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.

Owner Awarded Nominal Damages For Deficient Construction Not Affecting Market Value

What is the appropriate remedy when a contractor fails to build the building in accordance with the specifications but the deficiencies are not proven to affect the market value of the property? Should the answer to that question depend on the sort of building being constructed: a home as opposed to an office building? Should the answer be the same if the contractor’s work is deficient rather than not in accordance with the specification?

These were the issues dealt with recently by the New Brunswick Court of Appeal in Diotte v. Consolidated Development Co. The court upheld an award by the trial judge of nominal damages in the amount of $2,000 when the owner claimed $54,000 to correct the deficiency. This area of the law is largely unexplored in Canada so this important decision will be of interest to all those involved in building contracts.

Background

Diotte agreed to build an office building and garage for the owner, Consolidated. The building was to be built to the specifications of the federal Department of Fisheries and Oceans, which had agreed to lease the building. The specifications called for a garage of 150 sq. meters. The garage as built was 6.5 sq. meters, or about 4 percent, less than the specified size. The owner sought about $54,000 to pay for the remedial work to make the garage comply with the specifications. The trial judge awarded $2,000 and the award was upheld by the New Brunswick Court of Appeal.

Decision of the New Brunswick Court of Appeal

The Court of Appeal reviewed the seminal decisions of Cardozo J. in Jacob & Youngs Inc. v. Kent, 129 N.E. 889 (U.S. N.Y. Ct. App. 1921) (where the failure was the installation in a country residence of pipe which was of identical quality but a different brand than the contractually specified pipe) and the House of Lords in Ruxley Electronics & Construction Ltd. v. Forsyth, [1995] UKHL 8 (U.K. H.L.) (where the failure was the construction of a household swimming pool to a depth of 6 feet 9 inches instead of the specified 7 feet 6 inches). In both cases, the courts discussed what approach a court should take when the contractor installs something which does not meet the specifications but causes no economic damage to the property or the owner.

The New Brunswick Court of Appeal set out the four basic ways in which damages can be assessed in these circumstances: the cost of re-instatement:

the diminution in the value of the property:

the savings by the contractor by the breach; or

the loss of amenities to the owner.

In selecting the appropriate measure of damages, the N.B. Court of Appeal referred to the classic words of Justice Cardozo in the Jacob & Youngs decision:

“It is true that in most cases the cost of replacement is the measure. The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value. Specifications call, let us say, for a foundation built of granite quarried in Vermont. On the completion of the building, the owner learns that through the blunder of a subcontractor part of the foundation has been built of granite of the same quality quarried in New Hampshire. The measure of allowance is not the cost of reconstruction. “There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable”. The rule that gives a remedy in cases of substantial performance with compensation for defects of trivial or inappreciable importance, has been developed by the courts as an instrument of justice. The measure of the allowance must be shaped to the same end.” (underlining added)

The court then devoted fourteen lengthy paragraphs to a discussion of the Ruxley decision, and concluded with this summary:

“To summarize, their Lordships are in agreement that for breach of contract, the assessment of damages begins with measuring the actual loss suffered from the unfulfilled bargain. The damage award is to place the claimant in as good a situation as if the contract had been performed. Thus, as stated by Lord Lloyd with respect to building cases, the loss is “almost always measured in one of two ways: either the difference in the value of the work done or the cost of reinstatement” ….. Reasonableness informs the assessment, resulting in cases such as Ruxley, where it would “fly in the face of common sense” to award the cost of reinstatement, but where the difference in the value of the work done amounts to nil. It is in such cases of contract deviation that their Lordships diverge somewhat in approach. However, whether referred to as a personal preference, a consumer surplus, or the loss of an amenity, each judgment rendered in Ruxley recognizes that a non-monetary loss, arising from a deviation from contract specifications, is real and deserving of compensation, despite not being easily measurable in economic terms. Taken together, the various approaches make it evident that the law of damages allows some flexibility in constructing an appropriate award.” (underlining added)

Writing for the New Brunswick Court of Appeal, Justice Robertson emphasize that this case was one of “first impression” and that “care must be taken not to lay down rules or frameworks that are too distant from the trial judge’s factual determinations.” He expressed his view about the importance of the decision as follows:

“the substantive issue at hand forces the writer to make general observations with respect to matters that may become relevant in future cases. Experience teaches that the articulation or development of legal rules or principles or legal frameworks is rarely achieved with the issuance of a solitary set of reasons. These reasons for decision should be interpreted accordingly. As they are to be released on the eve of my retirement, the task of ensuring a solid foundation to the law of New Brunswick is left with my colleagues.”

