Alberta Court Applies Principles Of Contract Interpretation And Limitations To A Client-Consultant Contract

In the recently released decision in Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11, the Alberta Court of Queen’s Bench applied three potential aids to the interpretation to a client-consultant contract: contra proferentem; post-contract conduct; and estoppel. The court also applied the limitation period to a claim for a percentage-based fee.

The Interpretation and Limitations Issues

After the project was finished, the architects asserted that, on a proper interpretation of the client-consultant agreement, the fee should have been paid on a percentage basis, not a fixed fee basis. The architect relied upon the principle of contractual interpretation known as contra proferentem since the client (the University) had prepared the six drafts of the agreement. The owner asserted that the fee was a fixed fee, and also said that the contract should be interpreted in light of the parties’ actual performance of the contract and that the consultant was estopped from asserting that the fee was based on a percentage of the cost of construction.

The owner also asserted that the consultant’s claim was barred by the limitation period since more than two years had expired from the time when, if the consultant was correct, the fee would have amounted to more than the consultant was paid under the contract and the consultant knew or should have known that the owner was in breach of the contract.

Contra Proferentem

The Alberta court held that there was very little, if any, place for the application of the contra proferentem rule in the present circumstances:

“Where an ambiguity arises in respect of a matter that has been specifically flagged for future negotiation between two sophisticated parties, it should be resolved through the usual principles of contractual interpretation. This includes have regard to the factual matrix and, in some limited circumstances, post-contract conduct that might assist in determining the objective of the parties. The doctrine of contra proferentem has very limited utility or application in that analysis.”

Post-contractual conduct

During the performance of the contract, the parties proceeded on the basis that the fee was a fixed fee, not a percentage fee, but that the consultant was entitled to extra payment for work done in relation to change orders. The Alberta Court held that, in interpreting the contract, it was proper to look at this post-contractual in arriving at the proper interpretation of the contract, particularly when the conduct was consistently and unambiguously in favour of one interpretation:

“…..Such post-contract conduct is not properly considered as part of the factual matrix bearing on the intention of the parties at the time the contract was entered into. It may be considered, however, in the resolution of ambiguity in the contractual language used: Shewchuk v Blackmount Capital Inc., 2016 ONCA 9123 at 41….A cautionary approach is required where evidence of such subsequent conduct is used for the purpose of divining intention. It must generally be given limited weight, but “will have greater weight if it is unequivocal in the sense of being consistent with only one of the two alternative interpretations that generated the ambiguity triggering its admissibility”: Shewchuk at para 54. In this case, the language used in each of the six Change Orders signed by the parties during the project is both consistent and unequivocal in treating the work done by RKA as being part of the basic services. The language is also consistent with being compensated through adjustments to the “Fee for Service” under Section 1 of Schedule C to the Service Agreement.” (underlining added)

Estoppel

For the same reason, the Alberta court held that, by conducting itself throughout the project on the basis that the fee was payable on a fixed basis, the consultant was now estopped from asserting the contrary:

“…..it is reasonable to infer from the evidence that, had RKA refused to approve and sign-off on the Change Orders as worded, there would have been, at minimum, a discussion and negotiation of how RKA should be compensated, having regard for the wording of Article 4.3.2 and the fee negotiation contemplated in respect of fees for “Additional Services.” By RKA acquiescing in the Change Order process as implemented, only to assert its entitlement to additional fees well after conclusion of the project, the University was deprived of that negotiation (or termination) opportunity to its detriment…… Accordingly, had I accepted the position of RKA regarding the proper interpretation of the Service Agreement, I would have nonetheless found them to be estopped from claiming damages for breach of the Service Agreement.”

The Limitation Period

The Alberta Court held that the consultant’s claim was barred by the Alberta two year limitation period. If the consultant was correct that the contract provided for a fee based on a percentage of the cost of construction, then during the course of the project it would have been apparent to the consultant that the cost of construction had much exceeded the projected cost and that the consultant was owed a much higher fee than was being paid to it. More than two years passed from that point in time before the consultant made its claim.

The consultant asserted that the fee was not truly payable until its legal entitlement to percentage-based compensation was known, which it asserted was not known until the building was complete and the construction costs were known with certainty.

The Alberta court accepted the owner’s submissions:

“The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed. It is also clear that RKA was being paid for ongoing work, excluding the separately negotiated FFE Agreement, pursuant to a series of Change Orders purporting to contain add-ons to the basic services fee described in Section 1 of Schedule C…..Accordingly, the essential facts supporting a breach of contract under RKA’s interpretation of the Service Agreement were probably known as early as March 23, 2009. These facts were certainly known when the post-project reconciliation of amounts paid to RKA, as against amounts owing under the contract, was done in March 2010. Accordingly, if RKA is correct in its interpretation of the Service Agreement, and is not estopped from claiming a breach, it would nonetheless have been out of time pursuant to the Limitations Act.”

The Merits Of The Claim

The court reviewed what it described as the “poorly drafted” and “confusing and ambiguous language” of the contract. Thus, the RFP for the contract stated that the “fees will be based as a percentage (%) of the total construction budget” and the heading to Article 4.3 of the contract stated that the fee was a “Percentage-Based Fee”. However, article 4.3.2 stated: “For greater certainty, the Fee for Services as set out in Schedule C is a fixed fee, and there will be no adjustments to the fee in the event of changes in Construction Cost due to inflation. The fee will only be adjusted in the event and in accordance with an approved Change Order which changes the Scope of Work and results in an upward adjustment in the Construction Cost or Contract Time.” Schedule C to the contract stated: “(a) Fixed Base Fee…”

After sifting through all this inconsistent language, the Alberta court held that the contract provided for a fixed fee, not a percentage fee based upon the cost of construction. The court also held that the consultant was entitled to extra fees in relation to work done on the change orders:

“Article 4.3.2 shows that the parties intended that the fee for services be a fixed fee….. Although poorly drafted, Article 4.3.2 also shows that, on an objective basis, the parties intended that compensation for basic services in respect of changes to the scope of work being done, as opposed to “Additional Services,” are to be governed by Article 4.3 and the corresponding provisions of Schedule C…..The language used by the parties in Article 4.3.2 allows the University to exercise a measure of cost control by reviewing and approving Change Orders, and to adjust the base fee for services through the Change Order process. Section 1.3(a) of Schedule D of the Service Agreement includes, as “Additional Services,” revising or providing additional drawings, specifications, or other documents “caused by instructions inconsistent with instructions or written approvals previously given by the owners, including revisions made necessary by adjustments in the Owner’s program or Project Budget….The better view, however, is that the inclusion of services associated with a scope of work change in Article 4.3.2 was intended to bring them within the ambit of services compensable through adjustment to the fixed base fee as set out in Section 1 of Schedule C.”

Accordingly, the court dismissed the consultant’s claim for further fees based on a percentage of the cost of construction.

Discussion

It is not often that one construction law case deals with a number of contract interpretation principles and the limitation period. This decision will be a useful guide to those principles for application in similar circumstances.

The court was strongly influenced by the fact that, throughout the project, the consultant participated in the calculation and payment of the fee on a fixed fee basis, and did not suggest, until the project was well over, that the fee should have been paid on a percentage basis. Clearly there is a lesson for consultants here: be up front about the basis for the fee, and don’t try to assert a different basis after the fact.

The court’s conclusion on the limitations issue might be contentious. Under section 3(1) of the Alberta Limitation Acts, the limitation period starts to run when the claimant knew or ought to have known that: (i) injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to conduct of the defendant, and that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.

Accordingly, the limitation period only commences when the cause of action arises and (not or) the claimant knows or ought to know that it has a claim. In other words, the fact that the claimant knows or ought to know that the defendant’s conduct amounts to a breach of contract, and that the claimant will have a claim, does not start the limitation period unless the time for the obligation to be performed has arrived and an accrued cause of action exists (unless the claimant treats the defendant’s conduct as an anticipatory breach of contract and terminates the contract forthwith).

If the fee in this case was payable by installments, and each instalment was itself legally due and payable during the project at the stipulated time or event, then the limitation period for each payment then arose. But if, on the proper construction of the contract, the fee was one fee only earned on the completion of the project, although payable during the project by way of part-payments, then the limitation period would only arise when the fee was fully earned. And even in the first case, the limitation period would only expire payment by payment, and would not expire for those payments payable less than two years before the action was commenced.

The Alberta court did not discuss when the cause of action for the fee payments arose. In its view, the essential question was: “when the facts giving rise to the claimed breach were known or discoverable.” It further stated: “The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed.” It appears to have assumed that the obligation to pay had by then arisen. If that assumption is correct, then the court’s conclusion is correct. If the obligation to pay had not yet arisen, even though the clamant had submitted interim bills, then the court’s conclusion may not be correct. In addition, if any of the client’s payment obligations fell within two years of the commencement of the action, then the action may have been timely with respect to those payment obligations.

All of which is to say that the parties to a building contract that take a long time to perform should be careful about limitation periods that may arise during the contract. A building contracts is usually considered to be “entire”, “dependent” or “whole” contract, under which the obligations are not independent but dependent on one another, and not fulfilled until entirely fulfilled. However, the part payment obligations under a building contract are usually considered to be severable and presently enforceable as to each payment. This is how the Alberta court considered the payments under this consultant’s agreement. The issue may be disputable under another building or consultant’s contract.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, part 3(f), chapter 2, parts 2(3)(f), 2(4)(iii) and chapter 9, part 3(a).

Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11

Building Contracts – Interpretation – Estoppel – Contra proferentem – Post-contract conduct – Limitation periods

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                     January 29, 2018  

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

 

Alberta Court Rejects Assertion That The Mortgagee Was An “Owner” Under The Builder’s Lien Act

In Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254, the Alberta Court of Queen’s Bench made a number of decisions relating to the priorities between lienholders and mortgagees.

The court found that a mortgagee was not an “owner” of the land within the Alberta Builder’s Lien Act. In any event, by not claiming in its lien and lien action that the mortgagee was an owner, the lien claimant could not assert a claim that the mortgagee was an owner.

The court also found that under the Alberta Act, the mortgage advances had priority over the lien claimant even though they exceeded the value of the land at the time that the first lien arose.

