Case Review – Elite Construction v. Canada, 2021 ONSC 562

Elite Construction Inc. v. Canada serves as a stern reminder to construction contractors of the importance of abiding by contractual notice provisions.[1]Elite Construction Inc. v. Canada, 2021 ONSC 562, CarswellOnt 2971 [Elite Construction].

The Ontario Superior Court of Justice dismissed the plaintiff contractor’s $4.1 million claim for additional compensation on the basis that the contractor had failed to abide by the contractual notice provision for making claims for additional compensation. The Court also rejected the plaintiff contractor’s claim that the defendant owner’s conduct had waived strict compliance with the notice provision.

Lessons Learned

Delays and changing conditions are ubiquitous in construction projects, large and small. Notice provisions regarding claims that may arise as a result of changes or delays are a common and prudent contractual term.

Where present, as in Elite Construction, they often provide for very tight timelines for the contractor to provide notice of an intention to claim. Owners and contractors alike need to be aware of notice provisions, and ensure they have procedures for complying with and responding to them.
The practical takeaways from Elite Construction are:

  • Contractors must be sure to use the precise form and method of notice stipulated by the contract for claiming additional compensation, and must deliver that notice before the contractual deadline. Where no form of notice is stipulated by the contract, a notice should:
    1. be delivered in accordance with the means and method of delivery of any other notices under the contract;
    2. specifically reference the applicable provision in the contract that contemplates claims for additional compensation;
    3. identify the conditions giving rise to the claim for additional time or compensation;
    4. state explicitly that the contractor intends to assert a claim for additional compensation; and
    5. provide any other information contemplated by the contract.
  • Owners should be mindful to ensure that their conduct is, and can be demonstrated to be, consistent with their intention to rely on their contractual rights. Owners should bear in mind that contractors who have not abided by contractual terms may seek to argue that the owner has waived its right to rely on strict conformance with the contract.

Facts

Elite Construction pertains to a dispute for additional compensation arising from a stipulated price contract between the contractor Elite Construction Inc. and owner Public Services and Procurement Canada. As a stipulated price contract, a fixed sum was agreed to in compensation for “everything that is necessary to be done, furnished or delivered by the Contractor to perform the Contract in accordance with the contract documents”.[2]Elite Construction, at para 9.4.

The contract explicitly stated that no additional payments would be made to Elite for expenses associated with delay unless Elite complied with the notice provisions in the contract.[3]Elite Construction, at para 34. The notice provision required that where Elite incurred extra costs or losses attributable to Procurement Canada’s “neglect or delay”, Elite was to provide Procurement Canada with “written notice of intention to claim for that extra expense or loss or damage within ten working days of the date the neglect or delay first occurred.”[4]Elite Construction, at para 34, emphasis added by the Court.

Elite claimed that Procurement Canada’s failure to issue change orders under the contract in a timely way caused delays that required Elite to incur additional costs.[5]Elite Construction, at paras 28 and 52. The change order process provided by the contract required Procurement Canada to issue a “Contemplated Change Notice” (or “CCN”) outlining a requested change to the scope of work. Elite would respond to a CCN with a “CCN Summary” containing Elite’s estimate of the additional time and/or compensation required to perform the work outlined in the CCN. If accepted, Procurement Canada would issue a change order on the basis of the CCN Summary and any revisions negotiated by the parties.

Elite contended that Procurement Canada’s delay throughout the project in issuing change orders following receipt of Elite’s CCN Summaries caused the overall delay.

Elite commenced its action over a year after substantial completion of the project. The matter arrived before the Court as a result of Procurement Canada’s motion for summary dismissal of Elite’s claims, primarily on the basis that Elite had failed to abide by the contract’s notice provision for additional compensation.

Elite argued that it had provided the required notice, or in the alternative that Procurement Canada had waived strict compliance of the contract by its own dilatory conduct throughout the project. Elite submitted that Procurement Canada conducted itself outside of the terms of the contract, and in turn should not be allowed to demand strict compliance.

Analysis and Decision

The primary issues of interest in the Elite decision are the Court’s assessment of whether Elite complied with the notice provisions of the contract and whether Procurement Canada waived strict compliance with the notice provision through its conduct.

The Court granted Procurement Canada’s summary dismissal motion after finding that (i) Elite did not strictly comply with the notice provision to obtain either an extension of time to complete the contract or additional compensation,[6]Elite Construction, at para 59. and that (ii) Procurement Canada had not waived its right to rely on the notice provision.[7]Elite Construction, at para 122.

A. Strict Compliance With Notice Provisions Required

Law Regarding Compliance with Notice Provisions

The Court based its analysis on a line of Canadian appellate cases concerning contractual notice provisions in construction contracts, namely Corpex (1977) v. The Queen in Right of Canada, [1982] 2 S.C.R. 643, Doyle Construction Co. v. Carling O’Keefe Breweries of Canada Ltd., 198827 B.C.L.R. (2d) 89 (BCCA), and Technicore Underground Inc. v. Toronto (City), 2012 ONCA 597.

The Court noted that Corpex and Doyle emphasize the importance of enforcing notice provisions in construction contracts. Notice provisions provide benefits to both contractor and owner, placing them back in the position they were in at the time of the bid: the contractor can provide and negotiate a price, and the owner can determine if it wants to pay or negotiate that price, adjust the contemplated scope of work, or cancel the contract.[8]Elite Construction, at para 66.

With those benefits at stake, Canadian courts are reluctant to allow parties to evade a notice provision. The Court noted that compliance with a notice provision is a “condition precedent to maintaining a claim”,[9]Elite Construction, at para 67. and that there is no need for an owner to prove prejudice in order to rely on failure to comply with a notice provision as a bar to the claim.[10]Elite Construction, at para 68.

Court’s Application of the Law to the Facts

The Court noted that none of the various documents cited by Elite as providing notice actually referenced the notice provision or explicitly informed Procurement Canada of Elite’s intent to make a claim as contemplated in the notice provision. Failing to comply with the ten working days timing requirement of the notice provision, and failing to provide explicit notice of an intent to claim, barred Elite from claiming additional compensation.[11]Elite Construction, at para 81.

The Court first determined that Elite’s submission that it had properly requested an extension of time under the contract was irrelevant to Elite’s request for additional compensation as a result of the alleged delay, as the contract established separate procedures for additional time and for additional compensation.[12]Elite Construction, at paras 64 and 76.

The Court agreed with Procurement Canada’s assessment that the “logical time” for notice to be given under the notice provision for Elite’s claim for compensation arising from Procurement Canada’s delay in issuing change orders was within ten working days of any allegedly late change order.[13]Elite Construction, at para 72. Instead, Elite argued that its CCN Summaries and various emails to the project consultant constituted proper notice (as well as several other documents issued months and sometimes years after the change orders).

The Court rejected Elite’s submission that the CCN Summaries constituted the notice required by the notice provision. The Court found that “it would make no sense” for the CCN Summaries to constitute notice for additional and general amounts not incorporated within the ensuing change order: the CCN Summaries pertained to the additional work stipulated by the CCN and were supposed to contain a description of all additional time and compensation required to perform the work set out in the CCN.[14]Elite Construction, at Appendix “A”. Not only did the CCN Summaries precede the alleged neglect or delay Elite complained of, but allowing the CCN Summaries to constitute notice sufficient to ground a claim for general delay damages on top of the compensation already agreed to in the change order could lead to double recovery.[15]Elite Construction, at para 71.

Elite’s various emails to the project consultant were also found to not constitute proper notice under the notice provision, as they were not issued within the required ten working days, and did not refer to the delay or neglect by Procurement Canada that ultimately underpinned Elite’s claim.[16]Elite Construction, at para 74.

B. Waiver

Finding that Elite had not complied with the notice provision, the Court then assessed whether Procurement Canada had waived strict compliance with the notice provision by its own dilatory conduct. The Court applied the test for waiver set out by the Supreme Court of Canada in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co.,[17][1994] 2 SCR 490. which requires the party asserting waiver to establish that the waiving party had (i) full knowledge of the deficiency that might be relied on, (ii) an unequivocal and conscious intention to abandon the right to rely on it, and (iii) communication of the waiver.[18]Elite Construction, at para 82, citing Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 SCR 490.

Elite submitted that Procurement Canada’s own delay issuing change orders amounted to a waiver of the right to insist upon timely receipt of notice. Elite also asserted that Procurement Canada knowingly allowed Elite to perform work beyond the agreed-upon scope, and that this also amounted to a waiver of the specific requirements of the notice provision.[19]Elite Construction, at para 86.

The Court found that Procurement Canada’s conduct regarding the change orders did not breach any specific contractual provision, and that even if the delay was construed to be contrary to the general “time is of the essence” provision, it would not amount to waiver of the specific notice provision.[20]Elite Construction, at para 93. Further, the Court found that Procurement Canada had not permitted Elite to perform work beyond that contemplated in the original and amended contract, as all additional work was subject to pre-approval by virtue of the contract forms.[21]Elite Construction, at para 96. Accordingly, the Court held that Elite did not establish waiver by demonstrating that Procurement Canada had full knowledge of some deficiency by Elite that Procurement Canada might rely on and an unequivocal and conscious intention to abandon that right that was communicated to Elite.

References

References
1 Elite Construction Inc. v. Canada, 2021 ONSC 562, CarswellOnt 2971 [Elite Construction].
2 Elite Construction, at para 9.4.
3 Elite Construction, at para 34.
4 Elite Construction, at para 34, emphasis added by the Court.
5 Elite Construction, at paras 28 and 52.
6 Elite Construction, at para 59.
7 Elite Construction, at para 122.
8 Elite Construction, at para 66.
9 Elite Construction, at para 67.
10 Elite Construction, at para 68.
11 Elite Construction, at para 81.
12 Elite Construction, at paras 64 and 76.
13 Elite Construction, at para 72.
14 Elite Construction, at Appendix “A”.
15 Elite Construction, at para 71.
16 Elite Construction, at para 74.
17 [1994] 2 SCR 490.
18 Elite Construction, at para 82, citing Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 SCR 490.
19 Elite Construction, at para 86.
20 Elite Construction, at para 93.
21 Elite Construction, at para 96.