Justice Robertson then went on to make the following points:

  1. The case did not ‘raise allegations that the work performed was defective in the sense that it involved shoddy workmanship, below the “industry standard”. ‘ Accordingly the court did not have to decide whether the same approach to damages ought to be taken in the case of shoddy workmanship as opposed to a failure to meet the specifications. On the one hand, Justice Robertson was of the view that in the former case, “one is driven to expect that the law would expect the contractor to redo the work or, alternatively, provide the owner with compensation equal to the cost of reinstatement.” On the other hand, “the distinction between contract deviation and defective workmanship may be one without a difference. An appraiser may well conclude that it is not difficult to justify a diminution in value of property, due to slapdash workmanship, by reference to the cost of reinstatement. I say no more of the perceived distinction other than to point out that the law should be careful not to craft rules that serve as an incentive for builders to depart from their contractual obligations.”
  1. A different damage rule could possibly be justified when “the innocent party is a consumer who complains of contract deviation,” as opposed to the situation when “both the owner and builder are commercial parties.” Justice Robertson did not hold that there should always or necessarily be a different approach in the two cases, saying:

“Fortunately, this is not a case where breach of the contract specifications has deprived the owner of an amenity or personal preference. This is a commercial case in which the owner (Consolidated) lost 4.33 percent of the garage’s leasable floor space because of the builder’s (Diotte’s) failure to adhere to the contract specifications. The broad issue is whether it would have been reasonable to award damages equal to the cost of reinstatement ($54,000) or some lesser sum ($2,000). Evidence was led to demonstrate that Diotte had offered to undertake renovations that would have eliminated some of the deficiency in the size of the garage, but that Consolidated was unwilling to provide Diotte with access to the building. Evidence was also led at trial to establish that the tenant, who leased the property from Consolidated and for whom the property was being constructed, was prepared to enter into possession without compensation for the deficiency. In response, Consolidated argued that future tenants might not be as obliging.”

Justice Robertson also noted that the trial judge had found that Consolidated had not effected any of the repairs recommended by any of the experts and had not allowed Diotte to make the repairs that it had offered to make, leaving the trial judge with the “strong suspicion that even if the Court is to grant compensation to Consolidated to reinforce the garage or increase the usable space, the work will never be done.”

  1. Justice Robertson was strongly influenced by the absence of evidence about the impact of the deviation on the value of the property. Since the building was for rental purposes, in his view it would have been a “relatively simple matter to assess damages based on the lower of the cost of reinstatement or diminution in value of the work done. Had the appraisal revealed the fair market value of the property to be lower, because of the contract deviation, and by an amount less than the cost of the reinstatement, the court would be compelled to award damages based on the property’s diminished value. On the other hand, had the cost of reinstatement been lower than the diminished value of the property, the court would normally be compelled to award damages equal to the former….In the absence of expert evidence regarding the impact of the contract deviation on the property’s value, it cannot be assumed that an award of damages equal to the cost of reinstatement is reasonable.”
  1. However, Justice Robertson was satisfied that Consolidated was entitled to an award of nominal damages, either for lost expectations or a presumed diminishment in value. He pointed out that, to date, Consolidated has experienced no loss as a result of this missing square footage since the tenant had accepted the building as provided, and paid the rent as negotiated. Consolidated’s view that a future tenant might not be so accommodating was speculative, and Consolidated had not allowed Diotte to rectify the problem. In these circumstances, the trial judge’s award of $2,000 nominal damages was reasonable.

