How Does The Loss Of A Chance Apply To Damages For Breach Of A Building Contract?

Construction law practitioners must keep their eyes and ears open to the evolving case law in other areas of the law. That case law may have direct application to building contract issues.

This fact is especially true for the assessment of damages. Because of the numerous contracts involved in a building project, a breach of one contract may cause the innocent party to lose a chance to recover, or avoid a loss, on another contract. But is the loss of a chance to negotiate a better deal on another contract sufficient?

This is the issue that the recently Ontario Court of Appeal addressed in Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544. While the facts arose from a franchise relationship, the principles set forth by the Ontario Court of Appeal are directly applicable to construction law due to the intersecting contractual relations in both settings.

The Background

The facts arose from economic downturn in 2008-2009 and General Motors’ efforts to save itself from bankruptcy. GM wanted to avail itself of financial assistance from the U.S. and Canadian governments, but to do so it had to shed financial liabilities and put itself on a sounder financial footing. This involved terminating many franchises with its dealers.

In this case, the trial court found that by May 2009, the law firm Cassels Brock was acting for three of the parties to this tangled web: the Canadian government, certain specific GM Canada dealers and the GM Canada dealers association. GM offered a buy-out proposal to the dealers, including payment of a termination amount to the terminated dealers. Cassels Brock told the dealers they could not act for the dealers on that proposal. After many dealers accepted a buy-out from GM Canada, they sued Cassels asserting that it had been in conflict of interest. The trial judge and the Court of Appeal found that Cassels Brock had been in breach of its retainer contract with the dealers. The question then became: what is the amount of damages to which the dealers were entitled?

The dealers asserted that, had they had independent counsel, they would have been able to negotiate a much better financial settlement with GM Canada, and that by reasons of Cassels Brock’s conflict of interest, they had lost the chance of making a better settlement with GM Canada. Cassels Brock asserted that the dealers had to show that they had suffered a loss on a balance of probabilities, not just on the basis of a loss of a chance, and that in any event, the dealers’ assertion that they would have made a better settlement with GM Canada was purely speculative and not a sufficient basis to award damages.

Judgment of the Court of Appeal

Both the trial judge and the Court of Appeal held that the dealers’ damages were to be assessed based on the loss of a chance to make a gain or avoid a loss, not on the basis of the balance of probabilities of making a gain or avoiding a loss. That is because the dealers’ claims were in contract, not tort. In contract, the existence of damage is not an element in determining liability, while it is in tort. The dealers had satisfied the evidentiary test for contractual liability – on a balance of probabilities. When it came to damages, the courts held that the loss of a chance to negotiate a better deal was a sufficient basis to assess damages.

The Court of Appeal quoted from its previous decision in Folland v. Reardon (2005), 74 O.R. (3d) 688 (C.A.) to explain its reasoning:

“Whatever the scope of the lost chance analysis in fixing liability for tort claims based on personal injuries, lost chance is well recognized as a basis for assessing damages in contract. In contract, proof of damage is not part of the liability inquiry. If a defendant breaches his contract with the plaintiff and as a result a plaintiff loses the opportunity to gain a benefit or avoid harm, that lost opportunity may be compensable. As I read the contract cases, a plaintiff can recover damages for a lost chance if four criteria are met. First, the plaintiff must establish on the balance of probabilities that but for the defendant’s wrongful conduct, the plaintiff had a chance to obtain a benefit or avoid a loss. Second, the plaintiff must show that the chance lost was sufficiently real and significant to rise above mere speculation. Third, the plaintiff must demonstrate that the outcome, that is, whether the plaintiff would have avoided the loss or made the gain, depended on someone or something other than the plaintiff himself or herself. Fourth, the plaintiff must show that the lost chance had some practical value…..” (underlining added)

The Court of Appeal then said:

“Recently, in Berry v. Pulley, 2015 ONCA 449, 335 O.A.C. 176, at para. 70, this court described a “two-step framework” for the determination of a loss of chance claim. Associate Chief Justice Hoy explained, at para. 72, that the court must first determine if the four criteria set out in Folland are met. If they are, then the court proceeds to the second step and “will award damages equal to the probability of securing the lost benefit (or avoiding the loss) multiplied by the value of the lost benefit (or the loss sustained)”.”

Having held that the loss of a chance gave rise to compensable damages for breach of contract, the Court of Appeal referred to the following facts, among many others, in holding that the opportunity of negotiating a better deal with GM Canada fell within the realm of a compensable loss of a chance:

“GMCL had a GM-approved fund of $218 million to conclude the WDAs with 290 dealers. In the end, it offered $143.5 million to 240 dealers. This gave GMCL the financial flexibility to improve the compensation offered under the WDAs….The considerable and varied risks of a CCAA filing by GMCL to both GMCL and GM itself outweighed the benefits of such a filing and would have operated to make GMCL amenable to discussions with the dealers…These factual findings, which were available on the evidence, provide compelling support for the inference that it was likely, at the end of the day, that GMCL would have negotiated with the dealers about the WDAs had the negotiation option been put on the table and had the dealers acted as an organized bloc in opposition to the offers under the WDAs……The amount of the potential chance (to which the percentage of potential chance can be applied) is the difference between what the defendant offered and what the defendant internally had been authorized to offer.”