The Wait is Over: Regulations Have Been Released and Alberta’s Prompt Payment and Construction Lien Act comes into force August 29, 2022

On February 25, 2022, the Government of Alberta confirmed that the Prompt Payment and Construction Lien Act (the “PPCLA”)[1]Prompt Payment and Construction Lien Act, c P-26.4 [Prompt Payment Act]. will come into force on August 29, 2022,[2]Builders’ Lien (Prompt Payment) Amendment Act, 2020, c 30; Proclaiming the Builders’ Lien (Prompt Payment) Amendment Act, 2020, OC 50/2022. and published the long-awaited Prompt Payment and Adjudication Regulation and the Prompt Payment and Construction Lien Forms Regulation (collectively the “Regulations”).[3]Prompt Payment and Adjudication Regulation, Alta Reg 23/2022 [Prompt Payment Regulations] and Prompt Payment and Construction Lien Forms Regulation, Alta Reg 22/2022. [Forms Regulations]. As discussed in our previous post, participants and stakeholders in Alberta’s construction industry have been in a state of limbo since 2020, awaiting the coming into force of the PPCLA and the major changes it contains. Most notably, several new provisions in the PPCLA left much of the interpretive heavy lifting to the Regulations. With the coming into force of the PPCLA now confirmed and the publication of the Regulations providing necessary detail, parties can now take steps to ensure they are fully prepared for these major changes.

As outlined in our initial post from November 2020, the PPCLA will change the construction industry in four main ways, by: (i) instituting prompt payment timeline requirements; (ii) allowing for progressive release of holdbacks; (iii) creating an adjudication system; and (iv) extending the default periods for filing a lien. While the PPCLA sets out the major changes, the Regulations provide the necessary detail to fill in the gaps and make these changes functional.

The highlights from the Regulations include:

  1. New transition rules: the PPCLA provided that only contracts entered into after the PPCLA was proclaimed would be subject to the significant updates brought about by Bill 37 and Bill 62 (most notably, the prompt payment and adjudication regimes). The Regulations now provide that contracts entered into before the PPCLA is in force, but that are scheduled to remain in effect for longer than 2 years after August 29, 2022, must be amended within 2 years to indicate that they are subject to the PPCLA.
  2. Inclusion of engineers and architects: the Regulations stipulate that engineers and architects’ services are subject to the terms of the PPCLA where those services relate to an improvement.
  3. Adjudication process: details concerning the adjudication process have been given, the most salient of which is that a decision is to be made within 42 days of a notice of adjudication being filed and served (subject to an adjudicator extending the process by up to 10 days). Adjudicators will be appointed within 7 days of the adjudication notice, the claimant must submit its materials within 5 days of the adjudicator being appointed, and the respondent must submit its materials 12 days after it receives the claimants’ materials.
  4. Prescribed amount for progressive release of holdbacks: The PPCLA requires contracts which have a value over the prescribed amount to provide for a progressive release of the statutory holdback at least annually. The regulations set the prescribed amount at $10,000,000.

 

Prompt Payment Timeline

Pursuant to the PPCLA, the new prompt payment requirements are as follows:

  • the prompt payment timelines are triggered by the issuance of a “proper invoice” which must be issued by all contractors and subcontractors at least every 31 days (subject to narrow exceptions).[4]Prompt Payment Act, s. 32.1(6). Within this 31-day limitation, the Regulations stipulate that the owner and contractor may agree to specific terms as to when a proper invoice may be delivered.[5]Prompt Payment Regulations, s. 3.
  • upon receipt of a proper invoice the owner must (i) dispute all or part of the proper invoice within 14 days, and (ii) pay all undisputed amounts in the proper invoice within 28 days.[6]Prompt Payment Act, ss. 32.2(1) and (2).
  • a contractor must pay its subcontractors within 35 days of issuing a proper invoice to the owner[7]Prompt Payment Act. S. 32.3(4). or within 7 days of receiving: payment from the owner or a notice of non-payment from the owner,[8]Prompt Payment Act s. 32.3(1). unless the contractor issues its own notice of non-payment to its subcontractor, or serves the owner’s notice of non-payment, together with an undertaking that the Contractor will commence an adjudication no later than 21 days from issuing the notice;[9]Prompt Payment Act, ss. 32.2(5) and (6).
  • the above payment deadlines and obligations apply down the construction pyramid, applying as between subcontractors and their sub-subcontractors.

The requirements for a “proper invoice” are set out in the PPCLA,[10]Prompt Payment Act, s. 32.1(1). whereas the Builders’ Lien Forms Amendment Regulation sets out the prescribed forms in which all notices described above must take.[11]Forms Regulations, Forms 1-14.

 

Adjudication Process

The PPCLA creates the statutory adjudication system, whereas the Regulations provide the details necessary to allow for the adjudication system to be put into place and become operational.

Unlike Ontario, the Regulations stipulate that Alberta may have multiple Nominating Authorities. Authorized Nominating Authorities will determine who will act as adjudicators by issuing a certificate of qualification to adjudicate to eligible individuals. Part 2 of the Regulations sets out eligibility requirements to become an adjudicator. The stipulated requirements include “10 years of relevant work experience in the construction sector” and “sufficient knowledge and experience” in areas including dispute resolution, contract law, adjudication process, ethics, and determination writing.[12]Prompt Payment Regulations, s. 7(2). The Regulations also require ANAs to create a code of conduct which authorized adjudicators must adhere to.[13]Prompt Payment Regulations, s. 10.

Further, the Regulations clarify the kinds of disputes that can be adjudicated and the rules surrounding same. With regards to the kinds of disputes that can be adjudicated, the Regulations list the following matters:

(a) the valuation of services or materials provided under the contract or subcontract;

(b) payment under the contract or subcontract;

(c) disputes that are the subject of a notice of non-payment under Part 3 of the Act;

(d) payment or non-payment of an amount retained as a major lien fund or minor lien fund and owed to a party during or at the end of a contract or subcontract, as the case may be; and

(e) any other matter in relation to the contract or subcontract, that the parties in dispute agree to, regardless of whether or not a proper invoice was issued or the claim is lienable.[14]Prompt Payment Regulations, s. 19.

As for the rules surrounding the adjudication, the Regulations set out the following timelines and procedures:

StepsDays from service of notice of adjudication
Deadline for parties to agree on adjudicator4
Deadline for Nominating Authority to appoint adjudicator 11
Deadline for claimant to provide its submission16 (or 5 days from appointment of adjudicator, whichever is earlier)
Deadline for respondent to provide its submission28 (or 12 days from receipt of claimant’s submission, whichever is earlier)
Deadline for adjudicator to issue order determining the dispute46 (or 30 days from receipt of claimant’s submission, whichever is earlier)

 

Progressive Release of Holdbacks

The PPCLA makes progressive releases of holdback mandatory for projects where:

  • the completion date is longer than one year, or the contract provides for payments of the holdback on a phased basis; and
  • the contract price exceeds the prescribed amount,[15]Prompt Payment Act, s. 24.1. which pursuant to the Regulations is $10,000,000.[16]Prompt Payment Regulations, s. 2(2).

As stipulated in the Regulations, where a contract does not specify a phased amount, the partial release of holdback payment must be made on an annual basis.[17]Prompt Payment Regulations, s. 2(1).

 

Extension of default period for Liens

The PPCLA extends, or otherwise alters, the limitation periods for filing a lien as follows:

  • for general construction, the limitation period is extended from 45 days to 60 days; and
  • for any improvement primarily relating to “the furnishing of concrete as a material” or “work done in relation to concrete” the limitation period is extended to 90 days.[18]Prompt Payment Act, s. 27(2.21). However, the Regulations state that the 90 day limitation period does not apply to entities that install or use “ready-mix concrete”, as defined in the North … Continue reading

The Regulations clarify that the 90 day lien period does not apply to “entities that install or use ready-mix concrete”,[19]Prompt Payment Regulations, s. 36. which is defined as the “mixing together water, cement, sand, gravel or crushed stone to make concrete, and delivering it to a purchaser in a plastic or unhardened state”[20]North American Industry Classification System (NAICS) Canada 2017 Version 2.0, Code 32732 – Ready-Mix concrete manufacturing. This clarification suggests that the 90 day lien period would apply to concrete suppliers, or those engaged purely in preparatory activities (such as base preparation or installation of rebar), but not to the subcontractors who actually place and finish the concrete.

 

Transition Period

Any contract or subcontract entered into after August 29, 2022, will be governed by the new rules under the PPCLA and the Regulations.[21]Prompt Payment Act, s. 74(2). However, any contract entered into prior to August 29, 2022, will continue to be governed by the rules under the previous statute for a period of two-years.[22]Prompt Payment Regulations, s. 37. After the expiration of the two years, all construction contracts in Alberta will be subject to the PPCLA and the Regulations, and the new rules contained therein. While this calculus is relatively straightforward for most contracts, parties who have entered into contracts where work is scheduled to take just short of two years should consider the potential implications of any unforeseen delays on whether or not the new rules will apply.

As a result of this transition period, for the next two and a half years there will be contracts that are governed by the new rules and some governed by the old rules. Businesses and participants in Alberta’s construction industry will need to be cognisant of which rules apply to which contracts, as lien rights, payment rights and obligations, and dispute mechanisms will be significantly impacted. To this end, parties should consider reviewing and updating their contracts and internal processes to ensure contractual payment terms are consistent with the PPCLA and the Regulations.

 

Conclusion

The Regulations much needed clarity and refinement to the PPCLA, with the most substantial clarifications provided in regards to the adjudication process. The changes ushered in by the PPCLA and the Regulations are substantial. These changes will radically alter how the Alberta construction industry functions, particularly with regards to how and when parties are paid and how disputes are settled.