Discussion

This fascinating decision should definitely be put in the top drawer to be pulled out the next time we have to deal with the proper measure of damages when a contractor fails to adhere to the specifications. It contains a discussion of the relevant principles and the leading U.S. and U.K. decisions. It raises the key issues of whether damages should be assessed in a different way in the case of a commercial property as opposed to residential property, or in the case of defective work as opposed to work which deviates from the specifications.

Ultimately, however, the decision was based on the facts and the absence of evidence: the willingness of the tenant to take the building with the smaller garage; the refusal of the owner to allow the contractor to remedy the situation; the absence of any impact on market value; the absence of any savings by the contractor; and the failure of the owner to spend any money to correct the deficiency. All of these factors led both the trial judge and the Court of Appeal to conclude that it would not be fair to award the cost of correcting the deficiency to the owner.

But a decision based on facts is just as useful as one based upon law. This decision helps us provide advice to the owner or contractor about what to do or not do to support or avoid a claim for substantial damage award arising from defective work or work which does not meet the specifications. And it helps counsel decide what evidence ought to be led at trial to establish or negate the claim.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 9, part 6(m)(i)(B)

Diotte v. Consolidated Development Co. 2014 CarswellNB 410, 32 C.L.R. (4th) 282

Building Contracts – Damages – Measure of Damages – Breach of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                       February 28, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Who Is A Successor To A Contract?

Most commercial agreements contain a clause stating that the contract is binding upon and for the benefit of “successors.”  For example, Article 10.1 of the CCDC Cost Plus Contract states that the contract “shall enure to the benefit of and be binding on…successors”.

What does the word “successors” mean?  Who are “successors”?  Do those who enter into the contract know who the successors are?

Recently, the Ontario Court of Appeal considered this issue in Brown v. Belleville (City).  I dealt with that case in an article last week. In that article I was concerned with whether inaction could amount to acceptance of a repudiation of a contract.

Factual Background

 Let’s remind ourselves of the facts in Brown v. Belleville. In 1953, a municipality signed an agreement with a farmer under which the municipality agreed to maintain and repair a storm sewer drainage system that it had constructed on and near the farmer’s lands. Six years later, the municipality stopped maintaining and repairing the drainage system.  Over the next 50 years, the original municipality and successor municipality clearly and repeatedly repudiated the agreement.

The lands were sold from owner to owner and each owner unsuccessfully sought to have the municipality repair and maintain the drainage system.  Finally, in 2011 the then owners of the lands, the Browns, sued the municipality for breach of contract. The municipality, the Town of Belleville, defended the action on a number of grounds.  It said that the limitation period had expired because the Browns or their predecessors had long ago accepted the municipalities’ repudiation of contract. The trial judge and the Court of Appeal rejected that position. I dealt with that issue last week.

Belleville also said that the Browns had no standing to sue because they were third parties to the 1953 agreement, and that contract law does not entitle third parties to enforce agreements. Belleville also said that the Browns were not “successors” of the original farmer who entered into the agreement.  That agreement said:

“THIS INDENTURE Shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns.”

The agreement was never registered against the title to the land.  The City said that the agreement was never assigned or otherwise transferred to the plaintiffs or the other owners of the land after the original farmer who entered into the agreement.  The City asserted that the Browns were third parties to the original agreement and did not fall within any of the accepted  category of persons who could enforce the agreement.

Court of Appeal Decision  

 The Court of Appeal held that, on its face, the contract created a category of persons who could enforce the contract as parties to the contract, namely, successors of the owner who entered into the agreement. In that sense, the Browns did not have to demonstrate the application of the “third party beneficiary rule”. They were effectively parties as much as the original party.

