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.

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.

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

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

Background

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

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

Decision of the Ontario Court of Appeal

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

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

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

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

Comments

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

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

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

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

Building Contracts – Tenders – Subcontracts – Implied Representations and Conditions

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

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

 

The New Canada-China Foreign Investment Agreement: Will The UNCITRAL Arbitration Rules Result In Enforceable Justice?

Canada has recently signed a Foreign Investment Promotion and Protection Agreement (FIPA) with the People’s Republic of China.  Under the Agreement, a complaining investor is entitled to submit a claim and have it dealt with under the UNCITRAL Arbitration Rules.  The real questions about this Agreement are:

  • Will the UNCITRAL Arbitration rules in FIPA provide real and enforceable protection for  Canadian investments in China?
  • Will the UNCITRAL Arbitration Rules be sufficient to overcome Canadian concerns about the lack of responsiveness of the Chinese government to domestic public opinion and the lack of independence of the Chinese judiciary?

Parliament and the Canadian public have not had a large role in the discussions about the wisdom of entering into the FIPA with China and the wisdom of the specific terms of that Agreement.  The Agreement was signed in Vladivostok, Russia on September 9, 2012 and may come into force after it has been tabled with Parliament for 21 sitting days.  The Agreement may be seen at https://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fipa-apie/china…

Protections in the Agreement

Part B of the FIPA with China contains broad expressions of protection to investors from one country when they are investing in the other country.

Part B contains:

Article 4:                     guarantees for fair and equal treatment of investments

Article 5:                     most-favoured-nation treatment

Articles 6 and 11:        treatment no less favourable than that accorded to nationals

Article 7:                     protections for senior management and boards of directors

Article 10:                   protection against expropriation except for a public purpose and only with compensation

Article 12:                   protections for the free transfer of capital, profits, dividends and similar payments without delay

Article 15:                   the dispute resolution mechanism between Canada and China as the Contracting Parties.

The protections for Canadian investors contained in Part B may be ineffective without a Chinese government encouraged by public opinion to adhere to these protections.  After all, remedial protections are of little use if governments actually do renounce their contractual obligations.  Canadian investors may not view the Chinese government as under any compulsion of domestic public opinion to continually and fully implement these protections in the future.  Indeed, the real impetus for China (or indeed any country) to adhere to its obligations under bilateral treaties may be international opinion.

Remedial protections in any agreement are ineffective if no system for enforcing a judgment is available.  The need for effective enforcement may be greater to the extent that a government is not compelled by domestic public opinion to adhere to its agreements. Canadian investors might not view an action in the Chinese courts as leading to an impartial access to justice if the protections are withdrawn.

In this setting, the remedial aspects of FIPA are critically important from a perceptual standpoint, but not a complete answer from an enforcement standpoint.

Dispute Resolution System in the Agreement

Part C of the Agreement contains the dispute resolution system for an investor of a contracting party which wishes to assert a claim against the other Contracting State.

Before submitting a claim, the disputing investor must give notice of intent to submit a claim to arbitration, and consultations between the disputing parties must be held within 30 days of that notice unless the disputing parties agree otherwise.

Before submitting its claim, the disputing party must agree to arbitration under this Part of the Agreement, and at least six months must have elapsed from the date of the events giving rise to the claim and at least four months from the notice of intent to submit the claim to arbitration.  A three year limitation period is established, and the claim must be made within three years of the date when the investor first acquired or should have first acquired knowledge of the alleged breach and knowledge of the alleged loss or damage. (Article 21)

Annex C.21 requires that a Canadian investor wishing to make a claim under the Agreement shall first participate in the “administrative reconsideration procedure” that is apparently available in China, and withdraw any claim in a Chinese court.