With proclamation of the PPCLA and the Regulations, it is incredibly important to have competent counsel with a deep understanding of construction law and the prompt payment and adjudication regime to ensure your business is prepared to thrive in this new legislative environment. The lawyers at McCarthy Tétrault have extensive experience in the construction industry and can help you navigate this complex legislative scheme.

References

References
1 Prompt Payment and Construction Lien Act, c P-26.4 [Prompt Payment Act].
2 Builders’ Lien (Prompt Payment) Amendment Act, 2020, c 30; Proclaiming the Builders’ Lien (Prompt Payment) Amendment Act, 2020, OC 50/2022.
3 Prompt Payment and Adjudication Regulation, Alta Reg 23/2022 [Prompt Payment Regulations] and Prompt Payment and Construction Lien Forms Regulation, Alta Reg 22/2022. [Forms Regulations].
4 Prompt Payment Act, s. 32.1(6).
5 Prompt Payment Regulations, s. 3.
6 Prompt Payment Act, ss. 32.2(1) and (2).
7 Prompt Payment Act. S. 32.3(4).
8 Prompt Payment Act s. 32.3(1).
9 Prompt Payment Act, ss. 32.2(5) and (6).
10 Prompt Payment Act, s. 32.1(1).
11 Forms Regulations, Forms 1-14.
12 Prompt Payment Regulations, s. 7(2).
13 Prompt Payment Regulations, s. 10.
14 Prompt Payment Regulations, s. 19.
15 Prompt Payment Act, s. 24.1.
16 Prompt Payment Regulations, s. 2(2).
17 Prompt Payment Regulations, s. 2(1).
18 Prompt Payment Act, s. 27(2.21). However, the Regulations state that the 90 day limitation period does not apply to entities that install or use “ready-mix concrete”, as defined in the North American Industry Classification System.
19 Prompt Payment Regulations, s. 36.
20 North American Industry Classification System (NAICS) Canada 2017 Version 2.0, Code 32732 – Ready-Mix concrete manufacturing.
21 Prompt Payment Act, s. 74(2).
22 Prompt Payment Regulations, s. 37.

Do Section 23 Builders Lien Applications Exceed Masters’ Jurisdiction in BC? 2022 BCSC 287

The February 24, 2022 decision in Metro-Can Construction (PE) Ltd. v. Escobar[1]Metro-Can Construction (PE) Ltd. V. Escobar, 2022 BCSC 287. (“Metro-Can”) suggests that construction practitioners may wish to shift their practice for applications under s. 23 of the Builders Lien Act[2]Builders Lien Act, SBC 1997, c. 45. (the BLA”) by bringing those applications before a justice rather than a master of the Supreme Court. In Metro-Can, after three days of argument, the master hearing the application held that s. 23 applications are not within a master’s jurisdiction and must be heard by a justice.

Sections 23 and 24 of the BLA both provide mechanisms through which liens can be removed from title, but with very different effect for owners. Section 23 applications, which are only permitted in relation to liens filed by claimants who are not engaged by an owner, permit owners to excise themselves from the lien enforcement proceedings. Pursuant to s. 23, the owner’s liability is discharged upon payment into court of funds equal to the maximum possible liability of the owner, usually the greater of the required statutory holdback or amount owing to the party through whom the liens are claimed.[3]Ibid, at s. 23. On the other hand, a s. 24 application permits liens to be cancelled upon payment of adequate security into court without any discharge or determination of liability.[4]Ibid, at s. 24.

While s. 23 applications routinely come before masters, although rarely give rise to reported decisions, the decision in Metro-Can holds that the relief sought under a s. 23 application is in the nature of a final order and beyond a master’s jurisdiction as set out in Practice Direction 50 (“PD-50”).[5]2022 BCSC 287 at paras. 3 and 4.

It is correct to characterize the nature of relief sought on a s. 23 application as a final order, but the authors question the holding that masters lack the jurisdiction to make such orders under PD-50. PD-50 has two distinct parts: (1) a direction of the Chief Justice under the Supreme Court Act as to matters on which a master is not to exercise discretion; and (2) non-exhaustive guidelines for the assistance of the profession and public as to matters on which a master has jurisdiction.[6]PD-50, summary.

Critically, under s. 11(7) of the Supreme Court Act, a master has, subject to constitutional limitations or a direction of the Chief Justice, the same jurisdiction under any enactment or the Rules of Court as a judge in chambers.[7]Supreme Court Act, RSBC 1996, c. 443, at s. 11(7).

The Chief Justice’s direction in PD-50 does not list final orders as a matter on which a master is not to exercise jurisdiction, nor are any of the specifically identified restrictions engaged by a s. 23 application.[8]PD-50 at para. 3. Therefore, on a s. 23 application, a master should have the same jurisdiction as a judge in chambers.

In the second part of PD-50 which outlines non-exhaustive guidelines, paragraph 5, entitled “Applications”, provides that, subject to a direction of the Chief Justice or constitutional limitation, a master has jurisdiction to hear applications under the Supreme Court Civil Rules.[9]PD-50 at para. 5.Interestingly, the analogous provision of the practice direction preceding PD-50 (PD-14 and PD-34) was entitled “Interlocutory Applications”, with the term “Interlocutory” being dropped from the heading to paragraph 5 in PD-50.

Paragraph 8 of the PD-50 guidelines lists specific types of final orders that, again subject to a direction of the Chief Justice or constitutional limitation, a master has jurisdiction to make.[10]PD-50 at para. 8.  While a s. 23 application is not specifically identified as a final order that masters have jurisdiction to make, paragraphs 5 through 9 of PD-50 are non-exhaustive guidelines that do not restrict a master’s jurisdiction but, as noted above, are for the assistance of the profession and public.

The authors are of the view that Metro-Can was wrongly decided and that s. 23 applications, whether brought by way of petition or application in an ongoing action, are within the jurisdiction of a master as articulated by PD-50 and are matters that should continue to be within the purview of masters. However, in light of Metro-Can and subject to a subsequent decision overturning or overruling it, practitioners may wish to shift their practice to bringing s. 23 applications before a justice. Doing so avoids the risk of bringing the matter, if not fully arguing the matter as was the case in Metro-Can, before a master who may ultimately decide that they lack jurisdiction and refer you for re-hearing before a justice.

 

References

References
1 Metro-Can Construction (PE) Ltd. V. Escobar, 2022 BCSC 287.
2 Builders Lien Act, SBC 1997, c. 45.
3 Ibid, at s. 23.
4 Ibid, at s. 24.
5 2022 BCSC 287 at paras. 3 and 4.
6 PD-50, summary.
7 Supreme Court Act, RSBC 1996, c. 443, at s. 11(7).
8 PD-50 at para. 3.
9 PD-50 at para. 5.
10 PD-50 at para. 8.

Maintenance Work, Repair Work, Capital Repair Work, and Lien Rights in Canada

Introduction

I often explain the difference between non-lienable maintenance and repair work on the one hand, and lienable construction work on the other, using the analogy of a landscaper called to a worksite. In one scenario he’s asked to mow the grass and trim the hedges. In another, he’s asked to terraform the entire property, complete with a new deck, sheds, a koi pond, and a stone pathway. The first scenario is non-lienable maintenance, while the second is lienable construction.

Not every worksite, however, involves a koi pond. When dealing with (for example) heavy industrial projects or the energy sector, repair and maintenance work might involve the comprehensive replacement of very large and very expensive machinery and equipment, or massive investment in capital repairs. The difference between maintenance, repair, and construction is often less clear, and courts frequently struggle with where to draw the line. To assist you, dear reader, in making this determination, we have reviewed and summarized the current state of the law in British Columbia,[1]Builders’ Lien Act, SBC 1997, c 45 (the “B.C. Act”). Alberta,[2]Builders’ Lien Act, RSA 2000, c B-7; as of July 1, 2021, Alberta’s Builders’ Lien Act has been replaced by the Prompt Payment and Construction Lien Act, Chapter P-26.4 (the … Continue reading Saskatchewan[3]Builders’ Lien Act, SS 1984-85-86, c B-7.1 (the “Saskatchewan Act”). and Ontario.[4]Construction Act, RSO 1990, c C 30 (the “Ontario Act”).

Executive Summary

The lines of authority respecting the division between maintenance work, repair work, and construction work in Canada have generally divided into two camps: (i) emphasis on the characterization, effect or intended effect of the work in Ontario case law, or (ii) emphasis on the characterization, effect or intended effect of the overall project in B.C., Alberta, and Saskatchewan.

In Ontario, the emphasis is on the nature of the work: maintenance or repair work intended to improve the value of the land is likely lienable (as such work is considered an “improvement” under the statute), whereas work that is intended merely to maintain the status quo is likely not lienable.

In B.C., Alberta, and Saskatchewan, the emphasis is on whether the work or service is necessary or supportive for the completion of the overall project, wherein the overall project is the improvement (and the overall project includes the physical construction of a thing). To put this in perspective, if the overall project is the construction of a shopping centre, then all work and services associated with that construction are lienable, including maintenance, cleaning, inspection, security, temporary water services, the delivery of porta-potties to the site, heating and hoarding, etc.

Legislative Comparison

In each of these jurisdictions, analysis begins with the definition of an “improvement”, because for work or services to be lienable, that work or service must be provided to an improvement. In B.C, Saskatchewan, and Ontario, an improvement includes “repair” or “capital repair” to land in question; Alberta hasn’t included the same terms within its definition of same.

(a)          British Columbia

While there’s limited case law in B.C. on the lienability of maintenance work, it’s clear – given the inclusion of “repair” work in the B.C. Builders Lien Act’s definition of improvement – that repair projects (likely capital repair projects) can constitute an “improvement” and therefore sustain lien rights. Given the currently available case law in B.C., it also appears that B.C.’s courts are mostly in harmony with the developing lines of authority in Alberta and Saskatchewan.

