Lessons Learned
No decision better demonstrates the bow wave of unnecessary destruction and expense that expands in the wake of emotionally-fuelled squabbling. It destroys viable contracts and viable businesses, and in this case led to 14 years of litigation, the outcome of which should have been apparent before the first pleading was filed.
Construction
In September 2007, the municipal government of Halifax contracted High Performance Energy Systems to design and construct cooling and heating systems for Alderney Gate, a building that houses municipal government offices, a public library, and the Halifax Transit ferry terminal.
The fixed-price contract between Halifax and High Performance stipulated that upon substantial completion by High Performance, a 20-year capital lease agreement would come into effect through which High Performance would operate and maintain the retrofits and advanced energy system.
By February 2009, High Performance’s work on the project had effectively halted due to “hopeless” financial disputes between its three principals, whom a lower court found had engaged in an internal quarrel marked by “dubious” and “outrageous” tactics while neglecting the critical legal and accounting problems facing the company.
Its major customers became exasperated with the results. When the three principals found themselves bickering over responsibility for the work stoppage in front of Julian Boyle, the municipal engineer serving as Halifax’s municipal liaison with High Performance, he was aghast at the implied state of the company and told them they were like “[c]hildren playing in the playground…and arguing about whose ball it is”. Boyle demanded that High Performance immediately employ a project manager as they had been contractually obligated to do.
When no project manager materialized and work did not recommence, Halifax notified High Performance that it was in default of the contract a month later, in March 2009, was advised of High Performance’s insolvency in April, and terminated the contract in May. Halifax completed construction itself over the course of the next year at a cost of about $700,000.
Shortly after termination, two of the principals submitted a trio of invoices on behalf of High Performance for a total of $3,681,620, an “astonishing” amount that implied a claim by High Performance that it had achieved substantial completion, even in the face of the work stoppage and contract termination, and that contained hundreds of thousands of dollars of entries for unauthorized extras.
Litigation
By June 2009, subcontractors of High Performance had filed liens seeking payment of outstanding invoices from High Performance to the cumulative tune of approximately $202,000.
A year later, in July 2010, High Performance and two of its principals filed an application against the third, James Bardsley, seeking relief for shareholder oppression pursuant to the Companies Act (RSNS 1989, c 81), including permission for the two principals to bring a derivative action in the name of High Performance against Halifax to pursue any claims arising from the Alderney Gate contract.
In November 2010, an interim application judge – noting that the parties disagreed over whether the contemplated action contained a valid claim, and thus whether it was in the interest of High Performance to pursue – denied that particular request in order to preserve the status quo until a decision could be rendered when the main application was heard.
However, the interim application judge did take steps to settle the chaos inflicted by the ongoing quarrel by ordering:
- the appointment of a chartered accountant to prepare financial statements;
- the imposition of duties to co-operate with the accountant;
- appointment of an auditor;
- the imposition of duties to cooperate with the auditor; and
- a freeze on all payments to directors, including salary and for expenses incurred before the order, excepting trade payables, non-director employee salaries, and expenses approved unanimously by the directors.
All three principals defaulted on the order almost immediately, much to the ire of the main application judge:
Bardsley engaged in outrageous tactics again…Mr. Stewart and Mr. Beaini engaged in unfair tactics against Mr. Bardsley, tactics that were violations of the very order they had obtained. The chartered accountant appointed by the court was unable to complete his work. No audit was ever done. To this day, the principals have no understanding of the serious impediment financial disorganization caused to their venture.
Analysis
Receivership & Summary Judgement
PricewaterhouseCoopers was appointed receiver for High Performance in September 2013, and in January 2015 High Performance commenced a crossclaim against the municipality of Halifax in the subcontractors’ builders’ lien action, seeking contribution and indemnity from Halifax for any damages payable to the subcontractors.
A motion judge subsequently granted a summary judgement allowing Halifax’s limitations defence against a claim of contractual breach, dismissing High Performance’s claim against Halifax on the basis of unjust enrichment, and striking out High Performance’s defence.
Court of Appeal
High Performance found no greater sympathy at the Court of Appeal.
The limitations issue arose from a delay of more than five years before High Performance filed its claim against Halifax. High Performance attempted to argue that its “corporate incapacity” due to the internal war that had raged between its principals kept the limitations period from running, which the Court treated exactly as courts typically treat arguments unsupported by authority, never previously recognized at law, and advanced by a party clearly running a deep deficit in terms of equity.
Regarding the motion judge’s decision to strike the High Performance statement of defence (which alleged that Halifax might bear some responsibility to pay the $202,000 claimed by the subcontractors High Performance had hired), the Court of Appeal clarified that there were no material facts in dispute that might have established any such responsibility on the part of Halifax: there was no direct contract between the subcontractors and Halifax, and High Performance had already acknowledged the amounts claimed by the subcontractors were valid.
The Court likewise affirmed the motion judge’s decision to bar High Performance from claiming unjust enrichment. The Court clarified that the unjust enrichment claim had not been dismissed because of limitations issues, but rather because a contract existed: unjust enrichment was not even sufficiently viable to subject to a limitations analysis because the contractual breach provides a reason for the enrichment that precludes equitable relief. To wit, the following passage from Caglar v Moore, 2005 CanLII 39871 (ONSC), which the Court quoted:
Where there exists a contract under which parties are governed, and one party gains by a breach of the same, that party is not truly enriched, because the breaching party takes that gain subject to its liability for breach of contract. If the other party does not sue within the time set out in the Limitations Act, then, without more, there is a juristic reason for the gain because the breaching party is entitled to rely on the intended limitation.
However, unjust enrichment was not developed simply to provide an alternative remedy to that offered by the contract, without more. Otherwise, the remedy would impact directly on the rights of all parties to rely on the normal limitation period for breach of contract.
…
Allowing the claim for unjust enrichment in this case would mean that every time a limitation period for breach of contract expires, a plaintiff can rely on unjust enrichment, since the very nature of time limitations results in a benefit to one party and deprivation to the other. As a result, not only would the statutory laws creating limitations of action be circumvented, but the whole area of contractual damages would be undermined. The contract was a juristic reason for any enrichment in the case at bar, given that notice was contemplated by it, and the limitation period for an action for the breach has expired.