the owner to waive a mere formality or allowing the owner to waive a material non-compliance, but it seems that tender documents would have to be clearly written to achieve the latter result.

Principle 7 involves principles of contract interpretation that were used to rescue MTO from what were less than well-drafted tender documents. Besides arising from an analysis of the different parts of those documents, the principle appears to be based on a distinction between the substantive and procedural provisions of tender documents. The owner’s failure to follow the procedures – giving the bidders notice of non-compliance – cannot convert what is a non-compliant bid into a compliant bid.

Principle 8 is probably the most important and contentious. The Court of Appeal appears to have held that the exclusion clause drafted by MTO is the elusive “magic bullet” that removes all the owner’s liability arising from breach of any term of a tender. The court was at pains to say that egregious conduct by the owner might, in another case, not be protected by this exclusion clause. But absent such conduct, the court appears to have held that this clause gives the owner complete protection in respect of the tender.

If that is so, then many questions arise. Is there a Contract A at all? What is the consideration for the contractor’s bid if the contractor has no effective remedies? If the owner inserts such a sweeping exclusion clause into the tender documents, should the contractor be able to say that there is no Contract A and withdraw its bid? Or is such an exclusion clause so sweeping that it is contrary to public policy or unconscionable from the standpoint of the law of contract formation – something not argued by Rankin. Further cases may have to explore the answers to those questions.

Rankin Construction Inc. v. Ontario, 2014 CarswellOnt 12595, 244 A.C.W.S. (3d) 79

Construction Law – Tenders – Waiver – Non-Compliance – Exclusion Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 26, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

When Is A Consultant Liable To A Contractor For Subsurface Information In Tender Documents?

One of the difficult issues in construction law is the duty owed, if any, by the owner’s consultant to the contractor. In particular, does the consultant owe any such duty in respect of subsurface conditions? In North Pacific Roadbuilders Ltd. v. Aecom Canada Ltd., the Saskatchewan Court of Queen’s Bench recently held that it did. While this case was decided in 2013, it is now about to go before the Saskatchewan Court of Appeal so it is timely to note the trial decision as we await the appellate decision.

Background  

North Pacific was awarded the contract to build a 57-kilometre ore haul road for Cameco Corporation between its mine and mill at one location and a new mine at another location. UMA was Cameco’s consultant and prepared the specifications and technical information for the tender documents. UMA was acquired by Aecom. North Pacific asserted that UMA was negligent in the preparation of the tender documents and misrepresented soil and terrain conditions that would be encountered on the project.

Cameco gave to UMA three reports prepared by a civil engineering firm named J.D. Mollard and Associates Limited (“Mollard”). The route for the road selected by UMA and Cameco was the one recommended originally by Mollard. The tender documents did not make any reference to the Mollard reports and did not state that those reports were available for inspection.

Decision

The trial judge held that UMA had a duty of care to the bidders on the project, relying on such decisions as Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., [1993] 3 S.C.R. 206. The court held that it was foreseeable that bidders would rely on the information contained in the tender documents. While UMA’s failure to disclose the results of special-purpose test holes was not misleading to bidders, its failure to disclose the Mollard terrain mapping information amounted to a negligent misrepresentation.

The owner, Cameco, had the same terrain mapping information but had effectively excluded tort liability in the invitation to tender. That documents said that “Cameco shall not be liable for any damages or costs incurred by the Contractor in the performance of the contract in the event that the actual quantity or quality of the material differs from the quantity or quality of the material assumed by the Contractor for the purpose of submitting a bid.”

The court held that this language did not exempt the engineers from liability:

“The fact that the contractor may agree to exempt the party inviting tenders from liability for the design process does not suggest that it thereby should be taken to have exempted the engineering firm. In the scheme of things, it makes good practical and economic sense to place the responsibility for the adequacy of the design on the shoulders of the designing engineering firm, assuming reasonable reliance and barring disclaimers. The risk of liability to compensate third parties for design error will be reflected in the cost of the engineers’ services to the owner inviting tenders. But that is a much better result than requiring the owner to pay not only the engineering firm which it retains, but indirectly, the additional engineers which all tendering parties would otherwise be required to retain.”