Background

The mortgagee W was controlled by V. V also controlled the prior owner of the lands who had sold them to the present registered owner S. S was controlled by G.

W “advanced” monies under its mortgage but $1 million of that advance went into a GIC in W’s name, as security for the mortgage loan and in particular for the completion of “deep services” on the land. In addition, about $600,000 of the mortgage advance went into a GIC in W’s name as security for a development agreement with the municipality.

S agreed to sell the land to B, and B claimed priority under its agreement of purchase and sale.

Contractor P registered a builder’s lien and commenced a lien action against S. It joined W to the action, not as an owner, but as a “nominal” defendant and encumbrancer.

In the subsequent court proceedings, both mortgagee W and buyer B made tenders to buy the property and B was the successful bidder.

Both contractor P and buyer B claimed that mortgagee W was an “owner” under the Alberta Builder’s Lien Act.

Decision

The court held that “[r]emedies against a mortgagee or landlord such as declaring them to be an owner under the Builder’s Lien Act are unusual and rare. Clear circumstances must exist for this extraordinary remedy to be imposed. In my view, those circumstances are absent here.”

The court relied upon the following factors in finding that the mortgagee W was not an owner:

  1. there was no information that W and V were not acting at arms-length to the owner S.;
  1. there was nothing sinister or suspicious about the dealings;
  1. while W advanced more money than the land was worth at the time the mortgage was advanced, $1.5 million was “advanced” to invest in GICs in W’s name as security for S’s obligations under the mortgage loan;
  1. most of the registered owner S’s creditors on the project were paid. Accordingly, there was no basis for a suggestion that the mortgagee W and the registered owner S colluded to harm contractors and subcontractors;
  1. there was no evidence of direct dealings between the mortgagee W and any of the contractors or subcontractors. W did not pay the contractors or subcontractors directly and had no involvement with the construction on the lands, other than to release monies from one of the GICs to the registered owner S after it was satisfied that certain work had been completed;
  1. there was no evidence that, at any time before S defaulted on the mortgage, the mortgagee W had any intention of having an interest in the lands other than as mortgagee.
  1. there is no evidence of any request, express or implied by the mortgagee W that any contractor do any work on the property.
  1. the fact that G, who controlled the registered owner S, worked for or with the mortgagee W after the mortgage default was not relevant. G “undoubtedly had an interest in working with a major creditor to minimize his risks.”

The court also found that the contractor P’s claim that the mortgagee W was an “owner” of the land failed due to its failure to file a lien against the estate of W as owner:

“Essentially, a builder’s lien has no value until it is registered. While registration may have some retroactive effects, as under s 11(1) referenced above, it does not attach any interest in the lands until it is registered. A builder’s lien claim against an owner who has not contracted directly with the claimant provides in rem remedies only, and does not make an owner personally liable to the claimant. It is the owner’s interest in the lands that is at stake, not the owner’s other assets….Here, any builder’s lien claim against [W] is well past the filing deadline. Not by a few days or weeks, but rather years. Despite not claiming a lien against [W] interest in the lands, [P] has made no attempt to amend the lien it did file to include a claim against [W].

The court held that the mortgagee had priority over the lienholder and purchaser even to the extent of advances made which exceeded the value of the land when they were made:

“No authority is cited for the proposition that advances beyond the value of the mortgaged lands are not entitled to the same priority as advances up to the value of the lands and buildings. That may be the case in jurisdictions where lien claimants have priority over mortgagees to the extent that the lien claimants have increased the value of the property since the last mortgage advance. That is not the law in Alberta.”

The court also held that the contractor P’s claim against the mortgagee W could not be corrected under the curative section, section 37 in the Alberta statute, because “[t]he court has no discretion to depart from statutory requirements.”

Discussion

This decision provides a good check-list for those factors which may be considered in determining whether a mortgagee – or landlord or other person – is an “owner” under the lien statute. Here, there were circumstances which on the surface might raise suspicions: the prior owner was controlled by the same person who controlled the mortgagee which sought to be the buyer in the ultimate court proceedings. Was the “man in the middle”, S, simply a stooge? The court went through an eight point check-list and found no evidence to that effect.

The decision is also a warning that, if an ownership claim is to be made against any person, then the lien must be filed against that person’s interest in the land and an action asserting such a claim must be made against that person. And if such a claim is not made, the curative section will be of no avail.

The court’s finding that the mortgage advances had priority over the lienholder even to the extent of the advances exceeding the value of the land is noteworthy. Section 11((4) of the Alberta Builder’s Lien Act says that a registered mortgage “has priority over a lien to the extent of the mortgage money in good faith secured or advanced in money prior to the registration of the statement of lien” and does not mention the value of the land at the time when the first lien arose. By contrast, section 78(3) of the Ontario Act says that a prior mortgage has priority over liens “to the extent of the lesser of, (a) the actual value of the premises at the time when the first lien arose” and the amount of the advances.

In this case, a large portion of the “advances” made by the mortgagee were effectively to itself and were put into GICs in its name which provided security for the mortgage and for performance of the builder’s obligation and obligations under the development agreement with the municipality. Were these payments truly “advances” under the mortgage so far as the lien statute is concerned?

The curative section in the Ontario lien statute is proposed to be widened by the Construction Lien Amendment Act, 2017, which has now received second reading. Under new subsection 6(2) of what will be known as the Construction Act, the “minor irregularities” that are not to invalidate a certificate, declaration or claim for lien are expanded. They will now include minor errors or irregularity in the name of the owner, or person from whom materials or services are provided, or the legal description of the premises, or in placing owner’s name in the wrong portion of a claim for lien. However, it seems unlikely that this expanded section will cure the failure in a lien to make a claim against a party as an owner, or to do so in the statement of claim.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 16, section 4(a)(iv), 4(d) and 4(l)(C).

Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254

Building contracts – builder’s and construction liens – claim against mortgagee as owner – curative section

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                                 November 14, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Payment Clause Held Not To Be A “Pay-When-Paid” Clause

In Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51, the Yukon Supreme Court recently considered whether a payment clause in a construction contract was a pay-when-paid clause which entitled the contractor to only pay the subcontractor if and when it was paid by the owner.

The clause in question read as follows:

“Payments shall be made monthly on progress estimates as approved by the Contractor covering 90% of the value of the Work completed by the Subcontractor to the end of the previous month; such payments to be made 7 days after the Contractor receives payment for such Work from the Owner.” (underlining added)

The court considered the conflict in the law at the appellate level in Canada. In Timbro Developments Ltd. v. Grimsby Diesel Motors Inc., [1988] O.J. No. 448, the Ontario Court of Appeal held that the clause in question was a pay-when-paid clause, and that the contractor did not have to pay the subcontractor until paid by the owner. Justice Finlayson dissented, holding that the clause was a timing provision and “in no sense puts the subcontractors at risk that they will not be paid if the contractor is not paid. They are not co-adventurers or partners in this construction contract. Having done the work as found by the trial Judge, they are entitled to be paid.”

In Arnoldin Construction & Forms Ltd. v. Alta Surety Co., [1995] N.S.J. No. 43, the Nova Scotia Court of Appeal held that the clause in question was not a pay-when-paid clause which entirely protected the contractor from paying until paid by the owner. Rather, the clause was a payment timing clause which provided that payments by the contractor would generally be paid after payment from the owner but did not preclude the contractor form finally paying the subcontractor even if unpaid by the owner. In the Arnoldin case, the clause was being relied upon by the payment bonding company and that factor may have been important since it makes less sense to interpret the clause as entirely relieving the contractor from paying the subcontractor when the contractor has provided a payment bond to deal with that very situation.

In concluding that the clause was not a pay-when-paid clause, the Yukon Supreme Court said:

“I am in agreement with the interpretation in Arnoldin where the words in the contract before it which were not as clear and precise as the words in Timbro where the contractor clearly assumed the risk of non-payment by the owner to the contractor. In the case at bar, I am of the view that the payment clause is a timing clause rather than a “pay when paid” clause as in Timbro. There is no clear wording that the payment on the Subcontract was conditional on the owner paying the contractor. Therefore, I order that the balance outstanding shall be paid regardless of whether Martian has paid Seko, subject to amount only under the two remaining issues.”

Discussion

This decision follows the trend of recent cases. Most of the recent court decisions have held that, unless the language of the contract makes it very clear that the contractor does not have to pay the subcontractor at all if not paid by the owner, then the provision will not preclude the ultimate obligation of the contractor to pay the subcontractor.

It is difficult to distinguish Timbro from Arnoldin based upon the wording of the respective contracts. In Timbro the relevant wording was “when we have been paid by the owner”. In Arnoldin, the words were “after payment has been received by the Contractor.” The recent cases, following the Arnoldin and not the Timbro decision, may reflect a judicial antipathy to a clause which, in the absence of very clear words, denies payment to the subcontractor when, as Justice Finlayson said, it has done the work.

This decision high-lights the importance of the Prompt Payment regime proposed to be introduced into Ontario law by the Construction Lien Amendment Act, 2017. Under that legislation, a contractor is entitled to deliver to a subcontractor a notice of non-payment, and may deliver such a notice if it has not been paid by the owner. The same regime applies down the payment pyramid.

This legislation may arguably introduce into Ontario a statutory pay-when paid regime. That would be a surprising result since the general trend is for legislatures to ban pay-when paid (as has occured in the U.K. and in several U.S. states) and for courts to strain against finding that a clause is a pay-when-paid clause unless that is very clear.

Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51

Building Contracts – pay-when-paid clauses – Prompt Payment legislation

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                         October 27, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Amendments To The Ontario Construction Lien Act Have Been Given First Reading (Part 1)

On May 31, 2017, the Ontario Legislature gave first reading to Bill 142, which will enact the Construction Lien Amendment Act, 2017. By this legislation, substantial amendments are proposed to the Ontario Construction Lien Act, including the change of the name of the Act to the Construction Act.

The text of Bill 142 may be found by googling Bill 142, Construction Lien Amendment Act, 2017.