Article 22 of the FIPA provides that the investor can submit the claim under any one of three regimes:

  1. The ICSID Convention, provided that both Canada and China are parties to that Convention.  That Convention is the Convention on the Settlement of Investment Disputes between States and Nationals of other States, made at Washington, D.C. in 1885. While China has ratified this Convention, Canada has signed but not ratified the Convention because several of the provinces have not approved it. The English version of the ICSID Convention can be viewed at the ICSID’s website: https://icsid.worldbank.org/icsid
  2. The Additional Facility Rules of ICSID, if one of Canada or China is not a party to the ICSID Convention.  China is a signatory to the ICSID Convention, so investors could use the Facility Rules if they wish to do so.  The Additional Facilities Rules can also be viewed at ICSID’s website. Those rules provide an ad hoc form of arbitration similar to the UNCITRAL Arbitration Rules.
  3. The UNCITRAL Arbitration Rules, being the Arbitration Rules adopted by the United Nations Commission on International Trade Law, as amended from time to time.  The UNCITRAL Arbitration Rules can be viewed at UNCITRAL’s website:  http.www.uncitral.org

Article 24 of the FIPA provides that the arbitration shall be heard by three persons, that the arbitrators are to be experienced in international law, trade, investment or dispute resolution and that they are to be independent of the contracting governments and disputing parties. If the dispute relates to financial institutions, then the parties may agree that, in addition, all the arbitrators shall have expertise or experience in financial institutions. At a minimum, however, the chair person is required to have that expertise or experience.

Under Article 26, claims with questions of fact or law in common can be consolidated.

Articles 27 to 32 of the Agreement provides for such matters as the production of documents of, and the participation and submissions by third parties, the public access to the hearings and documents, governing law, interim measures and the enforcement of an Award.

Article 32(4) requires Canada and China to provide for enforcement of the award in its respective territory. This is the sole provision in the FIPA that deals with enforcement of awards.  This provision cannot be enforced by the investor, and can only be enforced by the other Contracting State.  So it will be imperative for Canada to ensure that a system is implemented in China for the enforcement of awards under this FIPA, and to monitor the effectiveness of that system.

The UNCITRAL Arbitration Rules

The availability of the UNCITRAL Arbitration Rules should provide a good measure of administrative law fairness to the arbitration proceedings under the FIPA.  Those Rules were adopted by the United Nations Commission on International Trade Law (UNCITRAL) which is the same body that developed the UNCITRAL Model Law. Among the countries that have adopted it, the Model Law provides a common basis for the conduct and enforcement of international commercial arbitrations, no matter where the arbitrations are conducted.  The origins of the UNCITRAL Model Law are found in the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).  The Model Law can also be viewed on UNCITRAL’s website.

The UNCITRAL Arbitration Rules were developed for use in international commercial arbitrations.  First adopted in 1976, these rules have been successfully used for many years to ensure fairness in the conduct of international commercial arbitrations.  It is the statutory adoption of the Model Law in the countries which have adopted that Law, not these Rules themselves, that requires courts in those countries to enforce the arbitral award.

The UNCITRAL Arbitration Rules go a long way to guaranteeing procedural fairness in the process leading to an award in the arbitration process provided to investors under FIPA. However, one aspect of the dispute resolution system in FIPA cannot be addressed by those Rules, and that is the enforcement of the arbitral award.  As noted, Article 32 (4) of the FIPA requires Canada and China to provide for the enforcement of an award in each of their territories.  Only Canada, and not a Canadian investor, can require China to implement such a system in that country. Only Canada, and not a Canadian investor, can commence proceedings under FIPA if such enforcement does not occur.

Until a tried and true enforcement mechanism is established by China, Canadian investors may be reluctant to conclude that the UNCITRAL Arbitration Rules, tried and true as they are, will ensure that the Chinese government complies with FIPA, or if it does not, that an arbitral award will actually result in compensation.

Conclusion

The UNCITRAL Arbitration Rules have been used in international commercial arbitration for many years, and also in other bilateral trade and investment agreements.  However, their use in the agreement with China is significant since Canadian investors may be concerned about the responsiveness of the Chinese government to domestic public opinion and about the independence of Chinese courts compared to those in other countries with which Canada has bilateral treaties.