In the 2011 case of Alexander Construction Ltd. v Al-ZaibakEyeglasses,[5]Alexander Construction Ltd. v Al-ZaibakEyeglasses, 2011 BCSC 590, 2011 CarswellBC 2349 (“Alexander Construction). the British Columbia Supreme Court needed to decide whether the lien claimant’s provision of basic inspection and maintenance work could be considered “work” within the meaning of section 1(5) of the B.C. Act, and therefore sustain lien rights that would have otherwise expired. The Court determined that while this work was “minimal”,[6]Alexander Construction at para. 66. given a liberal reading, it was still sufficient to constitute work on the larger improvement (the construction of a home). The Court noted that while the subject efforts “did not move the project any closer to conclusion, they prevented deterioration to the project that would further delay its completion.”[7]Alexander Construction at para. 66. In other words, the Court placed emphasis not on the nature or characterization of the work itself, but rather on the work’s connection to the larger overall improvement project.

In a similar line, in Shelly Morris Business Services Ltd. v Syncor Solutions Limited[8]Shelly Morris Business Services Ltd. v Syncor Solutions Limited, 2020 BCSC 2038 (“Shelly Morris”). the Supreme Court of British Columbia:

  1. noted that the definition of “improvement” is inclusive and can bear meanings other than those included in section 1 of the B.C. Act, as long as they do not subtract from the prescribed definition;[9]Shelly Morris at para. 24; quoting Boomars Plumbing & Heating Ltd. v Marogna Brothers Enterprises Ltd., 1998 CanLII 2970 (BCCA).
  2. emphasized that “improvement” means an improvement to the property itself; and
  3. held that the lien claimant must have contributed physically to the improvement of the site in question.[10]Shelly Morris at para. 30.

Both Alexander Construction and Shelly Morris are consistent with case law and statutory interpretation in Alberta and Saskatchewan, so the guidance from the jurisprudence in those provinces may be instructive for similar B.C. determinations.

(b)          Alberta

Alberta generally draws a much clearer line between physical construction of an improvement (which is lienable) and maintenance work (which is not) than jurisdictions such as Ontario. Given the absence of the terms “repair” and “capital repair” in the Alberta Act, Alberta courts have put more emphasis on the nature or characterization of the overall project rather than the effect or intended effect of the work in question.

Identification of the “improvement” in Alberta is determined by reference to the “overall project” and not the specific work being undertaken, so if nothing new is actually being physically constructed, there is likely not an improvement and thus likely no lien rights. On the other hand, if the overall project meets the definition of an improvement, then nearly any type of work or service provided to that larger project – and that is a necessary or supporting part of physical construction – will likely be lienable.

Fortunately, the Alberta Court of Queen’s Bench provided clear guidance on the specific circumstances in which maintenance will and will not be lienable in the 2021 case of Young EnergyServe Inc v LR Ltd,[11]LR Processing Partnership,Young EnergyServe Inc v LR Ltd, LR Processing Partnership, 2021 ABQB 101 (“Young EnergyServe”). where it dealt with the question of repair and maintenance work during a turnaround project at a gas processing plant.

In finding that a filed lien was not valid, the Court held that “the cleaning, repairing, and relining the interior of tanks and pressure vessels and replacing old or faulty piping and pressure valves are not directly related to the process of construction” and that “[t]hose activities are more appropriately characterized as being in the nature of maintenance.”[12]Young EnergyServe at para. 67.

First, the Court acknowledged that the recent approach taken in Alberta is to consider an “improvement” from the perspective of the “overall project”:

There is no evidence to suggest that the Turnaround Project was a component of a larger construction project on the Mazeppa Lands. In particular, there is no evidence: (i) that the overall project in this case was any broader than the Turnaround Project; or (ii) that the Turnaround Project was a component of the construction of the Mazeppa Power Plant.

I mention this point for context because the Alberta Courts considers “improvement” from the perspective of the “overall project” involved: Re Davidson Well Drilling Limited, 2016 ABQB 416 at para 79 [Davidson Well Drilling]. Based on the facts underlying this case, the Work under the Turnaround Project was not part of an overall project to build a structure on the Mazeppa Lands: see Trotter and Morton Building Technologies Inc v Stealth Acoustical & Emission Control Inc, 2017 ABQB 262 (Master Prowse) at paras 54, 55, and 58. […][13]Young EnergyServe at paras. 30, 31.

The Court noted that both the Supreme Court of Canada and the Alberta Court of Appeal have held that, in order to establish lien rights, a claimant must first strictly comply with the relevant statutory pre-requisites to the creation of the right. However, courts are then entitled to liberally interpret other matters dealt with in that statute. In this case, there was no evidence that the project in question was a component of the overall project to build a new structure on the lands.

Second, the Court reiterated and summarized the Alberta case law, which draws a clear distinction between work involved in the construction of an improvement versus subsequent maintenance, stating:

Alberta courts have determined that services must be directly related to the creation or construction of an improvement to entitle the provider to a lien under the Alberta BLA. As a result, the Courts in this province have, as a rule, rejected claims related to the maintenance and the remediation of lands.

The Alberta Court of Appeal has reinforced this interpretative approach by commenting that when assessing whether an applicant and the work it performs fall within the terms of the Alberta BLA, the proper approach is to give a strict interpretation to the relevant provisions: see Calgary Landscape at paras 13-19. That appellate Court was cited, and it stated that “[a]lthough it is clear that services need not be physically performed upon the improvement to fall with the meaning of the [Alberta BLA] they must […] be directly related to the process of construction”: Hett v Samoth Realty Projects Limited, 1977 ALTASCAD 120 (CanLII), 3 Alta LR (2d) 97 at para 25 (CA); see also Leduc Estates Ltd v IBI Group, 1992 CanLII 6104 (AB QB) at para 34.

In adopting this interpretation, the Alberta Court of Appeal confirmed that while services need not be physically performed for the improvement to fall within the meaning of the [Alberta Act], they must be directly related to the process of construction. As a result, the Alberta Courts have drawn a clear distinction between the work involved in the construction of an improvement as part of the construction process on a building site and the subsequent maintenance. As held in Calgary Landscape the former is “obviously related to ‘making or constructing’ while the latter, falling in the category of maintenance, clearly is not”: at para 12.[14]Young EnergyServe at paras. 44-46. [emphasis added]

Finally, the Court addressed jurisprudence under the Ontario and Saskatchewan Acts. With respect to the Ontario version, the Court noted that it would be inappropriate to rely on its definition of “improvement” because of a clear difference in the language between the Alberta and Ontario Acts; specifically, the use of the phrase “alternation, addition or repair” in the definition of “improvement” under the Ontario Act, which is absent in the Alberta Act. With respect to the Saskatchewan version, the Court referred to Re Davidson Well Drilling Limited,[15]Re Davidson Well Drilling Limited, 2016 ABQB 416. wherein Madam Justice J.M. Ross had previously acknowledged that the definition of “improvement” under the Saskatchewan Act is virtually identical to the Alberta Act. The Court ultimately used these factors to further distinguish the definition of “improvement” under the Ontario and Alberta Acts.

(c)          Ontario

In summary of what follows below, a party in Ontario may be entitled to lien rights where the work is intended to improve the value of the land (as in the case of “capital repair” work), but not in situations where the work is intended to maintain the status quo (i.e. non-lienable maintenance work). As such, the emphasis in Ontario case law appears to be on the effect or even the ‘intended effect’ of the work, rather than characterization of the larger “overall project” as there is, for example, in Alberta and Saskatchewan.

In 310 Waste Ltd. v Casboro Industries Ltd.,[16]310 Waste Ltd. v Casboro Industries Ltd., 2005 Carswell Ont 6441 (“310 Waste”). the Ontario Superior Court of Justice (Divisional Court) dealt with an appeal by a landowner from a judgement dismissing an application to discharge a lien associated with 310 Waste Ltd.’s removal of hundreds of thousands of tires from a dumpsite owned by Casboro Industries Ltd. Casboro, as landowner, retained 310, as contractor, when it was ordered by the Ministry of Environment to remove the tires from their dumpsite. When Casboro failed to pay amounts owing for the removal of the tires, 310 registered a lien against the associated lands.

On appeal, the Court agreed with the application judge’s rationale that maintenance (such as the removal of snow) did not give rise to a construction lien.[17]310 Waste at paras. 5, 6. However, the Court also agreed with the application judge’s conclusion that the removal of the tires, which were declared “waste” and a “contaminant” within the meaning of the Environmental Protection Act,[18]Environmental Protection Act, RSO 1990, c E. 19. “clearly enhanced the value of the land” and was therefore considered an “improvement” of the land as defined by the old Ontario Act, and held the lien filed by 310 to be valid.[19]310 Waste at paras. 7, 8. The rationale used in this decision is somewhat suspect given that merely “enhanc[ing] the value of land” without more (i.e. physical construction) has been rejected in many other contexts as an adequate justification to establish lien rights. Albeit, removing “contamination” through the use of physical labour likely does meet the established definition of construction.

Later, in U.S. Steel Canada Inc., Re,[20]U.S. Steel Canada Inc., Re, 2016 CarswellOnt 12275. (“U.S. Steel”) the Ontario Superior Court of Justice found that the following supply of goods and services could give rise to lien rights: (i) the adding of soil and the supply of flower plants; and (ii) spraying for weeds where the contractor provided its own material; and removing weeds, spreading dirt and gravel, and installing cloth. Further, the Court went so far as to suggest that “grounds keeping” would give rise to a lien right, although this conflicts with more strict interpretations from other jurisdictions.[21]Calgary Landscape Maintenance Ltd. v Khoury Real Estate Services Ltd., 1993 CarswellAlta 75, at paras. 11 and 12.