This proposed legislation (the Proposed Act) follows a lengthy Report: Striking the Balance: Expert Review of Ontario’s Construction Lien Act, delivered April 30, 2016 (the Report). The Report recommended the changes to Ontario’s Construction Lien Act (the Existing Act) that are now contained in the Proposed Act, so the contents of the Report should be consulted in interpreting and understanding the Proposed Act. The Report is reviewed in my article dated May 1, 2017. The text of the Report may be found by googling Amendments to the Construction Lien Act/Striking the Balance-Expert Review of Ontario’s Construction Lien Act.

The proposed changes to the Existing Act are so numerous that they will be dealt with me in two articles. This is the first article. These articles do not address all the proposed changes to the Existing Act, only those that I consider to be interesting or important.

The changes will be dealt with largely in the order in which they appear in the Proposed Act. I will offer my Comments and Questions about the various sections in the Proposed Act.

Joint Ventures 

The definition of “contractor” in subsection 2(1) is amended to include a “joint venture entered into for the purpose of an improvement or improvements”.

Written Notice of Lien

The definition of “written notice of lien” in subsection 2(1) is changed to read “a claim for lien or a written notice of a lien in the prescribed form, given by a person having a lien.”

New subsection 87(1.1) provides that “a written notice of lien shall be served in a manner permitted under the rules of court for service of an originating process.”

Comments and Questions

These amendments are important. They do away with the prior informality of the form and the manner of service of a notice of lien. Now, the notice of lien must be in a prescribed form and must be served in the same manner as an originating proceeding in court.

Improvements involving “repairs” limited to capital repairs

The definition of “improvement” in subsection 1(1) is amended to include the word “capital” before the word “repairs”. In the result, only capital, and not operating, repairs are included within the word “improvement”.

This point is emphasized in new subsection 1(1.1), which further defines the word “improvement” as follows:

            “Capital repair”

(1.1) For the purposes of clause (a) of the definition of “improvement” in subsection (1), a capital repair to land is any repair intended to extend the normal economic life of the land or of any building, structure or works on the land, or to improve the value or productivity of the land, building, structure or works, but does not include maintenance work performed in order to prevent the normal deterioration of the land, building, structure or works or to maintain the land, building, structure or works in a normal, functional state.” (underlining added)

Comments and Questions

The new legislation clearly re-draws the line around “repairs” to only include “capital” repairs. The debate will continue, however, but it will now be a debate about what is included in the definition of “capital repairs”, and whether the material or services fall within the words “extend the normal economic life” or “improve the value or productivity” on the one hand, or the words “prevent normal deterioration” or to “maintain” the building etc. in a “normal, functional state”, on the other hand.

The Report states that its approach to “capital” repairs and “maintenance” reflects the approach taken in the Income Tax Act. Accordingly, income tax cases may be of some assistance in interpreting this portion of the Proposed Act.

Price, Delay, Direct and Indirect Costs

In the definitions in subsection 1(1), the definition of the word “price” is amended in two respects:

First, if the parties have not agreed upon the price, then the price is to be set by the “market value” of the services and materials. Formerly, the price in this circumstance was to be set by the “value”, rendering it uncertain what scale or system of value was to be used.

Second, a new sub-paragraph (b) is added to state that if the contract is extended (that is, if there are delays) then only direct costs qualify as being part of the “price”. The amended definition reads as follows:

“ “price” means,

(a)  the contract or subcontract price,

(i)  agreed on between the parties, or

(ii)  if no specific price has been agreed on between them, the actual market value of the services or materials that have been supplied to the improvement under the contract or subcontract, and

(b)  any direct costs incurred as a result of an extension of the duration of the supply of services or materials to the improvement for which the contractor or subcontractor, as the case may be, is not responsible;” (underlining added)

The latter point about direct costs is further dealt with in subsection 1(1.2) to define what direct costs means, to define some of the possible ingredients of direct costs, and to specifically remove indirect damages from “price”. Subsection 1(1.2) reads as follows:

“Direct costs”

(1.2) For the purposes of clause (b) of the definition of “price” in subsection (1), the direct costs incurred are the reasonable costs of performing the contract or subcontract during the extended period of time, including costs related to the additional supply of services or materials (including equipment rentals), insurance and surety bond premiums, and costs resulting from seasonal conditions, that, but for the extension, would not have been incurred, but do not include indirect damages suffered as a result, such as loss of profit, productivity or opportunity, or any head office overhead costs.” (underlining added)

Comments and Questions

Although “indirect damages” do not now qualify as part of the price for lien purposes, indirect damages may qualify as recoverable damages, if they otherwise so qualify under the general law of contract and damages.

Do these new definitions mean that there can no longer be a debate about whether some of these items are direct or indirect costs for lien purposes?

Thus, in the first group – which is prefaced by the word “including” – is the additional supply of services or materials deemed to be a direct cost, even if the particular supply might, under contract law or accounting, be considered to be indirect? Does the word “including” have that effect?

So far as the second group – prefaced by the words “such as”, are loss of productivity or head office overhead now deemed to be indirect costs, or can it be shown that they are, in fact, law or accounting, direct costs in the particular circumstance? Does the word “such as” mean “for example”, and is that the same as “including”?

In sorting out what is included within or excluded from “direct costs”, the recommendation of the Report may be relevant. In its 5th recommendation, the Report stated that the “definition of “price” should be amended to include direct out-of-pocket costs of extended duration and exclude damages for delay.” (underlining added).

Crown and Municipal Ownership

Alternative Financing and Procurement arrangements

New subsection 1.1 may be summarized as follows:

When, as owner, the Crown, municipality or a “broader sector organization” [which is defined in the Proposed Act to have the same meaning as in the Broader Public Sector Accountability Act, 2010] enters into an agreement to undertake an improvement on behalf of the Crown, municipality or broader sector organization” with a “special purposes entity” then that entity is deemed to be the owner of the premises in place of the Crown, municipality or broader sector organization, and the contract between the entity and the contractor is deemed to be the contract, for the purposes of Part I.1 (prompt payment), Part II.1 (interim dispute resolution), Section 32 (certification and substantial performance), Section 39 (right to information) and any other portion or provision that may be prescribed. (underlining added)

With these exceptions, “the Crown, municipality or broader public sector organization continues to be the owner of the premises for the purposes of this Act,” and:

  “For the purposes of section 22, holdbacks shall be determined in reference to the agreement between the contractor and the special purpose entity.”

  For the purposes of section 85.1 (surety bonds), “the agreement between the contractor and the special purpose entity is deemed to be a public contract.” (underlining added)

Comments and Questions

These provisions relating to special purposes entities are somewhat duplicative, complicated and inter-dependent. The summary above is what I understand the provisions to mean. Exactly how they will work out will depend upon the final wording of the Proposed Act, and future experience and case law.

Definition of municipality

The definition of “municipality” in subsection 2(1) now includes a municipality or local board within the meaning of the Municipal Act, 2001, or a conservation authority established by or under the Conservation Authorities Act or a predecessor of that Act.

Crown and Municipal Land

Section 16 is amended to state that the land of the Crown or a municipality cannot be the subject of a lien. However, a lien may attach to the interest of any other person in the premises.

Under new subsection 16(3), the lien is a charge upon the holdback under section 21 even if the owner of the land is the Crown, a municipality or the land is a railway right-of-way.

Under new subsection 34(3.1), if the land is owned by a municipality, the claim for lien may be served by being given to its clerk.

            Comments and Questions

These amendments contain important clarifications or amendments of the existing law. Now, the prohibition against liening municipal land applies to all municipal land, not just a public street or highway owned by a municipality – as provided for in the Existing Act, subsection 16(3)(c). Now, it is clear that the lien may be a charge upon the holdback even if it is not a lien against Crown or municipal land or a railway right-of-way.

Sureties For Public Contracts

As will be noted in further detail in the second part of this article, if a public contract (defined to be a contract between a contractor and the Crown, a municipality or broader public sector organization) exceeds the prescribed amount, then new section 85.1 requires the contractor to provide the owner with a labour and materials payment bond and a performance bond in the prescribed forms and written by a licensed insurer and in each case providing coverage of at least 50 percent of the contract price.

Holdback, Substantial Performance and General Liens

Section 2 of the Existing Act defines when a contract is substantially performed for the purpose of the Act. It does so by stipulating that, when the cost of completion or correction are not more than certain amounts or percentages, then the contract is substantially performed.

Section 2 is amended by the Proposed Act to change the cost of completion or correction amounts in subsection 2(1) from $500,000 to $1 million, and the deemed completion amount in subsection 2(3) from $1,000 to $5,000 (or 1 percent of the contract price, whichever is the lesser).

In section 2(2), the non-completion of the improvement due to factors beyond the control of the contractor is removed as a reason for deducting the cost of completion from the contract price to determine substantial performance.

Subsection 2(4) of the Act is added to provide that separate improvements on separate lands may, if the contract so provides, be deemed to be made under separate contracts.

Comments and Questions

Does the new subsection 2(4) have any impact on the general lien, which is provided for in section 20? It seems to mean that, if the contract provides as now stated in subsection 2(4), then a general lien cannot arise on both or all improvements on “separate” lands.

Subsection 20(2) of the Present Act states that a general lien does not arise “under or in respect of a contract that provides in writing that liens shall arise and expire on a lot-by-lot basis.” Recommendation 20 of the Report was that “Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis.” Apparently, this recommendation will not be implemented as there is nothing in the Proposed Act deleting subsection 20(2).

Indeed, reading the new subsection 2(4) with the existing and remaining subsection 20(2), it seems that the present general lien regime continues to apply but with expanded rights to contract out of that regime, both under the existing right to contract out of it through a contract complying with subsection 20(2), and also under the new subsection 2(4) allowing for the contract to provide that there are separate contracts for “separate improvements” on “separate lands”.