The court stated it this way:

“…the broad and unqualified language of the enurement clause constitutes an express stipulation by the contracting parties that they intended the benefit of the Agreement to be shared by future owners of Mr. Sills’s lands, as his successors or assigns or by way of inheritance.  The  language  of  the  enurement  clause  unequivocally  confirms  that  the contracting parties intended and agreed that the benefit of the Agreement would extend to an aggregation or class of persons that includes successor  landowner of Mr. Sills.   On the admitted findings of the motion judge, the Browns are Mr. Sills’s successors.   In this sense, the Browns are not strangers or ‘third parties’ to the Agreement.   Rather, they step into Mr. Sills’s shoes and have standing to enfore the Agreement as against the City as if they were the original covantee(s) to the Agreement…given the intention of the contracting parties stipulated in the Agreement under the enurement clause, I conclude that ‘relaxing’ the doctrine of privity in this  case  does  not frustrate  the  reasonable expectations of  the  parties  at the  time the Agreement was formed.  To the contrary, it gives effect to them.”

Belleville relied upon a 1980 decision of the Supreme Court of Canada in Greenwood Shopping Plaza. It said that that decision precluded the Browns from relying on the 1953 agreement to which they were not a party. The Court of Appeal held that, in light of more recent decisions of the Supreme Court, the Greenwood case had been largely over-ruled. In any event, having regard to the enurement clause, the prohibition against third party enforcement of the agreement had little or no application.  If necessary, the court said that it would apply the exceptions to the rule prohibiting third party enforcement of a contract and allow the Browns to enforce the drainage agreement when they so clearly fell within the category of persons who were intended to have its benefit.

The Court of Appeal considered one further objection of Belleville, namely, that the Browns were using the 1953 agreement as a sword – to bring an action and positively enforce rights – rather than as a shield – or as a defence. In the modern cases in the Supreme Court recognizing the rights of third parties to rely on contract they had not signed, those third parties were asserting the contract as a defence.

The Court of Appeal held that this distinction made no difference in the presence of the enurement clause:

 “I recognize  that London Drugs and Fraser River were cases where the third-party beneficiaries sought to rely, by way of defence, on the benefit of the contractual provisions at issue  to resist  claims  brought  against them – they  were not  seeking to  enforce  the affirmative benefit of the relevant contractual provisions….. Nonetheless, it is my view that the Browns’ status as the successors of the original covenantee under  the Agreement affords  them the  right  to seek to  enforce  the original covenantor’s contractual obligations, as against the original covenantor.   In effect, for the purpose of enforcement of the Agreement, the Browns are Mr. Sills and the City is Thurlow.  Further, insofar  as  the performance  of  the  City’s  obligations under  the Agreement are concerned, there is a clear identity of interest between Mr. Sills and the Browns.   As Mr. Sills’s successors, the Browns stood ready to comply with the activity required of them under the Agreement- the provision of access  to their lands.    In all these circumstances, the application of the principled exception to the privity rule advances the interests of justice.” (emphasis added

Analysis

 The Brown v. Belleville decision answers one of the issues arising from “successor” clauses. Based on that decision, a person falling within the clause does not have to worry about the old rule that contract law does not recognize the rights of third parties.  If the contact has an enurement clause in favour of or binding on successors, then successors are parties to the contract as much as the original parties.

The next issue is:  who are successors? Clearly, based on Brown v. Belleville, a later owner of the same land that is affected by the agreement is a successor. But what about a tenant, or subtenant, of that later owner? If that tenant has exclusive possession of the affected property, and is the person who is really affected by a breach of the agreement, is that person a successor? What about the owner of other interests in the land such as owners of easements or mortgagees?

The issue becomes even more complicated when one considers building contracts.  If the main contract between the owner and the contractor states that it is binding on the “successors” of the contractor, does that word include a subcontractor?  What if the owner has given a covenant in the main contract that affects the electrical work and the contractor subcontracts the entire electrical work to an electrical subcontractor?  Is the electrical subcontractor the “successor” of the contractor?  Why not?

If the contractor assigned the electrical part of the main contract to the electrical subcontractor (if it were permitted to do so), then the enurement clause would likely apply because that clause would likely be expressed to include assignees. If the clause includes both successors and assigns, then the word “successors” must be given a wider meaning than “assisgns”, but who does it include?