The use of the UNCITRAL Arbitration Rules in the FIPA with China will go a long way to giving confidence to Canadian investors that they will obtain procedural fairness in the arbitration of a dispute arising under the FIPA with China.  However, procedural fairness is no substitute for actual adherence of governments to their agreements.  The real issues will be whether both the Chinese and Canadian governments fully implement FIPA and whether awards made by the arbitral process are enforced.

Thomas G. Heintzman O.C.,Q.C., FCIArb                                                                                                     October 7, 2012

www.heintzmanadr.com
www.constructionlawcanada.com

What Is The Effect of Piercing The Corporate Veil?

When the court pierces the corporate veil of a corporation, can another party be found to be the real party to the contract? Or is that other party only subject to consequential relief and not contractual relief? That is the issue which the English Court of Appeal recently faced in VTB Capital Plc v. Nutritek International Corp. That Court recently held that even in the face of fraud and other serious wrongdoing, the other party cannot be held to be a party to the contract unless the corporation which was shown as a party to the contract was a façade or sham.

The identity of the parties to a contract is fundamental to the contract’s legal existence and its commercial viability. In the context of building contracts, that identity is even more important since the parties undertake inter-related performance obligations and are relying upon the creditworthiness of the other parties to make sure that the project is completed. So the decision in VTB Capital should be carefully analyzed by those concerned with building contracts.

The Factual Background

 

The claim arose from a loan by VTB Capital, a company incorporated in England which carried on business as a bank in London. VTB Capital was controlled by a Russian state bank. The loan was to a company (RAP) incorporated in Russia, and was for the purpose of RAP buying six dairy companies in Russia. Other related agreements were also made, including a share warrant deed and participation agreement. The loan was not repaid and VTB Capital commenced an action in the English courts and sought to serve the claim on the defendants outside England. VTB Capital originally alleged that it was induced to enter into the loan by two other Russian companies and a Russian individual (the “Russian third parties”). It then sought to amend its claim to “pierce the corporate veil” of RAP, and assert that RAP was really only a puppet of the Russian third parties and that they were the real parties to the contract. VTB then asked permission to serve its claim outside England, with that contractual allegation included in the claim.

The English Court of Appeal held that when a corporation is a party to a contract and the corporate veil of the corporation is sought to be pierced so as to make others liable, then apart from the case where the corporation is a façade or sham, those others are not liable as parties to the contract. The other parties are only liable for consequential relief or based upon separate tortious or other wrongdoing. Accordingly, the Court of Appeal held that the new contract claim against the three Russian companies was not a valid legal claim and refused to permit the claim with this contractual allegation to be served outside England.

Piercing The Corporate Veil

The Court of Appeal undertook a lengthy review of English case law concerning “piercing the corporate veil.” It agreed that the corporate veil of a corporation can be pierced if there are “special circumstances….indicating that [the corporation] is a mere façade concealing the true facts.” Yet, it held that a proper reading of English cases disclosed that the “fraudulent or dishonest use of a company by its corporators or controllers so as to conceal the latters’ true identities” cannot in law possibly make those third party corporators or controllers the real and original parties to the contract. Rather, the corporation remained the party to the contract. If the corporators and controllers were to be held liable, that could occur through consequential remedies which would hold them accountable for monies or benefits received or for other equitable remedies, or they might be liable based upon separate tortious claims.

The Court of Appeal refused to apply the agency doctrine of undisclosed principals to this situation. The court said that the law on that subject was “anomalous”. On the facts of the case, the court said that the doctrine could not apply because “the puppeteers [had not] authorized the puppets to enter into the contracts on their behalf”, and because “VTB [did not intend] to contract with anyone other than the counterparties” named in the contracts.

The Court of Appeal accordingly found that the judicial authorities

“do not, however, go to the length of treating the puppet company as other than a legal person that is formally distinct and separate from the puppeteer; and were they to do otherwise, they would be ignoring the principles of Salomon. Consistently with that, they do not provide any basis for the proposition that the puppeteer should be regarded as having always been a party to a contract to which it or he plainly was not a party.”

This decision will have to be read very carefully. A bald conclusion – that the fraudulent or dishonest use of a company whereby the real actors’ identity is not disclosed cannot give rise to contractual liability for those actors -appears to raise serious legal questions, at least in Canada.