These conclusions are important and readily applicable to a building contract dispute.

First, since that dispute is based on a breach of contract, not a tort, then the loss of a chance, and not the probability of loss, is a sufficient basis to award damages to the plaintiff.

And second, according to this decision, the loss of a chance to negotiate a better contract with a third party falls within the loss of a chance.

The first point – that contract damages can be awarded based on a loss of a chance – has already been applied in the building contract setting. In Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, the damages of the plaintiff, who was wrongly not chosen as the successful tenderer, were assessed based upon the chance of site conditions and related performance problems impacting the amount of damages. In Maritime Excavators (1994) Ltd. v. Nova Scotia (Attorney General) (2000), 183 N.S.R. (2d) 236 (N.S.S.C.), the trial judge assessed the loss of a chance of the plaintiff being awarded the tender, and awarded the plaintiff its full damages, finding that the plaintiff would have been 100% likely to have been awarded the tender if it had been properly conducted. In Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town) (2008), 262 N.S.R. (2d) 163, the Nova Scotia Court of Appeal applied a 35 percent reduction to the plaintiff’s damage for the possibility that it would not have been awarded the tender even if properly conducted.

Now, based upon the Trillium Motor decision, the opportunity to use the “loss of a chance” approach to the assessment of damages in building contract cases is, arguably, much broader. The loss of a chance of negotiating a better contract with a third party now falls within the scope of assessable damages.

There may be many contracts in a building project. A breach of any of those contracts may give rise to the opportunity to claim a loss of an opportunity to negotiate a better contract with another party to the building project. For example, a breach of contract by the owner may cause the contractor a loss of a chance to negotiate a better contract with a subcontractor or supplier. A breach of contract by a contractor may cause the loss of a subcontractor’s opportunity to negotiate a better deal, or a better settlement agreement, with a supplier or other subcontractor. The combination of factors that may give rise to a claim for recoverable loss of a chance of negotiating a better deal seems only limited by the number of contracts or potential contracts involved in the project.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 9, section 6(d)

Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544

Building contract – assessment of damages – loss of a chance – negotiation of contract

Thomas G. Heintzman O.C., Q.C. LL.D (Hon.), FCIArb                                         August 2, 2017

When Is A Building Contract A Joint Venture?

A difficult issue that may arise between contractors and subcontractors is the nature of their contractual relationship.  Are they:  independent contractors; or partners; or joint venturers; or employees one of the other?

In WCI Waste Conversion Inc. v. ADI International Inc, The Prince Edward Island Court of Appeal recently considered whether a contractor and subcontractor were actually in a joint venture relationship.  The decision is an important one as the majority and minority of the court approached the issue in a different way.

The Court also considered questions relating to the obligations of good faith, fiduciary duty and repudiation on a construction project.  The decision provides a useful insight into those issues as they apply to a construction project.

Those issues will be addressed in my next blog, but for now, let’s consider the question of when parties to a construction project may be in a joint venture.

The Background

In June 2000, a PEI Crown Corporation, Island Waste Management Corporation (“IWMC”), issued a Request for Proposals for the design, construction and operation of a central composting facility to serve the province of Prince Edward Island.  WCI approached ADI about making a proposal together.  The two companies submitted a Pre-Qualification Submission which was expressly made by those companies “in association” and as a “team”.  The ultimate Proposal was submitted in March 2001 by ADI and it stated that it was prepared by both companies.  In July 2001, IWMC awarded the contract to ADI, with WCI shown as a sub-contractor.

In May 2001, ADI and WCI entered into a Memorandum of Understanding (“MOU”).  They entered into a further MOU in August 2001 after the contract had been awarded by IWMC to ADI.  The key provision of the August MOU stated as follows:

It is agreed that ADI will be the prime contracting party, with WCI engaged as a sub-contractor.  ADI will provide the bonding and insurances as stipulated by the RFP. However, it is agreed that the actual working relationship will be based on the general principles of a joint venture agreement as summarized below.

In their correspondence with each other, ACI and WCI frequently referred to the bid as being “joint” and to the relationship as being a “joint venture”, but ADI insisted throughout that it was the prime contractor and carried the associated rights and risks.

Construction of the project was substantially completed by October 2002.  During the construction, the relationship between ADI and WCI deteriorated and ADI terminated the contract with WCI.

The Sub-Contract or Joint Venture Issue

The trial judge found that the contract between the parties included the two MOUs and the correspondence between the parties, at least so far as determining the relationship between the parties.  He held that, for the purposes of the relationship with IWMC, the parties were in a contractor-sub-contractor relationship, but between themselves they were parties to a joint venture relationship.