U.S. Steel created some uncertainty for owners and contractors alike, as landscape maintenance contractors in Ontario now had a valid claim that their services could be lienable. As a means to provide clarity, the Ontario legislature passed the Construction Lien Act Amendment Act,[22]Construction Lien Act Amendment Act, SO 2017, c 24 – Bill 142. on December 12, 2017. Subsequently, on July 1, 2018, changes to the definition of “improvement” came into effect under the new, renamed Ontario Act, which succeeded the old Ontario Act.

Where the old Ontario Act defined improvement to include “any alteration, addition or repair to the land”, the new Ontario Act specifies “capital repair” instead of “repair” to the land. These amendments were based on recommendations from an extensive report prepared by the Ontario government in 2016[23]Striking the Balance: Expert Review of Ontario’s Construction Lien Act: see https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/. which addressed the distinction between repairs and maintenance by making reference to the Income Tax Act.[24]Income Tax Act, RSC 1985, c.1 (5th Supp.). Specifically, the report indicated that while capital repairs are intended to improve the land, “maintenance” is intended to maintain the original condition of the land and is not intended to form part of an “improvement”, and therefore does not result in a lien right.[25]Sections 2.1.1 and 2.3 of Striking the Balance: Expert Review of Ontario’s Construction Lien Act. This distinction puts the emphasis in Ontario on the effect or intent of the work (i.e. improvement, addition, “value-add” etc.), whereas Alberta and Saskatchewan courts are more interested in the nature of the labour, and whether it’s best characterized as actual physical construction or mere maintenance.

(d)          Saskatchewan

The question of lienability of maintenance work has not been dealt with as directly in Saskatchewan as it has in Alberta and Ontario. As always, whether maintenance work is lienable will depend on whether such work contributes to the “improvement” of the lands in question.

In Crescent Point Energy Corp. v DFA Transport Ltd.,[26]Crescent Point Energy Corp. v DFA Transport Ltd., 2019 SKQB 189 (“Crescent Point v DFA”). the Saskatchewan Court of Queen’s Bench considered, among other things, whether service hauling of various fluids to or from well sites constituted an “improvement” under the Saskatchewan Act and could therefore result in valid lien rights. Crescent Point was an Alberta partnership carrying on business in Saskatchewan in the exploration, production, sales and marketing of petroleum, natural gas and related hydrocarbons. DFA Transport was a Saskatchewan transport company that supplied Crescent Point with various fluid hauling services.

When Crescent Point ceased payments, claiming overbilling, DFA Transport filed an action and application to compel Crescent Point to pay all outstanding amounts and notified Crescent Point of a Claim of Lien registered against their interests in Saskatchewan.

The parties agreed that DFA Transport’s work included:

  • Production hauling: transporting water or oil from well sites to processing facilities or disposal sites;
  • Service hauling: transporting water, kill fluid, and other liquids to or from well sites or battery sites in connection with maintenance and repairs to wells or batteries performed by third parties; and
  • Completion hauling: transporting water to well sites to fill frac storage tanks and transporting flowback liquid away from well sites.[27]Crescent Point v DFA at para. 11.

In determining the validity of any lien rights as a result of DFA Transport’s work for Crescent Point, the Court considered whether the work constituted an “improvement” within the meaning of the Saskatchewan Act. Specifically, the Court relied on its previous decision in Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of),[28]Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of), [1992] 3 WWR 152 (Sask QB). which held that if a person provides a service which has a direct and real contribution to the construction of an improvement, that person will be entitled to make a lien claim.[29]Crescent Point v DFA at para. 19.

The Court also referred to Boomer Transport Ltd. v Prevail Energy Canada Ltd.,[30]Boomer Transport Ltd. v Prevail Energy Canada Ltd., 2014 SKQB 368. where it had previously held that services that included, inter alia, the pumping out and hauling of water on a continuous basis, where that water was required to be extracted from an oil-water mixture being pumped from the ground through an oil well head, were an integral part of the production of oil for market and thus met the definition of a lienable claim.

Given the foregoing, the Court ultimately held that DFA Transport’s Claim of Lien was valid because, by servicing Crescent Point’s well sites and transporting fluids to and from the well sites, such services were an “improvement” under the Saskatchewan Act.[31]Crescent Point v DFA at para. 26.

Post Script

Posts on this website take many forms, from brief blog posts to deep-dive features which eventually form the foundation for updates to one or more of my books. This post is, obviously, of the latter variety. If you want (even more) up-to-date analysis on this topic and others, I suggest subscribing to (or purchasing a physical copy of) Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition.

References

References
1 Builders’ Lien Act, SBC 1997, c 45 (the “B.C. Act”).
2 Builders’ Lien Act, RSA 2000, c B-7; as of July 1, 2021, Alberta’s Builders’ Lien Act has been replaced by the Prompt Payment and Construction Lien Act, Chapter P-26.4 (the “Alberta Act”).
3 Builders’ Lien Act, SS 1984-85-86, c B-7.1 (the “Saskatchewan Act”).
4 Construction Act, RSO 1990, c C 30 (the “Ontario Act”).
5 Alexander Construction Ltd. v Al-ZaibakEyeglasses, 2011 BCSC 590, 2011 CarswellBC 2349 (“Alexander Construction).
6 Alexander Construction at para. 66.
7 Alexander Construction at para. 66.
8 Shelly Morris Business Services Ltd. v Syncor Solutions Limited, 2020 BCSC 2038 (“Shelly Morris”).
9 Shelly Morris at para. 24; quoting Boomars Plumbing & Heating Ltd. v Marogna Brothers Enterprises Ltd., 1998 CanLII 2970 (BCCA).
10 Shelly Morris at para. 30.
11 LR Processing Partnership,Young EnergyServe Inc v LR Ltd, LR Processing Partnership, 2021 ABQB 101 (“Young EnergyServe”).
12 Young EnergyServe at para. 67.
13 Young EnergyServe at paras. 30, 31.
14 Young EnergyServe at paras. 44-46.
15 Re Davidson Well Drilling Limited, 2016 ABQB 416.
16 310 Waste Ltd. v Casboro Industries Ltd., 2005 Carswell Ont 6441 (“310 Waste”).
17 310 Waste at paras. 5, 6.
18 Environmental Protection Act, RSO 1990, c E. 19.
19 310 Waste at paras. 7, 8.
20 U.S. Steel Canada Inc., Re, 2016 CarswellOnt 12275. (“U.S. Steel”)
21 Calgary Landscape Maintenance Ltd. v Khoury Real Estate Services Ltd., 1993 CarswellAlta 75, at paras. 11 and 12.
22 Construction Lien Act Amendment Act, SO 2017, c 24 – Bill 142.
23 Striking the Balance: Expert Review of Ontario’s Construction Lien Act: see https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/.
24 Income Tax Act, RSC 1985, c.1 (5th Supp.).
25 Sections 2.1.1 and 2.3 of Striking the Balance: Expert Review of Ontario’s Construction Lien Act.
26 Crescent Point Energy Corp. v DFA Transport Ltd., 2019 SKQB 189 (“Crescent Point v DFA”).
27 Crescent Point v DFA at para. 11.
28 Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of), [1992] 3 WWR 152 (Sask QB).
29 Crescent Point v DFA at para. 19.
30 Boomer Transport Ltd. v Prevail Energy Canada Ltd., 2014 SKQB 368.
31 Crescent Point v DFA at para. 26.

Saving Paper Could Cost You – Potential Perils of Incorporating Terms by Reference: Razar Contracting Services Ltd v. Evoqua Water

Why this decision matters

Commercial agreements frequently incorporate or make reference to separate documents that form part of the larger bargain. This practice is known as “incorporation by reference”, and in the construction industry often involves the incorporation of language from prime or “head” contracts into subcontracts. In Razar Contracting Services Ltd. v Evoqua Water (“Razar Contracting”),[1] Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69.  the Manitoba Court of Queen’s Bench dealt with such language and refused to give effect to an arbitration clause located on the Defendant’s website, which the Defendant referenced in the purchase order it issued. Razar Contracting tells a cautionary tale about attempting to incorporate standard terms and conditions into a transaction merely by referencing where those terms can be found.

While the Court in Razar Contracting was more detailed in its dealing with the specific issues of jurisdiction to determine the existence of the alleged arbitration clause and the interpretation of same, the focus of this article is on the larger application of the Court’s findings regarding incorporation by reference.

In a world where contracts are increasingly negotiated, transmitted and executed electronically, businesses who rely on incorporating terms and conditions to their transactions without specifically including the terms themselves in the exchanges with the counterparty will want to consider what steps they can take to ensure that they can demonstrate their terms and conditions (i) have been brought to the other party’s attention; and (ii) were knowingly accepted.

Key Facts

Razar Contracting involved a dispute between a contractor, Evoqua Water Technologies Canada Ltd. (“Evoqua”), and a mechanical subcontractor, Razar Contracting Services Ltd. (“Razar”). The contractual relationship between the parties was formed after Razar responded to a bid package issued by Evoqua which included a form of subcontract with certain conditions. When Razar was awarded the contract, Evoqua simply issued a purchase order that stated that the terms and conditions of purchase that was located on its website applied to the purchase order unless otherwise agreed to in writing; Evoqua also provided a link to the website.[2]Ibid, at para. 6.

Razar’s president attested that he attempted, without success, to access the website. He made no further attempts, believing the form of subcontract in the bid documents would be executed.  However, that did not come to pass.[3]Ibid, at para 7.

Razar commenced an Action at the Manitoba Court of Queen’s Bench regarding unpaid invoices and claims for delay and impact costs. Evoqua brought an application to stay Razar’s Action, arguing that the terms and conditions on its website contained an arbitration clause which required all disputes between the parties to be resolved by an arbitral tribunal seated in Pittsburgh, PA, administered by JAMS.

The Court’s Analysis

The Application was formally brought pursuant to Article 8 of the Model Law On International Commercial Arbitration (“Model Law”),[4]The Model Law is in force in Manitoba pursuant to the International Commercial Arbitration Act, C.C.S.M. c. C151 (“ICAA“). Interestingly, the Court noted that both parties’ written … Continue reading which provides that on an application by a party, the court “shall” refer the parties to arbitration “unless it finds that the agreement is null and void, inoperative or incapable of being performed”.