Moreover, this decision was given in the context of an application to serve the claim outside the jurisdiction and not upon the ultimate merits of the case. So the ambit or application of the decision may be somewhat in doubt. The following are some of the apparent limitations of the decision.

First, the Court of Appeal did not doubt that, if the corporation was a “façade or sham”, then the corporate veil could be pierced. So, the VTB Capital decision involves a party to a contract which was a real party with a real corporate existence. What amounts to a “façade” or “sham” in any particular case may be a factual issue, but the present decision does not exclude the contractual liability of a third party if the corporate party fits within those words. However, if the “puppet” is a real and existing entity, then the puppet and not the puppeteer is liable.

Second, the Court of Appeal did not hold that, if the facts of a case fit the doctrine of undisclosed liability, then that doctrine cannot and should not be applied. All it held was that the present facts could not be “shoe-horned” (as it said) into that doctrine.

In essence, the Court of Appeal accepted the “façade or sham” basis for piercing the corporate veil but rejected the two other submissions for doing so.

First, it rejected the proposition that the court has a general power to pierce the corporate veil and that the court could hold the third party contractually liable “in the interests of justice.”

Second, it rejected the proposition that the corporate veil could be pierced if “the company was involved in some impropriety”. If the latter conduct existed, then the “relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts”, and not the contractual liability of the wrongdoer.

There is little doubt that, the next time a plaintiff in the Anglo-Canadian context attempts to pierce the corporate veil, the decision in VTB Capital will be pulled off the shelf, or downloaded from bailii. It is a densely written decision which cited many English decisions. But it cited no cases from Canada where the “corporate veil” issue has been frequently addressed.

On policy grounds, the decision adheres strictly to traditional contract law limiting the effect and enforcement of a contract to the parties named in it. The English Court of Appeal made a policy decision not to allow fraudulent corporate activity to give rise to a contract remedy against third parties. It did so at a time when courts, at least in Canada, are giving broader effect to contracts and allowing them to be enforced by third parties, and when Canadian courts seem inclined to provide wide remedies against corporate fraud. The future impact of the VTB Capital will depend, at least in Canada, on whether the same policy choice is made in Canada as was made in England.

Building Contracts – Parties – Corporations – Piercing the Corporate Veil

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.) at Chapter 1, Part 1(a)(i)(E)

VTB Capital Plc v. Nutritek International Corp., [2012] EWCA 808

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                          August 7, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

Remember Rainy Sky: The Commercially Sensible Interpretation Prevails

Every once in a while, an important decision comes along which should be put in your hip pocket so that it can be pulled out when needed.  Rainy Sky S.A. v. Kookmin Bank is such a decision.  In this decision, the U.K. Supreme Court (formerly the House of Lords) recently held that if there is a choice between interpretations of an agreement, the commercially sensible one should be adopted.

That principle may not be rocket science, but it is crucially important for two reasons.

First, the Supreme Court held this principle applies even if another interpretation is arguable.  The more commercially sensible interpretation will be selected whenever there is a contest over the meaning of a contract.

Second, this approach may make it more important to lay the groundwork for a sensible interpretation in the evidence.

Rainy Sky is an easy case to remember:  whenever the sky looks gloomy in a dispute, think of Rainy Sky!  It concerned a bond given by the Koomin Bank in relation to a shipbuilding construction contract.  The bond was given to protect the buyer in the event of the builder’s/seller’s default under the contract and obliged Koomin to pay “all such sums due to you under the Contract, between the buyer and the seller.”

The question was:   what “such sums” did the bond cover?  Did it cover only events such as the rejection by the buyer of the vessel, the cancellation or rescission of the contract by the buyer or the total loss of the vessel, all of which were specifically mentioned in the bond as events obliging the seller to repay the buyer?  Or did the bond also cover the insolvency of the seller?