The court concluded that “the combination of failing to disclose the Mollard terrain information combined with the uniform estimate for surplus rock to be encountered along the way, resulted in an expressly misleading representation to bidders.” The failure to disclose the Mollard terrain information was misleading by omission in implying there was no terrain information available to UMA that could assist bidders to prepare their bids.

On the other hand, the court concluded that UMA’s failure to disclose the results of test holes that it had dug did not amount to a misrepresentation:

“The question remains whether UMA should have disclosed the test hole results recorded by UMA survey crews in any event. I conclude such results not being disclosed did not make the material that was disclosed misleading or inaccurate…..The tests were never intended to disclose terrain conditions which might be encountered along the route….. Because they were specific-purpose tests, the results are arguably unrepresentative of all conditions that would be encountered along the route….. Failure to disclose the results of the special-purpose test holes was not misleading by omission to bidders.

The court concluded that the failure to disclose subsurface conditions amounted to a breach of the standard of care owed by the engineers:

“A key factor in Canadian court decisions awarding compensation to a contractor for variations in subsurface ground conditions has been finding that the project owner and/or engineer failed to disclose important information to the contractor. Where our courts have been satisfied that the owner or engineer has failed to fulfil his or her duty to warn a contractor of known adverse conditions which would have an obvious impact upon the contractor’s analysis and pricing of the project, the courts have decided in the contractor’s favour….not disclosing the Mollard terrain mapping information to bidders fell below the standard of what would be expected of a reasonable engineer in the factual situation faced by UMA. At the time of tender, 37 kilometres of the route was inaccessible to them, and was not going to be accessible to bidders. UMA had relied on the Mollard reports for preliminary design of the route, and used the Mollard terrain information to inform the regulatory authorities ….UMA knew that terrain information would be important to bidders in preparing their bid. While the Mollard reports advised against making the terrain information part of the tender specifications, it informed how the information might be made available to contractors, which indicates Mr. Mollard thought it was worthwhile making the information available to bidders. I conclude that UMA’s failure to disclose the Mollard terrain mapping information to bidders, which was the only information on the terrain to be encountered along the route that was available, and was information that UMA had relied on extensively itself, fell below the standard of a reasonable and prudent engineer and resulted in a breach of its duty of care to bidders on the project, including the plaintiff.”

The court dismissed UMA’s claim against Cameco and North Pacific that they were each contributory negligence. As to UMA, it had contracted out of any duty of care or responsibility to North Pacific in the invitation to tender and resulting construction contract.

As to North Pacific, its reliance on the tender information was reasonable. The bidders had assumed they had been supplied with the terrain information that was available. In these circumstances, North Pacific was not contributorily negligent in failing to make inquiries about additional terrain information.

Discussion

This decision takes the decision in Edgeworth into the subsurface world. Apparently, the non-disclosure of some information – such as test holes – will more likely lead to liability by the consultant to the contractor than the non-disclosure of other information – such as prior reports. What is the distinction and where is the boundary line? Apparently the more general the information, the more substantial the use of the information by the consultant or a regulator, and the less accessible this information to the contractor, the greater the duty of the consultant to disclose its existence to the contractor. Is this a satisfactory distinction?

The court’s reasons for holding the consultant liable are premised on the consultant being in the best position to ensure that no misrepresentation is made. But another consideration is whether the consultant is best able to absorb the cost of liability. Consultants are usually not able or willing to absorb what could be very large damage claims arising from tender misinformation. It seems likely that the consultant may request that exclusionary language in its favour be inserted into the invitation to tender, construction contract or contract with the owner. At the least, consultants may insist that their subsurface liability be limited to the amount of the liability insurance taken out by the consultant.

North Pacific Roadbuilders Ltd. v. Aecom Canada Ltd. (2013), 419 Sask. R. 117, 2013 CarswellSask 289.