Prompt Payment

New Part I.1 and sections 6.1 to 6.8 implement a “prompt payment” regime. The regime is detailed, so a careful review of it must be undertaken by all construction law practitioners. The following is a basic outline of the regime as I understand it:

  • Section 6.1 mandates the form of a “proper invoice”. Under subsection 6.2(1), unless the contract otherwise provides, a proper invoice must be given by the contractor to the owner each month. Under subsections 6.2(2) and (3), the contract cannot provide that the giving of a proper invoice is conditional on a prior certification of a payment certifier or the owner’s prior approval, but such a certification or approval after the proper invoice is delivered is not affected.
  • Under section 6.3, the owner must pay the proper invoice within 28 days, unless it disputes that invoice and gives a notice of non-payment within 14 days after receiving the invoice. The notice of non-payment must specify the amount of the proper invoice that is not being paid and must detail “all of the reasons for non-payment.” The owner must pay within the 28 days any amount not so disputed.
  • Under section 6.4, subject to giving a notice of non-payment to a subcontractor, the contractor must, within 7 days of receiving the amounts from the owner, pay the subcontractors whose materials or services were included in the contractor’s proper invoice to the owner. If the contractor has received partial payment from the owner, the contractor must pay any subcontractors for whose work the owner has paid the contractor. Otherwise the subcontractors are to be paid on a rateable basis.
  • If the contractor does not give notice of non-payment to a subcontract, then even if it has not been paid by the owner, it must pay any remaining amounts due to the subcontractors within 35 day of sending its proper invoice to the owner.

Under subsections 6.4(5) and (6), the contractor can give a notice of non-payment to a subcontractor:

  1. either due to the fact that it has not been paid by the owner, in which case the notice of non-payment must be made within 7 days of the notice of non-payment by the owner, and the contractor must agree to have the “matter” adjudicated; or
  2. due to the fact that it disputes the subcontractor’s claim in which case the notice must specify the amount not being paid and detail “all of the reasons for non-payment”, and must be given with the said 35 day period.
  • Under section 6.5, similar cascading regimes of payment, non-payment notices, etc. apply to subcontractors with slightly different time periods for notices and payment.
  • This prompt payment regime does not apply to wages.
  • Interest is payable on amounts due under these provisions at the greater of the prejudgment interest rate under the Courts of Justice Act, or the interest rate specified in the contract.

Comments and Questions

Contracting out/Pay-when Paid regimes. The first issue relating to this new prompt payment regime is whether the parties can contract out of it. In particular, does the new prompt payment regime replace and nullify, or enforce by statute, a “pay-when-paid” clause in a subcontract?

As to the first question, subsection 6.2(1) of the new statutory “prompt payment” regime states that proper invoices shall be given to the owner on a monthly basis “unless the contract otherwise provides otherwise.” Do those words apply to the whole regime? Or does that reference in this subsection to the parties’ entitlement to contract out mean that the parties cannot contract out of the other parts of these sections?

And does the “no waiver of rights” provision in section 4 of the Act nullify other conflicting contractual regimes?

As to the second question relating to pay-when paid clauses, two issues arise.

First, does the new prompt payment regime allow pay-when-paid clauses in subcontracts? There is nothing in the prompt payment regime that expressly mentions or nullifies pay-when-paid clauses.

In addition, the further question may be whether the new regime mandates a pay-when-paid regime whether or not the subcontract provides for such a regime. Thus, subsection 6.4(5)(a)(ii) states that the contractor is not obliged to pay the subcontractor under subsection 6.4(4) if it delivers a notice of non-payment to the subcontractor stating that the amount payable to the subcontractor is not being paid due to non-payment by the owner to the contractor. Does this subsection create a right to not pay the subcontractor if the owner has not paid the contractor, even if there is no pay-when-paid clause in the subcontract? Contractors may argue that it does, and that the statute has created a regime which must be followed.

In the United Kingdom under section 113(1) of the Housing Grants, Construction and Regeneration Act 1996 (U.K.), pay-when paid clauses are rendered ineffective unless the third party payor (such as the owner who has not paid the contractor) is insolvent.  This statute is the same one in which, in section 108, the adjudication regime is established. The two subjects – prompt payment and adjudication – are dealt with in the same payment regime, a regime in which pay-when paid clauses are banned except in the case of insolvency.

In the absence of such a prohibition of pay-when-paid clauses in the Ontario statute, does the proposed Ontario prompt payment regime effectively create a pay-when-paid regime which statutes in the U.K. (and in some states in the U.S.A.) have abolished? Where does the Ontario prompt payment regime provide a basis for the adjudicator (or arbitrator or judge) to require payment, either contrary to a pay-when-paid clause or contrary to a notice of non-payment under section 6.4 of the Proposed Act?

Second, if there are reasons why the pay-when-paid or other similar contractual regime could not presently be enforced by the contractor (for instance, if the contractor was the cause of the owner’s non-payment) can those reasons still be advanced by the subcontractor? While there is no provision in the Proposed Act to this effect, subcontractors will likely expect that they can do so. They may utilize the adjudication regime to require payment even though the contractor has served a non-payment notice on the subcontractor, alleging that the owner’s non-payment is due, among other reasons, to the fault of the contractor.

Is the non-payment regime arising from a disputed invoice or subcontractor’s invoice subject to the arbitration or other dispute resolution provisions of the respective contract?   Presumably yes, but there does not appear to be any link between the prompt payment regime and the either the court or arbitral dispute resolution systems. As noted below, this may mean that there are at least four dispute resolution regimes applicable to construction lien disputes.

Similarly, the link to, or impact of the prompt payment regime on, the certification or approval regimes is not entirely clear. Subsections 6.2(3) and (4) provide that a prior certification or approval regime cannot nullify a proper invoice, but it is unclear what the effect is of a certification or approval process after a proper invoice is delivered. Could such a process interrupt the contractor’s entitlement? What is the relationship between an owner’s notice of non-payment and a subsequent certificate denying payment or an owner’s non-approval? Could such a certificate or non-approval be the basis, by itself, of an owner’s notice of non-payment?

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                               September 10, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

Which Takes Precedence In A Building Contract: A Performance Standard Or A Design Standard?

The United Kingdom Supreme Court recently considered the question of whether the performance standard or the design standard prescribed in the contract took precedence. In MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59, the court held that the performance requirement took precedence and that the contractor was liable when the structure failed soon after erection although the structure was built according to the design standard which had an error in it.

This decision generally follows the principle adopted by Canadian courts in holding contractors liable for the structure’s failure to perform as required by the contract even though the structure was built according to specifications issued by the owner.

Background

The contractor MT agreed with the owner E.ON to build the foundations for proposed offshore wind turbines. The technical requirements (“TR”) issued by the owner to bidders stated that “[t]he Works elements shall be designed for a minimum site specific ‘design life’ of twenty (20) years without major retrofits or refurbishments; all elements shall be designed to operate safely and reliably in the environmental conditions that exist on the site for at least this lifetime.”

The TR stated that they were minimum requirements and that the contractor was “to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters” and that “[t]he design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly.”

The TR required the contractor to prepare the detailed design of the foundations in accordance with an international standard for the design of offshore wind turbines published by an independent classification and certification agency. An equation in that standard was later shown to be erroneous by a factor of 10, leading to the subsequent failure.

The contract between the parties incorporated the TR, which were attached to the contract. The contract required MT “in accordance with this Agreement, [to] design, manufacture, test, deliver and install and complete the Works” in accordance with a number of requirements, including

“(iv)    in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices and in accordance with internationally recognised standards and Good Industry Practice; …

(viii)   so that the Works, when completed, comply with the requirements of this Agreement …;

(ix)      so that [MT] shall comply at all times with all Legal Requirements and the standards of Good Industry Practice;

(x)       so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice; …

(xv)     so that the design of the Works and the Works when Completed by [Mt] shall be wholly in accordance with this Agreement and shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement. …”

The contract provided that MT was responsible for making good any defects arising for defective materials, workmanship or design which appeared within 24 months of E.ON taking over the works from MT. E.ON was required to produce a Defects Liability Certificate once the Defects Liability Period has expired and MT had satisfied all its obligations. Within 28 days of the issue of a Defects Liability Certificate, MT was entitled to apply for a Final Certificate of Payment, and to accompany the application with a final account. A Final Certificate of Payment was then to be issued which was conclusive. This regime is referred to as the “Defect Liability regime” in this article.

MT proceeded with the design and construction of the two wind farms. The international certifying authority evaluated and approved MT’s foundation designs. MT began the installation of the foundations in December 2007, and completed the Works in February 2009. During 2009 a serious problem came to light at another wind farm. The certifying authority carried out an internal review during late summer 2009, and discovered the error in the equation in the international design standard that had been prescribed by the owner. The foundations were re-built and litigation was commenced to determine which party was responsible for the additional costs.

The trial judge found in favour of E.ON on the grounds that: the contract required the foundations to be fit for purpose; fitness for purpose was to be determined by reference to the TR; and the TR also required the foundations to be designed so that they would have a lifetime of 20 years.

The Court of Appeal reversed the trial judgment. It held that the contract stipulated that the foundations must be constructed in accordance with the international design standard prescribed by the owner, and the other elements of the contract did not render MT liable for an error in that standard.

Decision of the U.K. Supreme Court

The U.K. Supreme Court reversed the decision of the Court of Appeal and re-instated the decision of the trial judge. The elements of its decision may be divided as follows:

  1. The effect of the Defects Liability regime was that “any claim by E.ON in respect of a defect appearing thereafter was barred, and….. there was no room for claims outside the 24-month period….. In my opinion, there is no answer to that analysis so far as it is directed to the effect of [the Defects Liability regime]….Clause 42.3 makes it clear that the provisions of clause 30 (and any other contractual term which provides for remedies after the Works have been handed over to E.ON) are intended to operate as an exclusive regime. And that conclusion appears to…. tie in very well with the notion that there should be no claims after the Final Certificate, which is to be issued very shortly after the 24-month period.”
  2. This reading of the Defects Liability regime helped to resolve the tension between the 20 year performance standard and other parts of the contract:

“In the light of the normal give and take of negotiations, and the complex, diffuse and multi-authored nature of this contract, it is by no means improbable that [MT] could have agreed to a 20-year warranty provided that it could have the benefit of a two-year limitation period, save where misconduct was involved. It would simply mean that the rights given to E.ON by paras 3.2.2.2(ii) were significantly less valuable than at first sight they may appear, because any claim based on an alleged failure in the foundations which only became apparent more than two years after the handover of the Works would normally be barred by clause 42.3. In this case, of course, there is no problem, because the foundations failed well within the 24-month period.”