In fact, the seller went bankrupt and failed to refund the advances paid by the buyer to the seller, and that event triggered Rainy Sky’s claim on the bond.  Rainy Sky asserted that the return of the advances was included as an obligation of Koomin under the bond.  Koomin asserted that the bond did not cover the seller’s insolvency, and that it covered only the specifically mentioned obligations of repayment contained in the construction contract.

The trial judge held that the bond covered the insolvency of the seller.  The Court of Appeal held that it did not, and that only the events of repayment specifically mentioned in the bond were covered by it. The UK Supreme Court restored the trial judgment.

The Supreme Court’s decision is a ringing endorsement of the reliability of commercial common sense as a touchstone to contract interpretation.  The Court adopted the following statement by the dissenting judge in the Court of Appeal:

“As the [trial] judge said, insolvency of the Builder was the situation for which the security of an advance payment bond was most likely to be needed….It defies commercial common sense to think that this, among all other such obligations, was the only one which the parties intended should not be secured.  Had the parties intended this surprising result I would have expected the contracts and the bonds to have spelt this out clearly but they do not do so.”

The Supreme Court re-iterated the principle stated by Lord Justice Hoffman in another case to the effect that “if the language is capable of more than one construction, it is not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement.”

The Court also referred to a previous decision of Lord Justice Longmore to the effect that “if a clause is capable of two meanings, it is quite possible that neither meaning will flout common sense, but that, in such a case, it is much more appropriate to adopt the more, rather than the less, commercial construction.”

The Supreme Court ended its judgment with the following statement:

“..the omission of the obligation to make such re-payment from the Bonds would flout common sense but it is not necessary to go so far…..of the two arguable constructions of paragraph (3) of the Bonds, the Buyers’ construction is to be preferred because it is consistent with the commercial purpose of the Bonds in a way in which the Bank’s construction is not.”

The court did not limit this principle to contracts in the nature of bonds and indemnities.  Rather, its pronouncement was clearly intended to relate to the general interpretation of contracts.  As such, it is of the highest persuasive authority in all common law countries.

The face of the judgment does not indicate that there was any expert or other evidence demonstrating the commercial common sense that the Supreme Court adopted.  So that sense of commercial reasonableness had to be derived from other sources.

In the Rainy Sky case, a primary source was the commercial skill and experience of the U.K. Supreme Court.  A court with that experience can make that judgment which other courts, even of high authority, may not be able to make if composed of judges who have not had extensive commercial experience.

If a judge or court does not have commercial experience, then that experience may have to be provided by expert or other testimony.  That circumstance may result in an unfortunate dispute between expert witnesses about what is “commercially sensible”.  That is a dispute which the Court of Appeal may have felt was undesirable.  The Court of Appeal also seemed unwilling to be the judge of what result amounted to commercial common sense when sophisticated parties had not themselves expressly stated that result in their contract.

In any event, we now have a judgment that we can rely upon for a crucial principle:  the commercially sensible interpretation of a contract prevails, even if another interpretation is arguable.

Construction Law  –  Interpretation of Building Contracts  –  Bonds:

Rainy Sky S.A. v. Kookmin Bank, [2011] UKSC 50

Thomas G. Heintzman O.C., Q.C.                                                                                                            December 3, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

Mary Carter Decision Upheld By The Supreme Court Of Canada

In my article of April 2011, I reported about the decision in Aecon Buildings v. Stephenson Engineering Limited.  In that decision, the Ontario Court of Appeal stayed an owner’s claim because of the non-disclosure of a Mary Carter agreement. The Supreme Court of Canada has recently dismissed an application for leave to appeal from that decision.  Accordingly, the ruling by the Court of Appeal will stand as good law across Canada on this issue.

Background to the Supreme Court’s Decision:

The City of Brampton had been sued by Aecon.  The City then sued the consultant, blaming it for the problem giving rise to Aecon’s claim. In turn, the consultant claimed over against the sub-consultant.

Before instituting its claim against the consultant, the City had effectively settled the claim against it by Aecon.  This sort of settlement, in which the settling parties continue as parties to the action, is known as a Mary Carter agreement.  The City did not disclose to the consultant that it had previously settled with Aecon. The City proceeded with its claim over against the consultant within the context of an apparently continuing claim against it by Aecon. The settlement agreement was only disclosed when it was discovered by the consultant who then demanded that it be produced.