The Court was asked to consider two main issues, which for the purpose of this article are addressed in reverse: (1) whether there was a valid and binding arbitration agreement, and (2) whether the Court had jurisdiction to rule on the validity or effectiveness of the arbitration agreement.[5]Ibid, at para. 13.

Issue 1 – Is There a Valid and Binding Arbitration Agreement?

Having taken jurisdiction of the matter for the reasons detailed further below, Kroft J. applied a balance of probabilities standard and found that no arbitration agreement was formed in the circumstances either for the purposes of the Model Law (which requires arbitration agreements to be in writing)[6]Model Law Article 7(2). or at common law.

In assessing whether an arbitration agreement was formed for the purposes of the Model Law, Kroft J. noted that under Article 7(2) of the Model Law, an agreement in writing could be found, among other ways, in acknowledgements in pleadings, or in “an exchange” of telecommunications that provide a record of the agreement.[7]Model Law Article 7(2). Kroft J. dismissed the argument that defining the purchase orders as the “Agreement” in the Statement of Claim signified Razar’s agreement to the terms and conditions on Evoqua’s website.

Examining the evidence concerning the formation of the agreement between the parties, Kroft J. noted that there was no “exchange” of communication between the parties where they both acknowledged and agreed to the arbitration clause, and held that such an exchange was required by the plain language of Article 7(2) of the Model Law to form an arbitration agreement.

Additionally, Kroft J. applied common law contractual formation principles and held that there was no meeting of the minds regarding the agreement to arbitrate. In so doing, Kroft J. took a high level view of the facts and circumstances surrounding the formation of the contractual relationship. Kroft J. noted that Evoqua was seeking to impose the terms outlined on its website, despite the fact that the bid documents had in fact contemplated an attached subcontract agreement with its own special conditions.[8]Ibid. Further, Kroft J. was persuaded that at the time of bidding, the president of Razar had not seen the terms and conditions that Evoqua sought to enforce, nor did the Court find evidence that Evoqua had taken adequate steps to draw those terms and conditions to Razar’s specific attention.[9]Ibid.

Having found no binding arbitration agreement, Evoqua’s application for a stay of the action in favour of arbitration was denied.

Issue 2 – Does the Court Have Jurisdiction in the First Instance?

Citing the seminal Supreme Court of Canada decision of Dell Computer Corp. v. Union des consommateurs[10]Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34. [“Dell”], Evoqua had argued that the Manitoba Court did not have the jurisdiction to rule on the existence or validity of the arbitration agreement, as that jurisdiction lay with the arbitral tribunal in the first instance. Dell confirmed the applicability of the competence-competence principle in Canada (the arbitrator has the competence to rule on its own competence)[11]Stated differently, the jurisdiction to determine the scope of its own jurisdiction. and further established the “general rule” that challenges to an arbitrator’s jurisdiction “must be resolved first by the arbitrator”, subject to questions of law or questions of mixed fact and law that require only superficial consideration of the evidence.[12]Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at paras 84-86.

Razar sought to distinguish Dell, relying on a 2009 British Columbia Supreme Court case, H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc.[13]H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc., 2009 BCSC 1389. [“H & H Marine”], which suggested that Dell was limited in application to arbitration issues arising under the Civil Code of Québec, and that the applicant needs to tender an evidentiary or statutory basis for the application of the competence-competence principle.

Justice Kroft relied on H & H Marine, and found that Evoqua had failed to tender evidence pertaining to the JAMS arbitration rules to establish the competence-competence principle would apply to the arbitral tribunal in Pittsburgh, PA. Justice Kroft also noted that in the event Dell applied, this case fell within the exceptions articulated in Dell, as the facts were not in dispute and the question before the Court required a legal conclusion, not material findings of fact. As such, Kroft J. found that the Court had the jurisdiction to consider whether there was an arbitration agreement and that the Court ought to exercise that jurisdiction.

Commentary

Regarding the interpretation of the contract generally, the Court’s consideration of whether the terms incorporated by reference actually formed part of the agreement stands as an interesting 21st century twist on the so-called “battle of the forms”.[14]See Butler Machine Tool Co Ltd. v Ex-Cell-O Corp (England) Ltd. [1977] EWCA Civ 9. What is consistent with this long line of authority is the underlying question of whether the terms and conditions have been specifically drawn to the attention of the seller.

Razar Contracting stands as an example of the difficulty a party may have establishing that such attention has been ensured when the terms and conditions are located outside of the main agreement and indeed may not have even been reduced to paper. While not explicitly referenced in Kroft J.’s decision, Razar Contracting is in keeping with the general trend that an arbitration clause in one contract is only incorporated into another contract if that clause is clearly and specifically referenced. In this way, some courts appear to have applied a more stringent level of scrutiny where the proposed term is an arbitration clause in particular. For example, in Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc.,[15]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) Chapnik J. held that “[i]ncorporation of an arbitration clause can only be accomplished by distinct and specific words …”,[16]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 11 [emphasis added].ultimately finding that “the manifest intention of the parties, as reflected on the face of the subcontract document, was not to include the arbitration clause therein; in the alternative, the matter was overlooked and cannot now be imposed upon the parties in the absence of agreement between them.”[17]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 15. Similarly, in Sunny Corner Enterprises Inc. v. Dustex Corp.,[18]Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172. Kennedy C.J.S.C. held that a “general incorporation of the prime contract into the subcontract will not normally include the arbitration clause.”[19]Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172 at para. 39 [emphasis added]. See also Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition at § 4:23. Incorporation … Continue reading While Kroft J. perhaps does not go as far, he nonetheless held “that the reference in Evoqua’s purchase order to a website showing multiple categories of terms and conditions with no real guidance does not amount to a written arbitration agreement […]”.[20]Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69 at para. 33.

More broadly, the British Columbia Supreme Court provided a valuable summary of the notice and accessibility considerations regarding the incorporation of terms and conditions through an external website in its decision in Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd.:[21]Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224.

In an appropriate case it might be that parties, especially sophisticated commercial actors, would be taken to know that terms and conditions are found on a website. It is now commonplace for companies to have internet websites which allow for electronic transactions. However, in order for terms and conditions on an internet website to be within the common understanding of the parties and part of their contract, there should be some evidence that those parties had interacted through the use of their websites, not just by email, or at least had notice of the terms and conditions on the other’s website at the time of entry into contract. There must also be evidence that those terms and conditions were posted on the website at the requisite time. It would be inappropriate to simply imply notice of terms absent any evidence that the website had been used before or that reasonable steps were taken to bring the existence of that website, and specifically the terms and conditions contained therein, to the attention of the other party prior to the contract.[22]Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224 at para. 124. See also Centre intégré universitaire de santé et de services sociaux du … Continue reading

Finally, with respect to the alleged arbitration process, the Court’s conclusion that the general rule of systemic referral to arbitration articulated in Dell need not apply in the circumstances is surprising, both legally and on the facts of the case. Dell has been followed by courts across common law Canada numerous times, including in Manitoba.[23]See for instance, Uber Technologies Inc. v Heller, 2020 SCC 16 where the Supreme Court of Canada confirmed that the framework from Dell Computer Corp. applies in Ontario based on the “similarities … Continue reading Also surprising is the Court’s decision not to address Article 16 of the Model law in the decision, as this provides for the application of the competence-competence principle for a tribunal subject to the Model Law.[24]On account of conflicts of laws principles, foreign law is to be assumed to be the same as the law of the forum unless specifically pled and proven otherwise: Old North State Brewing Co v Newlands … Continue reading Instead, the Court opted to recognize its discretionary jurisdiction afforded by Dell.

References

References
1 Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69.
2 Ibid, at para. 6.
3 Ibid, at para 7.
4 The Model Law is in force in Manitoba pursuant to the International Commercial Arbitration Act, C.C.S.M. c. C151 (“ICAA“). Interestingly, the Court noted that both parties’ written submissions were premised on the domestic Arbitration Act, CCSM c A120, applying. The application of the ICAA was only addressed in oral argument where both parties acknowledged that the ICAA applied.
5 Ibid, at para. 13.
6 Model Law Article 7(2).
7 Model Law Article 7(2).
8 Ibid.
9 Ibid.
10 Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34.
11 Stated differently, the jurisdiction to determine the scope of its own jurisdiction.
12 Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at paras 84-86.
13 H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc., 2009 BCSC 1389.
14 See Butler Machine Tool Co Ltd. v Ex-Cell-O Corp (England) Ltd. [1977] EWCA Civ 9.
15 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.)
16 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 11 [emphasis added].
17 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 15.
18 Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172.
19 Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172 at para. 39 [emphasis added]. See also Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition at § 4:23. Incorporation by Reference, which notes that in the United Kingdom, this rule is sometimes referred to as the “rule in Aughton” after the decision in Aughton Ltd. (formerly Aughton Group Ltd.) v. M.F. Kent Services Ltd. (1991), 57 B.L.R. 1, 31 Con. L.R. 60 (Eng. C.A.).
20 Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69 at para. 33.
21 Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224.
22 Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224 at para. 124. See also Centre intégré universitaire de santé et de services sociaux du Centre-Sud-de-l’Île-de-Montréal c. Oracle Canada, 2017 QCCS 6377 at para. 75, where Peacock J.S.C. commented on specific notice and accessibility issues and held: “Here, the Plaintiff could not find the external document by simply visiting www.oracle.com/contracts. The title of the document on the website was not the same as the one provided in the purchase order, a series of steps were required to reach the document, and the French version was only accessible if the English title happened to be found.”
23 See for instance, Uber Technologies Inc. v Heller, 2020 SCC 16 where the Supreme Court of Canada confirmed that the framework from Dell Computer Corp. applies in Ontario based on the “similarities between the arbitration regimes in Ontario, British Columbia and Quebec.” (at para 35). See also Wardrop v Ericsson Canada Inc., 2021 MBQB 183, and Buffalo Point Development Corp. Ltd. v. Alexander et al, 2012 MBQB 341.
24 On account of conflicts of laws principles, foreign law is to be assumed to be the same as the law of the forum unless specifically pled and proven otherwise: Old North State Brewing Co v Newlands Services Inc. (1998) 58 BCLR (3d) 144 at 154.