Construction law – consultants – liability of consultant to contractor – negligence- subsurface information

Thomas G. Heintzman O.C., Q.C., FCIArb                                                             October 5, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Ontario Court Of Appeal Holds That The Doctrine Of Mistake Does Not Apply To A Tender

In Asco Construction Ltd. v. Epoxy Solutions Inc., the Ontario Court of Appeal recently held that the doctrine of mistake did not apply to an invitation to tender. In doing so, the court provided a useful reminder of the limited circumstances in which the law of mistake can apply to building contracts.

Background

Asco was hired by the City of Kingston to renovate a theatre. Epoxy was the successful bidder for the subcontract work to install flooring. Epoxy’s bid was based on a sketch provided by Asco during the tender process. The sketch depicted the elevations of the theatre. After the bid was accepted, but before commencing its work, Epoxy’s surveyor found that the elevations in the survey were inaccurate. Epoxy asked for an increase in the contract price which Asco refused, insisting that the work be done in accordance with the contract and that any adjustment to the price could be made later. Epoxy refused to do the work without an assurance that the contract price would be adjusted. Asco sued for breach of contract and damages and Epoxy counter-claimed for loss of profits.

The trial judge found that the error in elevation was the contractor’s fault and awarded damages in favour of Epoxy. On appeal, the Divisional Court found that the contract between the parties was void for mistake. Epoxy appealed to the Court of Appeal.

Decision of the Ontario Court of Appeal

For three reasons, the Ontario Court of Appeal held that the doctrine of mistake could not apply.

First, the trial judge had held the mistake was the fault of Asco. The Court of Appeal held that a “party at fault cannot rely on its own mistake to avoid a contract.” Accordingly, the doctrine of mistake could not apply.

Second, Asco’s tender documents represented “an implied representation to compliant bidders that the work described in the tender documents could be built as described. Those bidders are entitled to rely upon the accuracy of design information prepared by the owner or its engineers. A bidder does not have to duplicate design and analysis prior to submitting a bid.” In arriving at this conclusion, the court relied upon the decision of the Supreme Court of Canada in Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., [1993] 3 S.C.R. 206.

Third, Asco could not rely on the doctrine of mistake because, “by asserting its claim for damages against [Epoxy], [Asco] elected to affirm the contract and thereby disentitle itself from relying on the doctrine of common mistake.”

Comments

This decision re-affirms the narrow application – or perhaps inapplicability – of the doctrine of mistake to the tender process. When a contract is made through an invitation to tender, it is only in very unusual circumstances that one party can assert to the other that it was mistaken about the contract. The parties have explicitly stated the basis of the contract, in either the invitation to tender or the response (being the bid) to that invitation. In those circumstances, the existence of a mistake seems very improbable. Either the tender and the bid have made the resultant contract clear. Or one of the parties is responsible for any mistake. In either event, the contractual doctrine of mistake cannot apply. Any difficulties in interpreting the invitation and the bid do not mean that the doctrine of mistake applies.

However, the Court of Appeal’s second proposition – that the invitation to tender contains an implied statement that the work can be built in accordance with the tender documents – seems more problematic. The Supreme Court of Canada stated that proposition in Edgeworth Construction, but where does that principle come from, and what is its ambit? The traditional rule is that an owner does not represent that a work can be built in accordance with its proposal and that a contractor takes on the “buildability” risk and must itself determine that the work can be built in accordance with its bid. Does the use of the tender process eliminate that traditional rule?

The decision in Asco v. Epoxy may reflect a general proposition that tendered contracts contain a representation that the project can be built as described in the invitation to tender. If it does, then it represents a wake-up call for owners and contractors issuing those invitations, and the consultants preparing the plans and specifications used in those invitations. They may wish to insert a specific warning into the invitation to tender that there is no representation that the building can be built as shown in the attached plans and specifications, and that it is up to the tendering contractor or subcontractor to determine that issue. If there is no such warning then the result in Asco v. Epoxy may well apply.

Asco Construction Ltd. v. Epoxy Solutions Inc., 2014 CarswellOnt 9200, 2014 ONCA 535, 242 A.C.W.S. (3d) 76

Building Contracts – Tenders – Subcontracts – Implied Representations and Conditions

Thomas G. Heintzman O.C., Q.C., FCIArb                                           September 14, 2014

www.heintzmanadr.com

www.constructionlawcanada.com