A further issue is this:  if the enurement clause is also expressed to be binding on successors, then third parties may find themselves bound by obligations under the contract even though they never signed the contract. In fact, a good test as to whether the contract enures to the benefit of a third party may be whether it should be binding on that party.  Clearly, the Browns were willing to be bound by the 1953 agreement and allow Belleville access to their land to repair and maintain the drainage system, so it was not difficult to find that the Browns were successors. Similarly, a subtenant or mortgagee of the Brown’s property would be willing to grant such access, so they may well be successors.

But what parties would be willing to be bound by the contractor’s building contract with an owner?  Would a subcontractor or supplier?  Likely not, especially if that includes the payment obligations. Often the subcontract will state that the main contract is incorporated into the subcontract, but at least one line of authority holds that some of the terms of the main contract (such as arbitration, insurance and guarantee clauses) are not incorporated into the subcontract unless that intention is specifically set forth in the subcontract.

Now that the Ontario Court of Appeal has held that successors may enforce a contract if there is an enurement clause in the contract to that effect, the clause may be more powerful and dangerous than it was previously.  This may be a good reason for the meaning of “successors” to be defined in the contract. The parties may mean that it includes only the successors by virtue of corporate or bankruptcy law. If so, they can say that. But they may mean it to have a broader meaning, such as a successor in title. Again, they can say that.  If they do not, then they will leave it up to the court to decide who is bound by or may rely upon the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 1, part 2

Brown v. Belleville (City), 2013 ONCA 148  

Construction law  –  Enforcement  –  Third Parties  –  Breach of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         March 29, 2013

 www..heintzmanadr.com

www.constructionlawcanada.com

 

When and How is a Subcontractor Bound by its Tender in a Bid Depository System?

The process by which subcontractors’ tenders are accepted in a bid depository is fundamental to the efficacy of that system.  If that process does not effectively bind the subcontractors, then the subcontractors will be able to unilaterally withdraw their bids later.  The British Columbia Supreme Court addressed this issue in its recent decision in Civil Construction Co Ltd v. Advance Steel Structure Inc.

This case required the court to unscramble the “Contract A – Contract B” legal structure created by the Supreme Court of Canada in Ontario v. Ron Engineering & Construction (Eastern) Ltd, [1981] 1 SCR 111 and apply it to the relationship between a contractor and subcontractor.  In Ron Engineering, a distinctly Canadian legal structure was created for contracts between the owner and the contractor in a bid depository system.  Under that structure, there are two contracts which are potentially formed in such a bidding system. The first contract, Contract A, is the contract formed by the submission of a bid. That contract is a judge-made creation arising from the wording of a bid depository system. It is based upon and regulates the bid system itself and requires the bidding contractor to leave its price in place for the duration of the bid and requires the owner to award the contract only to a compliant bidder. The second contract, Contract B, is the ultimate construction contract which may be entered into if the bidder is successful.

That process is workable at the owner-contractor level but becomes more difficult to apply at the contractor-subcontractor level.  Nevertheless, in Naylor Group Inc. v. Ellis-Don Construction Ltd, [2001] 2 SCR 943, the Supreme Court held that the same structure applies to the relationship between a contractor and subcontractor when the subcontractor files a bid in a bid depository system and the contractor carries that bid in its bid to the owner.

What Binds a Subcontractor to a Bid?

In Naylor v. Ellis-Don, it was the contractor, Ellis-Don, which refused to award the subcontract to the subcontractor, Naylor, whose bid it carried in its bid to the owner.  So the dispute dealt with whether the contractor was in breach of its obligations, not whether the subcontractor was.  The Supreme Court held that, by carrying the subcontractor’s bid in its own bid, a Contract A was created between the parties which “required the successful prime contractor to subcontract to the firms carried in the absence of a reasonable objection.”  (My emphasis added).

In the Ontario Court of Appeal, the result was stated somewhat differently.  There the Court of Appeal said: “Thus, unless the successful prime contractor has a reasonable objection to the subcontractor it has proposed, the prime contractor must communicate its acceptance of the subcontractor’s bid.” (Again, my emphasis added, for comparison purposes).