  1. The true meaning of the 20-year performance term was, not that the structures would last for 20 years, but that they would be designed to last for 20 years:

“….there is a powerful case for saying that, rather than warranting that the foundations would have a lifetime of 20 years, para 3.2.2.2(ii) amounted to an agreement that the design of the foundations was such that they would have a lifetime of 20 years. In other words, read together with clauses 30 and 42.3 of the Contract, para 3.2.2.2(ii) did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last for 20 years without replacement. …… Rather than the 20-year warranty being cut off after 24 months, E.ON had 24 months to discover that the foundations were not, in fact, designed to last for 20 years. On the basis of that interpretation, E.ON’s ability to invoke its rights under para 3.2.2.2(ii) would not depend on E.ON appreciating that the foundations were failing (within 24 months of handover), but on E.ON appreciating (within 24 months of handover) that the design of the foundations was such that they will not last for 20 years.

   It is unnecessary to decide whether para 3.2.2.2(ii) is a warranty that the foundations will have a lifetime of 20 years or a contractual term that the foundations will be designed to have such a lifetime. The former meaning has been taken as correct by the parties and by the courts below, but, for the reasons given in paras 28 to 31 above, I am currently inclined to favour the latter meaning…… However, it is clear that, if para 3.2.2.2(ii) is an effective term of the Contract, it was breached by [MT] whichever meaning it has, and therefore the issue need not be resolved.

  1. The legal resolution of the tension between the prescribed performance (which the court called the “prescribed criteria”) and the prescribed design may be resolved as follows:

“Where a contract contains terms which require an item (i) which is to be produced in accordance with a prescribed design, and (ii) which, when provided, will comply with prescribed criteria, and literal conformity with the prescribed design will inevitably result in the product falling short of one or more of the prescribed criteria, it by no means follows that the two terms are mutually inconsistent. That may be the right analysis in some cases…… However, in many contracts, the proper analysis may well be that the contractor has to improve on any aspects of the prescribed design which would otherwise lead to the product falling short of the prescribed criteria, and in other contracts, the correct view could be that the requirements of the prescribed criteria only apply to aspects of the design which are not prescribed. While each case must turn on its own facts, the message from decisions and observations of judges in the United Kingdom and Canada is that the courts are generally inclined to give full effect to the requirement that the item as produced complies with the prescribed criteria, on the basis that, even if the customer or employer has specified or approved the design, it is the contractor who can be expected to take the risk if he agreed to work to a design which would render the item incapable of meeting the criteria to which he has agreed.” (underlining added)

In arriving at its conclusion, the U.K. Supreme Court relied upon two Canadian decisions, The Steel Company of Canada Ltd v Willand Management Ltd., [1966] S.C.R. 746 and Vancouver Water District v North American Pipe & Steel Ltd., 2012 BCCA 337. In both those cases, the contractor was held liable when the work failed to live up to the performance standard in the contract even though the contractor used the specifications provided by the owner.

  1. In applying this principle in the present case and in finding in favour of the owner, the Court of Appeal concluded as follows:

“The opening provision of Section 3, para 3.1, (i) “stresse[s]” that “the requirements contained in this section … are the MINIMUM requirements of [E.ON] to be taken into account in the design”, and (ii) goes on to provide that it is “the responsibility of [MT] to identify any areas where the works need to be designed to any additional or more rigorous requirements or parameters”. In those circumstances, in my judgment, where two provisions of Section 3 impose different or inconsistent standards or requirements, rather than concluding that they are inconsistent, the correct analysis by virtue of para 3.1(i) is that the more rigorous or demanding of the two standards or requirements must prevail, as the less rigorous can properly be treated as a minimum requirement. Further, if there is an inconsistency between a design requirement and the required criteria, it appears to me that the effect of para 3.1(ii) would be to make it clear that, although it may have complied with the design requirement, [MT] would be liable for the failure to comply with the required criteria, as it was [MT’s] duty to identify the need to improve on the design accordingly.” (underlining added

  1. Having arrived at this interpretation of the contract as being the proper one, the Court of Appeal did not accept a number of submissions of the contractor as to why that interpretation should not be accepted, including:
    1. The “diffuse and unsatisfactorily drafted nature of the contractual arrangements, with their ambiguities and inconsistencies, [which] should be “recognised and taken into account”;
    2. The fact that the “onerous obligation” upon which the court’s interpretation rested “is found only in a part of a paragraph of the TR, essentially a technical document, rather than spelled out in the Contract.”
    3. This interpretation would or would not render the requirements in the TR redundant having regard to the terms of the contract itself.

Discussion

The MT Hojgaard decision contains a fascinating and important analysis of the factors which may assist a court to resolve the apparent conflict between a prescribed criteria (which I have called a performance standard) and a design criteria in a contract, or in the event of conflict, to determine which standard should takes precedence. The court stated the principle that, and the reasons why, the prescribed criteria will generally be given precedence over a design criteria, even a design criteria by the owner.

In the course of its decision, the U.K. Supreme Court considered almost all the conceivable factors relating to the interpretation of these sorts of contractual provisions. The decision provides, therefore, a good check-list for persons drafting or litigating these provisions.

The fact that the U.K. Supreme Court relied upon two Canadian decisions is significant. However, the court did not refer to any Canadian decisions on the other side of the ledger. There are many cases in which the owner’s claim against the contractor has been dismissed on the basis that the contractor had not given a warranty of the life or other criteria of the structure, or that the owner had not relied upon the contractor’s skill and judgment for the design of the structure. One of the leading Canadian decisions to this effect is CCH Canadian Ltd. v. Mollenhauer Contracting Co., [1976] 1 S.C.R. 49.

The debate in Canadian cases often turns on whether the owner relied upon the contractor’s skill and judgment, and whether the agreement of the contractor truly represents a warranty of performance. These elements of the usual Canadian analysis are not evident in the MT Hojgaard decision of the U.K. Supreme Court. Perhaps they were inherent in the court’s interpretation of the performance standard. But if reliance on the contractor’s skill and judgment is something that can be shown objectively from the parties’ conduct, and not merely from the words of the contract, it may be doubtful in this case that the owner really relied upon the contractor’s skill and judgment in relation to the international design standard contained in the TR issued by the owner.

In addition to resolving the tension between the design and performance standards in the contract, there are two other interesting aspects of the MT Hojgaard decision.

The first is the court’s interpretation of the term relating to “20 years without replacement” and its finding that this term “did not guarantee that the foundations would last 20 years without replacement, but that they had been designed to last for 20 years without replacement.”

The second is the court’s interpretation and use of the Defect Liability regime. The court held that this regime meant that, while the “20 years without replacement” term existed in the contract, it could only be enforced during the 2 years after the owner took over the project after which the owner’s rights terminated. The court relied upon this interpretation to resolve the tension between the performance and design criteria.

It can be predicted that Canadian courts will pay close attention to both these approaches.

Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 4, sections 3(i) and 5 and Chapter 7, section 7(c)(ii).

MT Hojgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor [2017] UKSC 59

Building Contracts –performance and design standards and defects – warranty period

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                   August 24, 2017

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.

A Subcontractor Recovers Against The Owner In Unjust Enrichment

A subcontractor who fails to register a construction lien faces an uphill battle in asserting a claim in unjust enrichment against the owner. That is because the owner will rely upon its contract with the contractor for any benefit that the owner has obtained from the subcontractor’s work. The owner will also assert that there is no equitable reason to grant an unjust enrichment remedy to a subcontractor who could have asserted a construction lien remedy but failed to do so.

Sometimes, however, the subcontractor’s unjust enrichment claim fits within the narrow opening between the owner’s contractual and construction lien defences, and N.K.P. Painting Inc. v. Boyko 2016 CarswellOnt 7332, 2016 ONSC 3016 was such a claim.

Background

The owner contracted with the prime contractor for the refurbishment of the corridors of the building. The prime contractor retained NKP as the subcontractor to supply painting and wallpapering material. During the project, the owner issued progress payments to the general contractor, less the applicable statutory holdback. NKP completed its work and invoiced the prime contractor. A total of $28,928.00 was not paid by the prime contractor to NKP, and the prime contractor became insolvent. Neither NKP nor the prime contractor registered liens. The owner held back a total of $23,893.74 under the prime contract.

Decision

The Superior Court judge held that there “is no reason to deny the appellant access to the common law remedy of unjust enrichment because it did not avail itself of potential statutory remedies,” as long as the ingredients of the unjust enrichment remedy were satisfied.

The court found that the owner had retained the 10 percent holdback, and that there was no claim against that holdback for deficiencies. While there was evidence of a claim by another subcontractor, there was no evidence about the status or disposition of that claim and no evidence to suggest that anything other than the full amount of the holdback remained available and under the control of the owner.

The court therefore concluded that “it would appear clear that [the owner] has been enriched in the sense that it has received 100% of the benefit of the invoiced renovation work performed but has only paid 90% of the invoiced amounts” and that “the enrichment corresponds to the efforts of NKP through the renovation work performed for which it has received no compensation.”

The court then considered the third element in the claim for unjust enrichment, namely whether there was a juristic reason for the benefit and corresponding deprivation. While that juristic reason may be a contract, that reason could only apply:

“where the party advancing the claim for unjust enrichment is a party to the contract, as is the party against whom the claim is advanced. On the facts of the case before me, that would require a contract between NKP and [the owner]. There is no such contract. In other words [the owner’s] enrichment and NKP’s deprivation did not arise in the context of a contract between these two parties…I therefore conclude that there is no established category of juristic reason to deny recovery to the Appellant.”

The court then considered the reasonable expectations of the parties and public policy and found that neither factor should deprive NKP from a remedy in unjust enrichment:

“In my view it cannot have been within the reasonable expectation of the parties that [the owner] would receive a 100% benefit of renovation work invoiced, including NKP’s efforts, while paying only 90% of the cost of those efforts. [The owner’s] statutory obligation to retain the holdback has expired and had expired at the time of trial. There was no legal requirement at trial for [the owner] to retain the funds by way of holdback, nor did [the owner] retain any legal entitlement to those funds….The purpose of the holdback funds is to represent a potential source of funds from which to compensate unpaid providers of service and materials to the improvement of a property. It is remedial in nature….Thus [the owner] could not reasonably have expected to retain the funds and indeed were it to do so it would represent a windfall.”