Holding Pattern: Alberta Awaits Prompt Payment and Adjudication Regime

Provincial legislatures across Canada are finally heeding the call from industry to implement prompt payment and adjudication regimes. As of the writing of this post however, only Ontario’s Construction Act [1]RSO 1990 c C.30 has in-force prompt payment and adjudication provisions. Elsewhere in Canada, legislatures are at various stages of implementation. In Alberta, Bills 37 and 62 introduced amendments (and then revised those amendments) to the Builders’ Lien Act,[2]RSA 2000 c B-7 to introduce prompt payment and adjudication – amendments so significant, that the Builders’ Lien Act will be renamed to become the Prompt Payment and Construction Lien Act (the “PPCLA“). The authors have previously written regarding the PPCLA and the introduction and passing of Bills 37 and 62 here and here, respectively.

July 1, 2021 was the anticipated proclamation date for the PPCLA when Bill 37 was introduced in October 2020.[3]Protecting jobs in the construction industry – October 21, 2020 – YouTube This ambitious timeline gave industry only a few months to prepare for the substantial changes brought about by the new legislation. Unfortunately, the line between ambition and folly is often best perceived in hindsight, which appears to have been the case here. Following what the Minister’s office describes as “overwhelming feedback from stakeholders”, the July 1, 2021 effective date has come and gone without the PPCLA having been proclaimed into force, and without an alternate effective date being announced.

As of the writing of this post, industry stakeholders continue to engage with the government over the details of how this new legislative framework will operate in practice. Those details are anticipated to be fleshed out in the PPCLA‘s  yet-to-be-released regulations.

In addition to requiring the finalization of the regulations, the PPCLA will require the Minister to appoint an authorized “Nominating Authority” who will be empowered to appoint adjudicators to decide disputes subject to the adjudication regime. As of the date of this blog post, only the ADR Institute of Canada (ADRIC), in collaboration with the Royal Institute of Chartered Surveyors (RICS), has publicly announced an intention to submit a bid to become a Nominating Authority. An ADRIC-RICS Nominating Authority does not appear to be in a position to appoint adjudicators until at least 2022 however, when it has had an opportunity to qualify adjudicators according to its standards.[4]https://adric.ca/construction-adjudication/construction-adjudication-training/  It therefore appears unlikely that the PPCLA will be able to be proclaimed until at least spring 2022.

In the meantime, contracts or subcontracts entered into before the PPCLA is in force will continue to be subject to the existing provisions of the Builders’ Lien Act, subject to the yet-to-be-released regulations.[5]See Bill 37 s.26, PPCLA s. 74

For more information regarding the major consequences of the PPCLA, not just for the construction industry, but for any industry that is involved directly or indirectly in the buying, selling, drilling, mining, developing, maintaining or financing of land in Alberta, please see our team’s presentation that can be accessed here.

We will continue to monitor the progress of the PPCLA and other prompt payment and adjudication regimes across the country, and will provide further updates as they become available.

References

References
1 RSO 1990 c C.30
2 RSA 2000 c B-7
3 Protecting jobs in the construction industry – October 21, 2020 – YouTube
4 https://adric.ca/construction-adjudication/construction-adjudication-training/
5 See Bill 37 s.26, PPCLA s. 74

The Duty Good Faith in Contractual Discretionary Powers – Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton

The Ontario Superior Court of Justice (the “Court”) recently dealt with the question of what constitutes a breach of the duty of good faith contractual performance in the context of a construction contract. In Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton, 2020 ONSC 5806 (“Dominus”), the Court held that the City of Brampton’s failure to consent to significant reduction in the amount of a security deposit when much of the contracted work had been completed because of a third party dispute amounted to a breach of the general (and in this case contractual) duty to act reasonably and in good faith in the exercise of contractual discretion.

While decided in 2020, the Court’s decision in Dominus remains consistent with the Supreme Court of Canada’s (the “SCC”) more recent decision in Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd., 2021 SCC 7 (“Wastech”),[1]Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech]. and provides a useful, construction-specific example of when a party is found to be exercising their discretion unreasonably and therefore contrary to the duty of good faith. In short, refusing (or choosing) to exercise contractual discretion based on an overly rigid interpretation is unreasonable and contrary to the duty of good faith.

Good Faith Principle and Discretionary Contractual Clauses

As outlined below, the general organizing principle of good faith contractual performance was first recognized by the SCC in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”).[2]Bhasin v. Hrynew, 2014 SCC 71, at para. 63. The organizing principle underlies and manifests various other more specific doctrines governing contractual performance. One such specific doctrine, as identified in Bhasin, is the duty of good faith performance in exercising contractual discretion. Despite being decided before the SCC’s more recent decision in Wastech, the Court in Dominus provides some useful and detailed commentary regarding the exercise of such discretion.

In Wastech, the SCC held that the duty to exercise contractual discretion in good faith requires that a party exercise their discretionary powers reasonably.[3]Wastech at para. 67. Reasonableness is determined based on the purpose for which the discretionary powers were granted under the contract;[4]Ibid, at para. 88. an unreasonable exercise of discretion is one which is unconnected to the contractual purpose and is a breach of the duty of good faith.[5]Ibid, at para. 75. In Wastech, the Greater Vancouver Sewerage and Drainage District (“Metro”) was in a long-term contract for the removal and transportation of waste by Wastech Services Ltd. The contract gave Metro the discretion to choose which site to send the waste to and Wastech’s rate was dependent on the distance the waste was transported. Metro exercised their discretion by choosing the closer site, resulting in Wastech earning less revenue. Contrary to the ruling of the arbitrator, the SCC determined that the contract did not require Metro to use its discretion to ensure Wastech reached its target operating ratio in any given year. As such Metro, was not in breach of the duty of good faith because their exercise of discretion was connected to the purpose of the contract and was therefore reasonable.[6]Ibid, at para. 100.

Summary of the Decision

Facts

Dominus CityZen Brampton SWQRP Inc. (“Dominus”), the developer, was contracted by the City of Brampton (the “City”) to complete an expansion of the Brampton City Hall. Dominus and the City entered into a Site Plant Agreement (the “SPA”) pursuant to the Planning Act.[7]Planning Act, R.S.O. 1990, c. P.13. Under the SPA, the City had two roles: first as the owner of the lands and occupier of the City Hall constructed thereon, and second as the regulator acting on behalf of the community and public interests that are protected by the SPA. The Court was ultimately tasked with the interpretation of a security deposit provision of the SPA. Dominus was required by the SPA to post a deposit of $646,510.00 (the “Security Deposit”) as a performance guarantee for the estimated cost of all works required to be completed as part of the City Hall project.

Section 15 of the SPA provided that Dominus may, “from time to time, apply to the [City] for a reduction in the amount of the security by an amount up to ninety per cent (90%) of the value of the works for which security was deposited […]”.[8]Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton, 2020 ONSC 5806 at para. 26 [Dominus].

Further, section 29 of the SPA contained a provision requiring the parties to act reasonably and in good faith:

Where approval or consent is required hereunder, such approval or consent shall not be unreasonably withheld. Where something is required to be done hereunder to the satisfaction of or in the discretion or opinion of a party or official thereof, such party or official shall act reasonably in exercising such satisfaction, discretion or opinion.[9]Ibid, at para. 30.

Dominus completed the redevelopment of the City Hall with the exception of two relatively minor items: a trench drain and a wooden privacy fence. Dominus took the position that it was unable to complete the two remaining items because of an ongoing suit that the owners of the neighboring properties had commenced against the City and Dominus for nuisance and trespass, claiming damages in excess of $2MM. Dominus requested that a portion of the Security Deposit be returned in amounts relative to the value of the work completed. However, the City denied Dominus’ request for two reasons:

  1. Under the City’s interpretation of the SPA, all work must be completed before any release of funds would be considered or made;[10]Ibid, at paras. 6 and 8. and,
  2. Because of the presence of an indemnity provision contained in the SPA, under which the City was claiming a right to set-off the indemnity claims against the Security Deposit[11]Ibid, at para. 6.
Issues and Decision

In considering the parties’ submissions and arguments, the Court distilled the dispute into six key questions.[12]Ibid, at para. 32. For the purposes of this blog post, we will focus on four of those questions:

  1. Does the SPA Allow for a Partial Reduction of the Security for Completed Works When Some Remain Outstanding?
  2. Was the City in breach of the SPA or any independent duty of good faith, or did it act unreasonably or in bad faith, by refusing to consider this request and/or for refusing to reduce the Security Deposit?
  3. Did the Security Deposit cover, or could it be set-off against, the City’s right to claim indemnity?
  4. If the entitlement to a reduction or refund is established, how much of the Security Deposit is Dominus entitled to receive?

Ultimately, the Court found the City’s refusal to release or reduce the Security Deposit was not reasonable in the circumstances and was contrary to the organizing principle of good faith in the performance of contracts, including under the specific terms of the SPA. Further, the Court held that the SPA did not give rise to any right of set-off against the Security Deposit, and ordered that the City release $596,510.00 plus pre-judgement interest.[13]Ibid, at para. 78.

Analysis

In the result, the OSC found that a proper interpretation of the SPA based on the principles of contractual interpretation would allow for a partial reduction in the Security Deposit, as sought by Dominus.[14]Ibid, at para. 38. The Court held that the City’s interpretation of the SPA was too rigid and therefore unreasonable,[15]Ibid, at paras. 41 and 51. holding that the SPA did not link the Security Deposit to the indemnity provisions, nor did it expressly allow for setting-off of other claims against the Security Deposit.[16]Ibid, at para. 72. Therefore, the presence of the indemnity clause was held to be not relevant to the City’s determination of whether the deposit should be reduced or released, such that its refusal to do same was in breach of its general and contractual good faith obligations.[17]Ibid, at para. 72.