In Civil Construction v. Advanced Steel, it was the subcontractor that refused to adhere to its bid.  And it said that its bid had not been accepted by the contractor.  In these uncharted waters, what is the right result under the Ron Engineering structure, or is the structure being bent so out of shape that it cannot apply?  What event binds the subcontractor to its bid, a communicated acceptance or the filing of the contractor’s bid?

Civil Construction was a bidder as the general contractor in a tender by the City of Richmond, British Columbia for the construction of a drainage pump station upgrade.  Advanced submitted an unsolicited bid dated June 10, 2009 to Civil Construction for the structural steel subcontract work.  In its bid, Advanced stated that its bid was “valid for acceptance for the next 30 days and valid for delivery within 90 days after acceptance”.  Civil incorporated Advanced’s bid into its own bid dated June 10, 2009 to the City of Richmond.

On July 10, 2009, Civil was advised by the City that it was the successful bidder.  Civil’s project manager testified that, on that same day, he called each of the subcontractors, including Advanced, to advise them that they were named as sub trades in its tender submission.  On July 13, 2009, the City wrote to Civil to formally award the general contract on the project to Civil, and Civil wrote to Advanced on the same day to award it the structural steel subcontract.

Advanced refused to enter into the subcontract for two reasons:

First, it said that Civil’s acceptance on July 13, 2009 of Advanced’s bid of June 10, 2009 was outside the 30 days stipulated in that bid.

Second, it said that Civil’s acceptance of its bid contained conditions not set forth in its bid, and therefore amounted to a counter-offer, which Advanced refused to accept.

Civil proceeded to hire another structural steel subcontractor and sued Advanced for the extra cost of that subcontract.

The Court rejected both of Advanced’s arguments

First, it held that the relevant acceptance by Civil of Advanced’s bid occurred on June 10, 2009. That acceptance occurred by reason of Civil including Advanced’s bid in Civil’s own bid to the owner.  By doing so, Civil created the Contract A with Advanced under the bid depository system.

Under that system, the B.C. Court held that Advanced’s bid was accepted by Civil under Contract A once that bid was submitted by Civil as part of its bid to the owner.  Relying on previous decisions in the Supreme Court of Canada and Alberta, the Court held as follows:

“[C]ontract A is formed when a subcontractor tenders in response to a general contractor’s invitation and the general contractor incorporates that bid as part of its tender to the owner. Under contract A a subcontractor may not withdraw its tender for a set period and must enter contract B upon acceptance of its bid, which is when the general contractor’s bid with the subcontractor’s tender included is accepted by the owner.

The general contractor’s obligation to a subcontractor under contract A arises once the general contractor chooses to carry the subcontractor’s bid in its tender to the owner.

In return for the subcontractor being bound by its bid, the general contractor, upon acceptance of its bid, which includes the subcontractor’s bid, is obliged to enter into a construction subcontract B with the subcontractor.”

The Court accordingly held that, since Civil had included Advanced’s bid in its own bid on June 10, 2009, the relevant acceptance had occurred within the 30 days set forth in Advanced’s bid.  In effect, the Court interpreted the words “valid for acceptance” in Advances’ bid as meaning “valid for acceptance for Contract A, not Contract B”.  The Court did not refer to any communication of that acceptance by Civil to Advanced, or any necessity for such a communication.

Second the Court also held that Civil’s purported addition of further work in the subcontract was not permissible under the Contract A system.  Therefore, Civil and Advanced were bound to enter into a Contract B that conformed to the bid, and the additional work specified by Civil was ineffective and Advanced was bound by a subcontract which did not include that additional work.  Accordingly, Advanced was liable in damages to Civil based upon that subcontact.

Two Disquieting Features:

While this decision is the common sense result of a bid depository system, it does have two disquieting features.

First, when the contractor includes the subcontractor’s bid in its tender to the owner, should the contractor be obliged to tell the subcontractor, at that time, that the latter’s bid is included in the contractor’s tender?