The Ontario Court of Appeal held that the non-disclosure of the settlement agreement was an abuse of process and stayed the City’s claim against the consultant.  As a consequence, the claim by the consultant against the sub-consultant was also stayed.

The City of Brampton sought leave to appeal to the Supreme Court of Canada from the decision of the Ontario Court of Appeal.  On June 30, 2011, the Supreme Court dismissed the application.  As is usual, the Supreme Court gave no reason for its decision.

However, this is one of the rare occasions in which the reasoning of the Supreme Court can be discerned.  That is because of a decision which the Court released on June 23, 2011:  Aecon Buildings, a Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited, 2011 SCC 33.

In that decision, a panel of the Court denied a motion of the City to admit further evidence about the importance of the proposed appeal.  The City wanted that evidence before the Court due to a requirement in section 43 of the Supreme Court of Canada Act that any application for leave to appeal in a civil case must demonstrate that the proposed appeal raises a matter of public importance.

The City’s proposed evidence consisted of a number of articles written about the Court of Appeal’s decision.  In those articles, the authors spoke about the importance of that decision to the ongoing conduct of actions in which Mary Carter agreements are made.  However, the Supreme Court held that the articles did not address an issue of real importance.  It said: “Here, however, the issues are straightforward.  Must the Mary Carter-type agreement be disclosed immediately and if it isn’t what are the consequences?”

Justice Binnie answers the “importance” question:

Justice Binnie was a member of the panel and wrote the decision denying leave to admit this further evidence on the application.  He answered the “importance” question as follows:

“I think “immediate disclosure” is self-explanatory.  Its application in a particular case will be fact dependent.  Here, as stated, the applicant never did volunteer disclosure of the existence of the agreement to the parties or to the court. The Court of Appeal decided that in the circumstances a stay of proceedings was warranted.  The procedural point about how a party goes about disclosing the existence of such an agreement to the court (were they to decide to do so) is not something that raises a legal issue of public importance for this Court.”

As a further indication of the narrowness of the issue sought to be raised in its Court, the panel further observed:

“Nobody expresses any doubt that the rule stated by the Court of Appeal is consistent with its past authority, or suggests that the remedy for abuse of process was not, as a matter of law, available.”

While the panel of the Court said that “whether the rule itself raises a legal question of public importance is for the leave panel to decide,” the die had been cast in the Court’s decision on the motion to admit further evidence.  The court’s decision to dismiss the application for leave to appeal was a predictable result of the Court’s view of the narrowness and lack of importance of the issue.

As a result, the comments in my article of April 3, 2011 are now under-lined:

“This decision is a reminder of the drastic remedies available to the Courts if litigation is conducted unfairly” and the parties must be scrupulous to ensure that Mary Carter and other similar agreements affecting the conduct of litigation are immediately disclosed.

The irony, of course, is that the settlement of disputes is itself of public value, especially in the field of construction law.  Settlements allow the parties to reduce their risks and avoid the expenditure of money on litigation, and they save the public resources spent on courts.  Construction disputes frequently arise from good faith differences of opinion about the meaning of building contacts and about events during tenders and on the job site.  These differences are part of the cost of doing business and the parties owe it to themselves to make every reasonable effort to settle and not prolong their differences.

But if they do settle, then they owe a duty to the court system to disclose the settlement.  Otherwise, the justice system cannot properly function.  Since the judge has no independent power or authority to inquire into the events, the justice system depends upon the adversarial system to arrive at the just result.  If some of the apparent adversaries are no longer true adversaries, then that fact must be disclosed to the court.

Construction Law – Settlement – Agreement – Litigation – Champertous – Abuse of Process:

Aecon Buildings, A Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited (SCC Judgments in Leave Applications, June 30, 2011, No. 34112)

Thomas G. Heintzman, O.C., Q.C.                                                                                                                           September 25, 2011

Can A Construction Lien Be Based On A Pre-Incorporation Contract?