The court held that the owner’s enrichment was the amount of the holdback held by the owner, and granted judgment for that amount in unjust enrichment in favour of the subcontractor.

Comment

The court arrived at a fair result but, it is submitted, the court’s conclusion is incorrect that a contract must be between the claimant and the defendant before it can be a defence to a claim in unjust enrichment.

There are many cases in which a contract has been held to be a defence to an unjust enrichment claim even though the contract was not between the unjust enrichment claimant and defendant. In most cases, the contract was between the defendant and a third party. For example, if an owner enters into a prime contract with a contractor and pays the contractor in full, including the holdback, then that prime contract is a juristic reason why the owner should not have to pay the subcontractor, which has been unpaid by the contractor but has not filed a construction lien. Requiring the owner to pay twice is not fair, either from a contract or construction lien perspective.

There are even some cases in which the contract between the claimant and a third party has been held to be a juristic reason for the claimant being denied an unjust enrichment remedy against the defendant. For example, a subcontractor has been denied an unjust enrichment remedy against an owner due to the subcontract between the subcontractor and contractor. However, unless the claimant has been paid in full under the subcontract, it is harder to justify that conclusion since there seems to be no good reason why the owner should be entitled to rely upon a subcontract to which it is not a party as a juristic reason for not paying the unpaid subcontractor.

However, the present case fits within the crack between the owner’s juristic reason defences, both based upon its prime contract with the contractor and upon the construction lien regime. The work under the prime contract had been entirely completed but the owner had not paid out the holdback under that contract. So there was no juristic reason under that contract why it should not be compelled to pay the holdback to the subcontractor.

And under section 8 of the Construction Lien Act, the holdback was held in trust “for the benefit of subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor…”. Therefore, even though the subcontractor had not filed a lien, there was a good juristic reason why the owner should pay to the subcontractor the monies in its hands that were due under the prime contract.

The validity of the subcontractor’s unjust enrichment claim extended to the amount held back by the owner, not the amount which the subcontractor had not been paid by the contractor. Payment of the former amount did not penalize the owner under the prime contract nor over-stretch the statutory trust fund remedies, while payment of the latter amount would have.

Another fact to note in this case is that the prime contractor’s trustee in bankruptcy did not assert a claim to the holdback. Accordingly, whether such a claim could have been asserted, in view of the trust fund provisions of the Construction Lien Act, was not considered.        

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 4.

N.K.P. Painting Inc. v. Boyko 2016 CarswellOnt 7332, 2016 ONSC 3016

Building contracts – construction and builders’ liens – unjust enrichment – juristic reason defence

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                                   August 20, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

When Does An Arbitral Award Contain An Appealable Question Of Law?

The Supreme Court of Canada has recently re-examined the issue of whether a statutory and contractual interpretation by an arbitral tribunal may be appealed. The court re-iterated the principle that arbitral awards are not appealable on a question of law when in reality the question is one of mixed fact and law. On this basis, in Teal Cedar Products Ltd. v. British Columbia, 2017 CarswellBC 1648, 2017 SCC 32, the Supreme Court re-instated an arbitral award which had been set aside in whole or in part, by the courts of British Columbia.

In doing so, the court re-affirmed its previous decision in Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633 to the effect that, unless a discrete question of law arises, the interpretation of a contract is a question of mixed fact and law, not a question of law, and that an arbitral award interpreting a contract cannot be appealed to the courts if the right of appeal is only on a question of law.

I reviewed the Sattva decision in an article dated August 10, 2014 and the decision of the British Columbia Court of Appeal in Teal in an article dated July 7, 2015

The Issues

Teal held a license to harvest timber on provincial Crown land. The province then reduced the amount of Teal’s allowable harvest. The parties were able to settle the amount of Teal’s compensation for its loss of harvesting rights (the Rights Compensation) but were unable to agree on the compensation for the improvements Teal had allegedly made to Crown land (the Improvements Compensation). The parties agreed to arbitrate the amount of Improvement Compensation to which Teal was entitled. The arbitrator made an award in Teal’s favour and the province appealed.

The issues upon which the arbitral award was appealed were as follows:

  1. Did the arbitrator err in selecting a valuation method that was allegedly inconsistent with the governing statute, the Revitalization Act?
  2. Did the arbitrator err in his interpretation of the contract between the parties, especially in resorting to the factual matrix to interpret an amended settlement agreement between the parties in light of the negotiations between the parties?
  3. Did the arbitrator err in denying compensation to Teal Cedar relating to the improvements associated with one of its licences because it never lost access to those improvements?

The Decision Of The Majority Of The Supreme Court Of Canada

The nine-member court was divided 5-4 in this appeal. The majority held as follows with respect to these questions:

  1. This question was a question of law. Accordingly it could be appealed under the British Columbia Arbitration Act. However, the arbitrator applied the plain meaning of the statute prescribing that valuation and reasonably selected a suitable valuation method. Accordingly, his award was valid and could not be set aside.
  2. This question was either a question of mixed fact and law, or was without reviewable error as it was based on the wording of the contract interpreted in light of the factual matrix. In either case it was not appealable to the courts since section 31 of the B.C. Arbitration Act limits appeals to questions of law.
  3. This question was one of mixed fact and law and not reviewable under the B.C. Arbitration Act.

The four judges who dissented held that the arbitrator erred on Question 1. They held that Teal was entitled to compensation only for its limited interest in the improvements.  Teal, as a licence holder, did not own the improvements, which belonged to the Crown. The arbitrator selected a valuation method — the cost savings approach —, which failed to consider that Teal had only a limited interest in the improvements as a licence holder and was therefore not entitled to compensation on that basis under the Act.

In arriving at its conclusions, the majority of the court provided some further explanations and clarifications of its historic decision in Sattva. Here are three addition principles that can be extracted from Teal and added to the principles arising from Sattva:

  1. Alteration Of A Legal Test Raises A Legal Question.

If, in the course of the application of a legal principle, the underlying legal test has been altered, then a legal question arises. “For example, if a party alleges that a judge (or arbitrator) while applying a legal test failed to consider a required element of that test,” –for example, if “the correct test requires him or her to consider A, B, C, and D, but in fact the decision-maker considers only A, B, and C” – then a question of law arises. “If the correct test requires him or her to consider D as well, then the decision-maker has in effect applied the wrong law, and so has made an error of law.”

This situation is an example of an “extricable question of law” which under Sattva is reviewable as a question of law, but the alleged error is hidden or “covert” in the arbitrator’s award. The legal issues or tests are “implicit to their application of the test rather than explicit in their description of the test.”

  1. Statutory interpretation is normally a legal question and contractual interpretation is normally a question of mixed fact and law.

As explained in Sattva, “contractual interpretation remains a mixed question, not a legal question, as it involves applying contractual law (principles of contract law) to contractual facts (the contract itself and its factual matrix)”. But statutory interpretation is a matter of law.

  1. An arbitrator’s legal decision should be reviewed on a standard of reasonableness.

While an appeal of a court’s decision on a question of law should be conducted on the basis of correctness, an appeal of an arbitrator’s award on a question of law – in this case, the interpretation of a statute – should be conducted on the basis of reasonableness, based upon the arbitrator’s presumed special expertise. To do otherwise, and “to weigh an arbitrator’s actual (as opposed to presumed) expertise in every arbitration would require some sort of preliminary assessment of the arbitrator’s level of expertise with a view to establishing the standard of review for every particular hearing — which would be antithetical to the efficiencies meant to be gained through the arbitration process.” Moreover, “in a commercial arbitration context…..from a policy perspective, the deliberate aim is to maximize efficiency and finality.” All of these factors merit deferential review of the arbitrator’s decision.

The arbitrator is presumed to be an expert even though the arbitration process in this case was mandated by statute, not voluntary. If an issue arises in the course of an arbitration that is outside the subject matter of the arbitration, then in that case the presumed expertise of the arbitrator –and the review of the award on a reasonableness basis- might not apply.

This part of the Supreme Court’s decision may come as a surprise. In previous lower court decisions, it has been assumed that errors of law by an arbitral tribunal should be reviewed on a standard of correctness: see, for instance, Denali Construction Inc. v. Tremore Contracting Ltd.,2013 CarswellAlta 898, 2013 ABQB 321, 25 C.L.R. (4th) 54 at paras. 14-16 (Alta Q.B.). The Supreme Court has now said that the standard of reasonableness applies to the review of arbitral awards, even if the question is one of law.

Discussion

The legal principles stated in Teal have clear application to arbitrations arising under building contracts. For example, if the arbitrator is considering a statute such as the Construction Lien Act, his or her interpretation involves a question of law. If the relevant provincial arbitration statute permits an appeal on a question of law, then the arbitrator’s decision on this point is appealable. But in the appeal, the arbitral award will be reviewed on a standard of reasonableness and only set aside if it is unreasonable.

If, on the other hand, the arbitrator is interpreting a building contract, his or her interpretation will usually amount to a question of mixed fact and law, and will not be appealable as a question of law. However if there are several elements involved in a particular issue, and if the arbitrator fails to consider, or mis-applies one of the elements, then according to Teal that failure may give rise to a discrete question of law and be appealable.

Exactly how this element of the Teal and Sattva decisions will work out may be a matter of contention. For example, under GC 10.2.6 of CCDC 2 Stipulated Price Contract, the contractor is required to advise the consultant and obtain direction as required by GC 10.2.5 before performing work which is contrary to law, and if it does not, the contractor is obliged to bear the expense of correcting the work. If, in the absence of some other justification (such as waiver or estoppel), the arbitrator holds that the contractor satisfies this condition by reason of advising the consultant without considering the absence of written directions (or vice versa), is this an error of law, or just an error of mixed fact and law due to the involvement of the surrounding facts?