Normally, an acceptance only occurs when the acceptance is communicated to the offeror.  There could be many subcontractors who tender for the work.  If there is no communication from the contractor to the subcontractor when the contractor submits its bid, should the subcontractor be presumed to know that its bid is the one which has been accepted for inclusion in the general contractor’s bid?

As noted above, in Naylor v. Ellis-Don, the Ontario Court of Appeal said that the contractor “must communicate its acceptance of the subcontractor’s bid” to the subcontractor.  But what if it doesn’t?  Does that let the subcontractor off the hook?  And while the Supreme Court said in that case that Contract A “required the successful contractor to subcontract to the firm carried”, is the subcontractor similarly bound to proceed with the subcontract in the absence of an express and timely acceptance by the contractor?

The courts can, of course, create exceptions to the normal rule that an acceptance occurs when it is communicated to the offeror.  Those exceptions are based upon business efficacy and the presumed intent of the parties.  One such exception is the old rule that a posted acceptance is deemed to occur at the time of posting, not the time of receipt.

The Court Constructed a New Exception for Subcontractors

It appears that in the present case, the court constructed a new exception for subcontractors’ bids in the bid depository system.  According to this decision, the acceptance of a subcontractor’s bid for purposes of Contract A occurs when the contractor includes the subcontractor’s bid in its own bid, even though that is not communicated to the subcontractor.  The real question is whether that is a good rule, and if it is, whether the rule should be specifically set forth in the bid documents. Otherwise, it could be argued that the contractor should be required to notify the specific subcontractor whose bid has been included in the contractor’s bid to the owner, so that the subcontractor knows that its bid has been accepted for the purpose of Contract A.

For the moment, and based on this decision, contractors and subcontractors may proceed on the basis that if a subcontractor states a time for acceptance in its bid, then that statement will be taken to mean the time in which the contractor has to insert that bid into its own bid to the owner, that there is no need for the contractor to advise the subcontractor that that has occurred, and that it is up to the subcontractor to inquire, if it wishes to know, whether its bid has been included in the contractor’s bid.

Warning to Contractors:

The other question which is raised by this decision is whether a subcontractor can avoid this result by a more specific tender. Can the subcontractor specifically state in its bid that its offer of a construction contract (ie:  Contract B) must be accepted within a specific period of time, and a time period shorter than the contractor’s bid period?  In other words, could the subcontractor specifically state that its bid could only result in a construction contract if that construction contract is entered into within a specific period of time which is less than the bidding process allows?

The short answer is that such a bid is non-compliant with the bid depository system and Contract A under the Ron Engineering structure.  This answer follows from the requirement in Contract A that the subcontractor keep its bid open during the bid period and enter into Contract B on the terms set forth in the bid, that is, up to the time the contract is awarded and a reasonable time thereafter.  But if this is the right answer then contractors will have to be alert to ensure that any subcontractors’ bids they receive do not have such a short fuse in them, and if they do, to disqualify them from the bidding process.

Advanced may have intended to raise this question in the present case.  But the court did not answer the question by holding that Advanced’s bid was non-compliant with the terms of the bid.  Rather, it interpreted the word “valid for acceptance” in Advance’s bid to mean “valid for acceptance under Contract A”, and it arrived at that conclusion by reference to the bid depository system and Ron Engineering.  It will require a more specifically drafted subcontractor’s tender to raise the “non-compliant acceptance period” issue.

Construction Law – Subcontractors – Bid Depository System

Civil Construction Co Ltd v. Advance Steel Structure Inc., 2011 BCSC 1341

Thomas G. Heintzman O.C., Q.C.
November 13, 2011

www.heintzmanadr.com
www.constructionlawcanada.com

Tenders in Construction Projects – Which Limitation Period Applies?

What is the limitation period for the commencement of an action arising from a tender in a construction project?

If the owner is a municipality or other public body, does a limitation period in its incorporating legislation apply to the tender?  These were the questions recently faced by the Prince Edward Island Court of Appeal in Central Roadways v. City of Summerside.