The  majority of the PEI Court of Appeal affirmed this finding.  A number of features of its reasoning are important.

First, the majority held that ADI could not rely on evidence outside the MOU to contradict the statement in the MOU that the relationship between the parties was a joint venture.

Second, the majority held that it was not necessary that WCI have an expectation of profit from the prime contract with IWMC for there to be a joint venture between the parties.  Even though WCI was only entitled to a fixed payment from ADI, and ADI was entitled to all the upside and subject to the downside of that prime contract, the parties were still entitled to call their agreement a joint venture agreement and thereby impose duties upon themselves consistent with a joint venture.

Third, the majority held that contractors and subcontractors are entitled to contract between themselves as joint venturers, and to contract with the owner on the basis that only one of them is the contractor and the other is a subcontractor.  The majority distinguished the case of Design Services v. R, [2008] 1SCR 737 in which a subcontractor asserted that it was in a contractual relationship with the owner based upon it really being part of a joint venture with the contractor.  The majority of the PEI Court of Appeal said that, in Design Services, the owner had issued no contract at all to the contractor but had issued the contract to another bidder:

“Canada awarded no construction contract to the contractor, Olympic.  Olympic didn’t enter into a subcontract with Design Services.  In the present case, WCI’s claim is between the contracting parties, inter se, where terms have been agreed and expressed by the parties.”

The minority judge disagreed.  As to the clause in the MOU stating the parties’ relationship, the minority judge held that there was an inconsistency between the first and third sentences and that “the court was obligated to find an interpretation which would give meaning to both provisions that create the inconsistency.”

The minority judge then turned to the actual responsibilities and the actual entitlements to payment and profits to determine whether the relationship was really one of joint venture or one of contractor-subcontractor.  He found that ADI entered into a fixed price contract with IWMC in which WCI had no entitlement to profit, and that WCI entered into a fixed price contract for WCI to be paid a fixed price.  There was no sharing in profits under either arrangement.  ADI and WCI had separate activities for which they were responsible.  Each party entered into separate sub-contracts.  Neither party was vulnerable to the other.  In short, all the ingredients of the relationship indicated that there was no joint venture and that the parties were independent contractors.  According to the minority judge, the statement about a joint venture in the MOU:

“meant they would work in close cooperation with each other to carry out their specialized duties as contractor and subcontractor…. Reliance on joint venture was for purposes of facilitating the proper functioning of their working relationship as contractor and subcontractor…there is nothing in their contractual arrangements which would indicate they agreed to enter into a joint venture….The statement standing by itself in the contract did not make their legal relationship that of parties to a joint venture.”

This disagreement between the majority and minority reveals a fundamentally different approach to determining the legal relationship between the parties.

The majority held that, if the parties state in their agreement that they are joint venturers, then the court will hold them to that statement.

The minority held that the court may go behind that statement, at least if the parties also state that they have a contractor-subcontractor relationship so far as the owner is concerned; and the court may determine if the relationship between the parties is really one of joint venture and if it is not, then the parties’ statement about joint venture may be over-ridden.

This difference in opinion raises a number of questions:

First, if the parties wish to have a joint venture relationship between themselves, but also wish one of them to be the prime contractor and the other to be the subcontractor, can they legally do so?  If they can, how do they do so to ensure that the relationship is not disputed later?

The wording used by the parties in the key provision of the MOU seems as clear as possible, namely, that the parties wanted a joint venture arrangement between them, but recognized that one of them would be contractor and the other sub-contractor so far as the owner was concerned.  How could they have more clearly stated that intention?  Would it have been better to leave out reference to the “actual working relationship” being “based on” a joint venture agreement, and instead say that the “real legal relationship between the parties is that of joint venture”?   Or with this judicial precedent, can we now proceed on the basis that the words in this contract are sufficient in the future to create a joint venture between a contractor and subcontractor?

Second, which approach is better?  Should courts accept the parties’ statement as it is?  Or should they inquire into the actual relationship to see if it is one of joint venture?  In the employment setting, courts often determine whether the relationship is really one of employment or one of independent contractors, but there are real public policy reasons for doing so.  When the parties say that they are partners, should the court go behind that statement to see if they really are?  If they say that they have entered into a joint venture agreement, are there good public policy reasons for the court to go behind that statement?

These thoughts are enough for the moment.  In the next blog we will consider the approach of the PEI Court of Appeal to the following important issues:

…when do parties to a construction project owe duties of good faith or fiduciary duties to each other?

…and what misconduct on a construction project will be considered to be sufficiently serious that it amounts to repudiation entitling the other party to terminate the contract?

A very meaty decision indeed!

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed, Chapter 7, part 1.

WCI v. ADI, 2011 PECA 14 (CanLII)

 Construction Law   –   Contractors and Subcontractors   –   Joint Venture

Thomas G. Heintzman O.C., Q.C.                                                                  January 7, 2012