In any event, all construction law practitioners dealing with arbitrations under building contracts must be familiar with the trilogy of Supreme Court decisions: Sattva, and Teal and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co, 2016 SCC 37 which apply Sattva.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 11(a)

Teal Cedar Products Ltd. v. British Columbia, 2017 CarswellBC 1648, 2017 SCC 32

Building contracts – arbitration – appeal of arbitral awards – questions of law and mixed fact and law

Thomas G. Heintzman O.C., Q.C., LL.D (Hon.), FCIArb                       July 16, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

What Amounts To An Effective Claim Under A Building Contract?

The Ontario Court of Appeal has recently allowed the appeal in the case of Ledore Investments Limited (Ross Steel Fabricators & Contractors) v. Ellis-Don Construction Ltd., 2017 ONCA 518. In doing so, it held that the arbitrator committed no reviewable error in deciding that the correspondence sent by Ellis-Don to its subcontractor did not amount to a claim under the building contract in question.

This is an important decision from a construction law standpoint. Building contracts often contain a clause which provides that claims are released if they are not made during the building project. In the Ellis-Don subcontract, that provision stated that unless a party had made “claims” within a specific number of days from the final completion of the contract, then the right to assert claims under the contract was lost. The arbitrator held that the proper elements of a “claim” were missing in the letter sent by Ellis-Don to the subcontractor. The Court of Appeal held that this decision was not unreasonable and should not be overturned.

Accordingly, parties to building contracts who wish to ensure that they have given a valid “claim” must pay attention to this decision.

The Contract

Article 15 of the subcontract between Ellis-Don and the subcontractor Ross Steel read as follows:

“15.1   As of the date of the final certificate for payment of the prime contract, the contractor expressly waives and releases the subcontractor from all claims against the subcontractor, including without limitation those that might arise from the negligence or breach of this agreement by the subcontractor, except one or more of the following:

(a) those made in writing prior to the date of the final certificate for payment of the prime contract and still unsettled;” [Emphasis added by the court, underlining added by me.]

The Claim Made By Ellis-Don

The letter written by Ellis-Don, upon which it relied as being its claim, read as follows:

“In addition to impacting the schedule, Ross Steel also forced Ellis-Don to expend substantial monies to accelerate the work in an effort to recover the schedule. We are currently assessing the financial impact that Ross Steel’s slippages have had on Ellis-Don and we intend to recover the costs from you.” (underlining added)

The Arbitrator’s Decision

The arbitrator held that this letter did not amount to a “claim’:

“I find that while Ellis-Don may have contemplated a delay claim in January 1999 and may have discussed amongst its own representatives a possible strategy to assert a claim for delay costs in the amount of $400,000, there is no proof that it actually did so. As stated earlier, the intention to claim is not the same as a claim. Further, the failure to advance the delay claim in the August 4, 1999 meeting supports my view that Ellis-Don did not assert a delay claim “in-writing” before the final certificate of completion.” [Emphasis added by the court.]

Appeal Judge’s Decision

Ellis-Don appealed the arbitrator’s decision to the Ontario Superior Court of Justice. That court set aside the arbitrator’s decision, holding that Ellis-Don’s letter was a sufficient “notice of claim” and that all that was required under Article 15.1 was a notice of claim, not a claim:

“…..provisions requiring claims to be made in writing should be treated as provisions requiring written notice of claims, contrary to the approach taken by the arbitrator….In this court’s view, the arbitrator erred in finding that “claims made in writing” should not be treated as provisions requiring written notice of a claim…..the arbitrator misapplied the general principles and considerations established in Doyle to reach his conclusion that Article 15.1(a) had been satisfied but instead fashioned and applied his own test in that regard, contrary to the applied legal principles established. (underlining added)

I reviewed this decision in an article dated December 3, 2016.

The Court Of Appeal’s Decision

First, the Court of Appeal held that the standard of review to be applied to the arbitrator’s decision was reasonableness. Only if the arbitrator’s award was unreasonable should it be set aside.

In a very pithy decision, the Court of Appeal then held that the arbitrator’s decision was reasonable:

“In our view, [the arbitrator’s] interpretation of Article 15.1(a) of the subcontract at paragraphs 52-68 of the award is eminently reasonable. The question of whether Ellis-Don advanced a “claim” for delay in writing within the time permitted under the subcontract is, by its very nature, a question of mixed law and fact. The question required the arbitrator to not only interpret Article 15.1(a), but also to decide whether the language contained in Ellis Don’s January 18, 1999 (or any other letters) was sufficient to constitute a “claim”. This is precisely what the arbitrator did.

The arbitrator was aware of the cases the respondent relies on in this appeal (Ellis-Don put them before him and relied on them in argument). In our view, the arbitrator did not ignore or misperceive them. Indeed, in terms of the principal case relied on by the respondent, Doyle, the arbitrator’s decision is not inconsistent with it; his dichotomy between “intention to make a claim” and “an actual claim” is similar to the distinction in Doyle, at para. 71, between “grumbling display[ing] an intention to claim” and an actual claim.”

Discussion

Where does this decision leave us with respect to whether a letter like Ellis-Don’s amounts to a valid “claim” under a construction contract?

Is the most that we can say that it is reasonable to conclude that such a letter is not a “claim”? If that is so, then another arbitrator might well find that such a letter is a “claim”. Could the reviewing court well find that that decision is not unreasonable?

That is the problem with the review of arbitral awards on the standard of reasonableness. After the court’s review, we know that the arbitral award is or is not unreasonable. We do not know that it is correct or the only conclusion that is possible.

The second issue is: what did the court and arbitrator decide about Ellis-Don’s letter? We know that the letter was held to be an insufficient claim, but do we really know why? Was it because the letter stated an intention to make a claim, not a claim stated in the present tense? Or was it because the letter did not contain sufficient particulars of a claim?

These are very different issues. By way of example, the Court of Appeal recently held that a claim under a construction contract was invalid, despite the finding by the judge of first instance that the claim was valid, because it did not contain sufficient particulars of the claim: Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205. I reviewed that decision in an article dated July 10, 2016. In that case, the claim provision required the claimant to provide a “sufficient description of the facts and circumstances of the occurrence that is the subject of the claim to enable the Engineer to determine whether or not the claim is justified.”

A third issue is whether these cases apply to “notice of claim” provisions. Thus, GC 12.2 of the CCDC 2 Stipulated Price Contract states that the contractor and owner waive and release “claims” against each other unless (subject to various exceptions) “Notice in Writing [of the claims] has been received ….no later than the sixth calendar day before the expiry of the lien period…” Does this provision make a distinction between a “Notice” of a claim and a “claim”? Does it do so in order that the claimant be put to a lesser standard of particularity or intention to give notice of, and thereby preserve, a claim? Would the views of the Superior Court judge in the Ellis-Don case be more applicable to a “notice of claim” provision rather than a “claim” provision?

In any event, these two decisions of the Ontario Court of Appeal appear to express a judicial and arbitral tendency toward requiring greater precision, and an express statement of a present claim, in the making of claims under building contracts. Arbitrators and the courts seem to be departing from their previous more laissez faire attitude to those claims, under which if the owner was generally aware of the impending claim, it couldn’t avoid the claim on technical grounds. Now the courts and arbitrators seem to be demanding that the claim be present and clear, and if the wording of the dispute resolution clause demands it, that sufficient particulars of the claim be provided.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 4 part 3(c), chapter 6 part 9(b)-(e), chapter 7 part 5 and chapter 9 part 4.

Ledore Investments Limited (Ross Steel Fabricators & Contractors) v. Ellis-Don Construction Ltd., 2017 ONCA 518

Building contracts – dispute resolution clauses – arbitration – claim

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                           July 9, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

May A Party Terminate A Contract For “Fundamental Breach”?

In the recent decision in R.P.M. Investment Corp. v. Lange, 2017 CarswellAlta 770, 2017 ABQB 305, the Alberta Court of Queen’s Bench held that a party to a contract may terminate a contract on the basis of a “fundamental breach” of the contract, in addition to the right to terminate the contract for repudiation. While on the facts of the case the court held that a fundamental breach had not occurred, the decision still raises the question: what is the role of fundamental breach in Canadian contract law?

It is submitted that the Alberta court erred in applying the doctrine of fundamental breach to the termination for breach of contract. If that doctrine exists at all in Canadian law, it applies to exclusion clauses. Canadian courts should apply the doctrine of repudiation, not fundamental breach, to issues relating to the termination of contract for breach.

This decision and this article do not deal with the role of fundamental breach in relation to exclusion clauses. The law on that subject is somewhat tortured. The last word from the Supreme Court of Canada on that subject is probably found in the Tercon case: Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 CarswellBC 296, 2010 CarswellBC 297, [2010] 1 S.C.R. 69.

The Background

The Langes engaged the plaintiff, (called “Mission” in the reasons) to build a home near Calgary. Mission did not complete the construction and the Langes hired a new contractor to complete the construction. Mission sued for the amount remaining due on its contract and the Langes counterclaimed for damage.

Each party accused the other of fundamental breach and repudiation of the contract.   The Langes allege that Mission committed fundamental breaches by not complying with the plans and specifications and by abandoning the project. The trial judge found that neither allegation was proven. While there were breaches of the contract, none of them rose to the level of fundamental breach, as they did not deprive the Langes of “substantially the whole benefit of the contract.” As to abandonment, while Mission removed certain property from the job site, that “was done for cost-savings purposes and did not constitute abandonment.” Moreover, Mission demonstrated its continuing intention to complete the project.

As to repudiation, the trial judge found that the Langes had not expressly accused Mission of repudiation, but that abandonment, had it been found, “might well have constituted a repudiation.”

Mission’s claim for fundamental breach was based on unreasonable delay on the part of the Langes, on the basis that “the Langes had an obligation to act in good faith in moving the project forward.” The trial judge dismissed this claim on the ground that “the delays on the part of the Langes did not constitute fundamental breach as they were not sufficient to deprive Mission of the whole benefit of the Construction Agreement.” The trial judge also held that a finding concerning the allegation of fundamental breach was unnecessary “in light of my finding below in respect of Mission’s repudiation allegation.”