In May 2008 the City of Summerside sought tenders for the resurfacing of city streets.  Two bidders, Central Roadways and another bidder, submitted tenders.  Central Roadways’ tender was the lowest, but on June 16, 2008 the City’s Council met and decided to award the contract to the other bidder, and advised Central Roadways the next day.

In November 2008, Central Roadways asked the City why its tender was not accepted and requested a copy of Council meeting minutes of June 16, 2008.  The City replied by letter and provided  a copy of the minutes but the minutes did not disclose any reasons why the other tender was accepted and not the tender of Central Roadways.

On February 20, 2009, Central Roadways commenced an action against the City.  The City brought a motion to dismiss the action on the ground that it was barred by the limitation period in s-s.46 (2) of the City of Summerside Act.

Section 45 and 46(1) of that Act provided that notice was to be given to the City in the case of damage sustained from unsafe conditions, or from nuisances or encumbrances, on City streets or sidewalks.  Section 46(1) then said that, except as provided in S. 46(1), all actions against the City were to be commenced within six months of the cause of action arising.

The City asserted that this limitation period applied to the claim arising from the tender, and the judge who heard the motion agreed.  But the P.E.I Court of Appeal reversed the decision.

The Court of Appeal examined the wording and history of the City of Summerside Act and concluded that the six month limitation period only applied to claims arising from City bylaws or claims relating to unsafe conditions or nuisances and encumbrances on City property.  Even though the word “all” in s. 46(2) was normally all-encompassing, it should not be so interpreted in light of these surrounding circumstances.

The Court of Appeal noted that the limitation period in P.E.I. for claims in contract is six years and that a limitation period of six months is a very different limitation period.  Since the shorter limitation period was found in a statute for the City’s benefit, it should be interpreted against the City in the event of any ambiguity.  The Court said:

“Interpreted to include all causes of action against the City, the very short six-month limitation period would seriously circumscribe the right of a person to commence any action against the City.  This being so, any ambiguity must be resolved in favour of a less restrictive limit on the time within which to commence an action.”

The Court of Appeal held that the claim by Central Roadways was in contract, since it arose from the alleged breach of its contract with the City inherent in its submission of a tender to the City’s invitation.   While there might be good policy reasons for the City to provide very short limitation periods for actions arising from slip and falls or other accidents on City streets,

“there is no valid policy reason why other actions against the City, like an action for breach of contract, should have the time for the commencement thereof limited to a very short six months…If the Legislature is of the mind that there are valid policy reasons for a shorter limitation period for the commencement of such actions against municipalities like the City, then it should express the policy more clearly in the Act  so as to specifically exclude these actions from the scope of the Statute of Limitations.”

This decision contains warnings about limitation periods relating to tenders.

The first warning is that a claim arising from a tender is a claim in contract and must be brought within the limitation period for a contract claim.  In addition, a tort claim relating to the tender must be brought within the limitation period relating to tort claims.

The second warning is this:  look for any limitation period contained in the tender documents. The tender documents may themselves contain a specific and shorter limitation period.  A shorter contractual limitation period may be permitted under the general limitation statute.  Thus, In Ontario, s.22(5) of the Limitations Act, 2002 permits the normal two year limitation period to be shortened in business agreements, but not consumer agreements.

And third, ensure that there are no other statutory limitation periods which may apply to the tender.  In Ontario, that is unlikely since s.19 of the Limitations Act, 2002 states that a statutory provision containing a conflicting limitation period is of no effect unless that provision is set out in the Schedule to the Limitations Act, 2002.  But if there is a limitation provision in another statute which is potentially enforceable, then depending on the origin and nature of that provision, the decision in the Central Roadways case may require that the limitation provision be read against the public body and only enforceable if it clearly applies to the tender.

Tenders – Limitation Period – Construction Contract – Actions – Breach of Contract – 

Central Roadways v. City of Summerside, 2011 PECA 4 (CanLII)  https://bit.ly/jnQhQk