Did the SPA Allow for a Partial Reduction of the Security for Completed Works When Some Remain Outstanding?

The Court found that on a proper, contextual and purposeful interpretation of the SPA that a partial reduction of the Security Deposit for completed works was available even when some works remained outstanding.[18]Ibid, at para. 7. The City argued that in their role as a regulator and holder of public funds they were entitled to insist on strict adherence to the requirements of the SPA because of the recognized overarching planning and public interest objectives of the SPA.[19]Ibid, at para. 50. However, the Court determined that interpreting the SPA to allow for a partial reduction of the Security Deposit did not undermine the public interest or planning objectives associated with the SPA; instead, the Court held that such an interpretation “reflects an appropriate balance between the commercial realities of a significant contract such as this and the objective of securing the completion of the remaining outstanding works in furtherance of the planning objectives embodied in the SPA.”[20]Ibid, at para. 40.

The Court reached the following conclusions regarding the proper interpretation of section 15 of the SPA:

Section 15.3 explicitly provides that Dominus may, from time to time, apply to the City for a reduction in the amount of the security by an amount up to ninety per cent (90%) of the value of the works for which security was deposited. The contemplation of applications from time to time suggests that more then one request may be made and considered before the 90% cap is reached.[21]Ibid, at para. 38.

It makes common and commercial sense that these applications, from time to time, would correspond with the completion of certain works for which the certification requirements have been met to enable a partial release of the security deposit. Section 8 requires an engineering certificate prior to any reduction in security posted for public works purposes or occupancy of the building and section 13.5 requires an architect’s certificate prior to the release of any landscaping securities. The City emphasizes the word “any” in these provisions and says that it should be read as prohibiting “any” reduction in or release of security until all of the works have been completed. The word “any” could be equally read to be referring to any one of a number of potential requests for reductions or releases of the security. Reading the word “any” in this way is harmonious with the contemplation in section 15 that there may be releases or reductions to the security from time to time, for completed works that have received the necessary certifications.[22]Ibid, at para. 39. [emphasis added]

Ultimately, the Court found that the City’s interpretation of the SPA, namely that it did not allow for any opportunity for Dominus to apply for and potentially receive a reduction in the Security Deposit until all work was completed, “is too rigid an interpretation and application of the SPA.”[23]Ibid, at para. 41.

Was the City in breach of the SPA or any independent duty of good faith, or did it act unreasonably or in bad faith, by refusing to consider this request and/or for refusing to reduce the security deposit?

In addressing the issue of good faith, the Court cited Bhasin for the following general proposition regarding the duty of good faith in contractual discretion: “Failing to exercise contractual discretion without any reasonable justification is contrary the common law good faith principles in the performance of a contract.”[24]Ibid, at para. 27.

The City made three main arguments as to why they had reasonable justification for their failure to exercise the discretion granted to them under the SPA:

  1. Based on the overarching planning and public interest objectives of the SPA, they could insist on strict compliance with the SPA, such that all work must be completed before a reduction is to be considered;
  2. The general language in section 21.5 of the SPA, “together with all other applicable provisions of the SPA” gave the City discretion to withhold the Security Deposit until all incomplete works had been completed; and
  3. The existence of the third party tort claim triggered an indemnity by Dominus to the City.

The Court rejected the three justifications provided by the City and found that they were unreasonable for the following reasons.

In response to the first justification, the Court found that the reasonableness of this justification is dependent upon whether the SPA allowed for a partial reduction in the Security Deposit.[25]Ibid, at para. 50. As summarized above, the Court found that the City’s interpretation of the SPA was unreasonable, and therefore overarching planning and public interest objectives of the SPA did not give rise to a reasonable justification.[26]Ibid, at para. 51.

In response to the second justification, the Court determined that the City’s interpretation of section 21.5 of the SPA as “granting unfettered discretion to say no to a reduction of the Security Deposit as long as any of the works remain incomplete” was also incorrect.[27]Ibid, at para. 53. Under section 21.5 of the SPA, Dominus acknowledged that the City would not be required to reduce or release the Security Deposit until it was satisfied that Dominus had: (i) complied with the Construction Lien Act;[28]Construction Lien Act, RSO 1990, c C-30 (now the Construction Act, RSO 1990, c C-30). (ii) paid and discharged any and all liens under same; and (iii) indemnified the City for any claims arising out of a failure to comply with the Construction Lien Act. Based on contractual interpretation principles, the Court reiterated that a general phrase “must be read to be qualified by the sections identified immediately before it.”[29]Dominus, at para. 53. Therefore, the Court held that the general phrase in section 21.5 only applied to the specific lien claims contemplated in the sections regarding the Construction Lien Act, and did not provide the City with a general unfettered discretion to reject Dominus’ request.[30]Ibid.

In response to the third justification, the Court found that “the security deposit does not apply to the tort claims, nor has the City even made an indemnity claim against Dominus in respect of the tort claims.”[31]Ibid, at para. 58. Therefore, the existence of the third party tort claim did not provide the City with a reasonable justification to refuse or reduce the Security Deposit. This issue is discussed further below.

Ultimately, the Court concluded:

The City has, in this case, fettered the exercise of its discretion by too narrow an interpretation of the SPA (that unless all works are complete, nothing will be returned) and extraneous and irrelevant self-serving considerations (as security that was not contracted for or a set off for a contingent indemnity claim in tort). The City’s refusal to release or reduce the security deposit is not reasonable in the circumstances and is contrary to the organizing principle of good faith in the performance of contracts and section 29 of the SPA.[32]Ibid, at para. 32. [emphasis added]

Did the security deposit cover, or could it be set-off against, the City’s right to claim indemnity?

Pursuant to the indemnity provision contained in section 20 of the SPA, Dominus agreed to indemnify the City for all actions arising based on Dominus’ performance of the contract.[33]Ibid, at para. 66. However, the Court found that the SPA did not link the Security Deposit to the indemnity provision, noting that the SPA clearly “earmarked” the Security Deposit only to secure the cost of the work Dominus undertook to complete.[34]Ibid.

The City also claimed that it was able to retain the Security Deposit based on a right of set-off. However, the Court noted that the parties did not make substantial submission in this respect. Nonetheless, the Court identified two somewhat tenuous instances that a right to set-off could exist, but which ultimately did not.[35]Ibid, at para. 72. First, for a potential contingent indemnity claim against Dominus in respect of the tort claims.[36]Ibid, at paras 69 and 70. However, the capacity in which the City was being sued in the tort claim and the capacity that the City had entered into the SPA (i.e. their two roles) may affect this right of set-off.[37]Ibid. Second, the uncertain costs to access the neighboring land could result in a contractual claim under section 15.2, however the Court determined that such an interpretation would be a stretch of the indemnity language.[38]Ibid, at para. 71.

If the entitlement to a reduction or refund is established, how much of the security deposit is Dominus entitled to receive?

Having found that the SPA allowed Dominus to be eligible for a possible reduction in the Security Deposit and that the City was in breach of the SPA for failing to exercise their discretion regarding same, the Court determined that Dominus was entitled to a receive a portion of the Security Deposit referable to the completed works.[39]Ibid, at para. 73.

Pursuant to section 15.4 of the SPA, Dominus was eligible to receive up to 90% of the value of the completed works until the two-year warranty lapsed.[40]Ibid, at para. 74. Given that five years had elapsed, the Court determined that Dominus would receive 100% of the Security Deposit, minus the value of the anticipated costs of the two uncompleted items.[41]Ibid. Evidence was given regarding the estimated value of that uncompleted work to be $10,000.00. The Court then multiplied this number by four to allow for a significant buffer given the uncertainty surrounding the additional costs associated with completing the outstanding work. Therefore, the reasonable estimation of the outstanding work, which included a reasonable holdback for uncertain additional costs associated with such work, was held to be $50,000.00.[42]Ibid, at para. 75. As such, the Court ordered the City to release $596,510.00 ($646,510.00 less $50,000.00) of the Security Deposit to Dominus.[43]Ibid, at para. 78.

References

References
1 Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech].
2 Bhasin v. Hrynew, 2014 SCC 71, at para. 63.
3 Wastech at para. 67.
4 Ibid, at para. 88.
5 Ibid, at para. 75.
6 Ibid, at para. 100.
7 Planning Act, R.S.O. 1990, c. P.13.
8 Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton, 2020 ONSC 5806 at para. 26 [Dominus].
9 Ibid, at para. 30.
10 Ibid, at paras. 6 and 8.
11 Ibid, at para. 6.
12 Ibid, at para. 32.
13 Ibid, at para. 78.
14 Ibid, at para. 38.
15 Ibid, at paras. 41 and 51.
16 Ibid, at para. 72.
17 Ibid, at para. 72.
18 Ibid, at para. 7.
19 Ibid, at para. 50.
20 Ibid, at para. 40.
21 Ibid, at para. 38.
22 Ibid, at para. 39.
23 Ibid, at para. 41.
24 Ibid, at para. 27.
25 Ibid, at para. 50.
26 Ibid, at para. 51.
27 Ibid, at para. 53.
28 Construction Lien Act, RSO 1990, c C-30 (now the Construction Act, RSO 1990, c C-30).
29 Dominus, at para. 53.
30 Ibid.
31 Ibid, at para. 58.
32 Ibid, at para. 32.
33 Ibid, at para. 66.
34 Ibid.
35 Ibid, at para. 72.
36 Ibid, at paras 69 and 70.
37 Ibid.
38 Ibid, at para. 71.
39 Ibid, at para. 73.
40 Ibid, at para. 74.
41 Ibid.
42 Ibid, at para. 75.
43 Ibid, at para. 78.