Construction Lien Claims  –  Pre-Incorporation Contracts

What happens when a pre-incorporation construction contract is made in the name of a company which does not do the work, and then the construction lien is filed in the name of the company that was later incorporated and did the work?

That was the situation faced by the Alberta Court of Appeal in Canbar West Projects Ltd v. Sure Shot Sandblasting & Painting Ltd.  The Court held that the lien was valid and, furthermore, that the contract had been effectively adopted by the company that did the work.

A company known as Can-West Projects Ltd entered into a contract with Sure Shot  to construct facilities on land owned by a company related to Sure Shot.  The problem was that Can-West was not then incorporated, and when the principals behind it went to incorporate the company, they found that the name was taken. So they incorporated a company by the name of Canbar West Projects Ltd. and that company registered the name “Can-West Projects” as a trade name.  After it was incorporated, the rest of the work was done by Canbar West Projects Ltd and it registered the lien.

The trial judge held that Canbar did not have a valid lien because it had not entered into the contract, and that Canbar had not adopted the contract made in the name of Can-West.  The Court of Appeal of Alberta reversed both of these findings.

First, the Court of Appeal held that, so far as the lien was concerned, it did not matter that the contract was not in the name of Canbar.  The entitlement to a lien arises from three elements:

–         the owner requests the work

–         the claimant does the work

–         and the work improves the value of the land

The lien does not arise from the existence of a contract.  Indeed a contract with the owner will not exist between the owner and a sub-contractor and yet sub-contractors can file liens.  Here, Canbar had done the work, at least from the date of its incorporation; and the land had been improved.  The mere fact that the contract had been made with a contractor under another name did not mean that the owner had not requested the work to be done.  In effect, the trial judge had incorrectly used principles relating to the making of contracts when the issue related to construction liens.

Some of the work had been done before Canbar’s incorporation.  As to that work, the Court of Appeal referred to section 15(3) of the Alberta Business Corporations Act, which deals with pre-incorporation contracts.  The Court held that Canbar had adopted the contract made in the name of Can-West, in two ways.

First, the name on the contract was very similar to the name of the company as incorporated.  In this circumstance, the contract can be said to have been made “in its name” within the subsection.  As the court said, “minor variations in name surely must be included with respect to contracts made in the name of a then non-existing corporation.”

Second, the contract was made “on behalf of” the company within the meaning of the subsection. The principals intended to incorporate a company, to use the Can-West name and to have it perform the work, and they only adopted another name because that name was taken.  The company in fact adopted and performed the contract and the owner took no objection to the company doing further work after they knew that the lien was filed in the name of CanBar.

On the latter point, the trial judge had held that the existence of another, totally unrelated, company having the Can-West name disentitled CanBar from adopting the contract.  The Court of Appeal disagreed. The other Can-West company did no work on the project and did not file the lien.  That company was totally irrelevant to the issue.

This decision is a reminder of two important principles.  One relates to construction liens. Construction liens are a creature of statute, not contract law.  They protect those who improve lands, by virtue of that improvement and not by virtue of a contract. The owner must request the work or materials, but the lien arises from the request and the subsequent improvement, not a contract.

The second principle relates to pre-incorporation contracts.  Adoption of such a contract can, under the legislation, occur “by any act or conduct signifying [the corporation’s] intention to be bound”, but only as long as the original contract was made in its name or on its behalf.  Those involved in pre-incorporation contracts should make both elements very clear, both that the contract was made in the future corporation’s name or on its behalf, and also that there is a clear adoption of the pre-incorporation contract, by an express corporate resolution or contract or other express written document to that effect.  Absent that sort of clarity, pre-incorporation contracts can lead to litigation.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed.) at Chapter 1, para 1(a)(ii) and Chapter 11, para 2(a)(iii).

Construction Lien  –    Pre -incorporation Contracts:

Canbar West Projects Ltd v. Sure Shot Sandblasting &Painting Ltd., 2011 ABCA 107  https://bit.ly/mmCQ7h