The trial judge found that the Langes had repudiated the contract by writing an email stating that ” …we are hereby giving notice of our intent to terminate effective November 8, 2010.” The trial judge said:

“In my view, Mr. Lange’s email would lead a reasonable person in the position of Mission to that conclusion. It is possible that Mr. Lange’s email was merely a tactic intended to force a favourable response from Mission. However, the law is clear that the test is what a reasonable person would conclude, not what was subjectively intended. Therefore, Mr. Lange’s strategy, if that is what it was, is irrelevant to the outcome.”

Accordingly, Mission had the right to accept the Lange`s repudiation and terminate the contract.

The Trial Judge`S Legal Framework

The trial judge held that a party to a contract has two rights to terminate the contract in the event of breach: for “fundamental breach” and for “repudiation”. In the case of fundamental breach, the wrongdoer`s conduct “deprives the non-breaching party of substantially the whole benefit of the agreement”. Repudiation occurs by the wrongdoer`s conduct “by words or conduct evincing an intention not to be bound by the contract”.

In this case, the trial judge conducted an analysis of both types of breach, and concluded that repudiation by the Langes had occurred, but that fundamental breach had not.

Discussion

This decision raises the question of whether fundamental breach is a separate ground for termination of a contract. Separate, that is, from repudiation.

It is submitted that it is not, and that the trial judge was not required to perform a separate analysis of fundamental breach in this case.

Fundamental breach is a doctrine developed to deal with exclusion clauses, not with the right to terminate the contract. Under the law developed in England, largely by Lord Denning, the idea came into being that if the wrong-doer’s conduct was so egregious that it removed the whole basis of the contract, then an exclusion clause could not be enforced. The law with respect to exclusion clauses – and fundamental breach – has been very contentious, and has largely been eliminated from the Canadian law relating to exclusion clauses. The history of the fundamental breach doctrine as it applies to exclusion clauses can be reviewed in the Tercon case.

In the present decision, the trial judge quoted from the decision of the Supreme Court of Canada in Guarantee Co. of North America v. Gordon Capital Corp., 1999 CarswellOnt 3171, [1999] 3 S.C.R. 423. However, that case was an exclusion clause case. The Supreme Court of Canada analogized a time limitation provision in a bond to an exclusion clause. The Supreme Court held that, under the principles then developed relating to fundamental breach, the time limitation clause was enforceable. But the Guarantee v. Gordon Capital case, on that issue, was not about whether a contract could be terminated for fundamental breach.

The other case cited by the trial judge was the decision in RIC New Brunswick Inc v Telecommunications Research Laboratories, 2010 ABCA 227, 487 AR 340. In that case, the Alberta Court of Appeal did perform a “fundamental breach” analysis to determine whether a contract could be terminated for breach. It did not perform a repudiation analysis.

In my respectful submission, the doctrine of fundamental breach has no place in the law relating to the termination of a contract due to the breach of the contract. The only doctrine that applies in that situation is repudiation. The wrongdoer`s conduct is either a repudiation of the contract or it is not. In that context, the question of whether the wrongdoer`s conduct amounts to a fundamental breach is irrelevant.

It is also confusing. Two tests cannot work as they will potentially lead to inconsistent results. One test for termination of the contract is sufficient. The repudiation test is well known and has a history of hundreds of years of judicial pronouncements. It is difficult enough to have to advise parties to a contract as to whether there has been a repudiation without having another test riding alongside to create confusion.

It is also duplicative and unnecessary, as the present case demonstrates. The parties argued both tests, although one half-heartedly because it is apparent that both cannot apply. The separate analysis proceeds for no good reason.

The suggestion that a fundamental breach may give rise to a right to terminate a contract appears to have arisen from language used by the Supreme Court of Canada in the Guarantee v. Gordon Capital decision. However, on the relevant point that case was about exclusions clauses, and whether a time limitation clause should be analysed in a fashion similar to exclusion clauses. It was not about whether a fundamental breach gives rise to a right to terminate the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. at chapter 8, section 8.

R.P.M. Investment Corp. v. Lange, 2017 CarswellAlta 770, 2017 ABQB 305

Building contracts – termination – repudiation – fundamental breach

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                       June 12, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

Supreme Court Of Canada Grants Leave To Appeal In Bond Notification Case

On March 9, 2017, the Supreme Court of Canada granted leave to appeal from the decision of the Alberta Court of Appeal in Valard Construction Ltd. v. Bird Construction Co., 2016 CarswellAlta 1584, 57 C.L.R. (4th) 171.

This appeal will be of significance in determining the rights of contractors and subcontractors to receive, and the obligation of owners and contractors to give, notice of the existence of a payment bond.

The claim arose from a payment bond taken out by a subcontractor on a project on which Bird Construction was the contractor and Valard Construction was a sub-subcontractor. In the payment bond, Bird Construction was shown as the “obligee” and “trustee”. Valard said that it was not aware of the existence of the bond until after the time for filing a claim under the bond expired. Valard sued Bird for its failure to notify it of the existence of the bond.

The trial judge and the majority of the Alberta Court of Appeal held that Bird was not obliged to give notice to the sub-subcontractors of the existence of a payment bond applicable to the project. In a judgment of 183 paragraphs, the dissenting appellate judge held that because the contractor is designated in the bond as a trustee, the contractor owed a fiduciary duty to the sub-subcontractors which included the obligation to notify them of the existence of the bond.

The payment bond was in a CCDC format and provided, in part, as follows:

The Principal [the subcontractor] and the Surety, hereby jointly and severally agree with the Obligee, as Trustee, [Bird] that every Claimant who has not been paid as provided for under the terms of its contract with the Principal, before the expiration of a period of ninety (90) days after the date on which the last of such Claimant’s work or labour was done or performed or materials were furnished by such Claimant, may as a beneficiary of the trust herein provided for, sue on this Bond, prosecute the suit to final judgment for such sum or sums as may be justly due to such Claimant under the terms of its contract with the Principal and have execution thereon. Provided that the Obligee is not obliged to do or take any act, action or proceeding against the Surety on behalf of the Claimants, or any of them, to enforce the provisions of this Bond. If any act, action or proceeding is taken either in the name of the Obligee or by joining the Obligee as a party to such proceeding, then such act, action or proceeding, shall be taken on the understanding and basis that the Claimants, or any of them, who take such act, action or proceeding shall indemnify and save harmless the Obligee against all costs, charges and expenses or liabilities incurred thereon and any loss or damage resulting to the Obligee by reason thereof. Provided still further that, subject to the foregoing terms and conditions, the Claimants, or any of them may use the name of the Obligee to sue on and enforce the provisions of this Bond. (underlining and square bracketed added)

The majority of the Albert Court of Appeal held that the wording of the bond “is intended to create a limited trust, as is necessary to circumvent the third-party beneficiary rule that would otherwise preclude a non-party entity from claiming any rights under the bond….The bond’s wording is explicit that the respondent obligee/trustee is not obliged to do or take any act, action or proceeding against the surety on behalf of the claimants to enforce the provisions of the bond. And, the bond imposes no positive obligations of any other kind upon the respondent. Without more, the obligations of parties to a labour and material payment bond are established by the wording of the bond.”

The majority noted that the question of whether the Obligee under a payment has a duty to notify the beneficiaries had been answered in the negative by a judgment of an Ontario county court judge 45 years previously:  Dominion Bridge Co. v. Marla Construction Co. [1970] 3 O.R. 125.

The majority also noted that the Alberta’s Builders’ Lien Act “provides the method for a potential claimant — a lienholder — to make a demand for information, and imposes consequences upon those who fail to promptly comply with such a demand.”

In the lengthy judgment, the dissenting judgement reviewed the law of fiduciary duties and pointed to the judicial authorities establishing that one of the duties of a trustee is to give notice to beneficiaries of their rights under the trust. The dissenting judge held that Bird could not have it both ways: “A trustee cannot both assert that the bond features a trust and that the trustee has none of the duties of a trustee. A trust cannot function without a trustee. This is a blatant violation of the equitable principle against approbation and reprobation.”

The appeal to the Supreme Court may involve a number of fascinating questions.

Which result is best for the construction industry: should the Obligee have, or not have, a duty to advise the potential beneficiaries of the payment bond?

Which parties are best suited or able to take responsibility for the default by the bonded contractor or subcontractor?

These questions seem to involve industry and public policy considerations. Should only the parties to this dispute be heard? Should the CCDC – whose payment bond is involved –or contractor associations and surety bond associations, also be heard?

What is the proper role of the courts as opposed to the legislature in dealing with this issue? As the Alberta Court of Appeal noted, section 33(5) of the Alberta Builders’ Lien Act enables subcontractors, once they are lienholders, to apply to court to obtain information from owners, contractors and subcontractors about any “contract, agreement”. But section 33(5) does not refer to payment bonds and section 33(1) of the Alberta Act provides for the subcontractor or sub-subcontractor to obtain a copy of the construction contract, but (unlike the Ontario and Saskatchewan Act) does not contain a right to obtain the details of and a copy of a payment bond from the owner, contractor or subcontractor, and section 33(2) imposes no sanctions for the failure to produce such a bond.

Does this omissions indicate that the Alberta legislature intended that the right to this information would be dealt with at common law, or did it intend that the subcontractor would not have a statutory right to this information but only a right to bring an application to obtain the information? Is the latter approach a practical way for subcontractors to obtain this information in the ordinary course of business?

Interestingly, Chapter 10 of recent study of the Ontario Construction Lien Act (Striking the Balance: Expert Review of Ontario’s Construction Lien Act; April 30, 2016) dealt specifically with surety bonds, and with third party rights under those bonds. The Report states the following:

“A contractor’s obligation to obtain a payment bond is provided for in the underlying contract between the owner and the contractor. As a result, subcontractors may not always be aware that a payment bond was issued with respect to the project. This is addressed in the current section 39 of the Act, which provides that a lien claimant or trust claimant is entitled to request a copy of any payment bond issued in respect of the contract.

The Report makes no recommendation relating to the issue presented by the Valard v. Bird case. Does that indicate the view of the authors or those who made submissions to them that this issue is not one suitable for legislative attention, or that, having regard to the specific rights provided in section 39 of the Ontario Act, the present Ontario statute law need not be altered?

Whatever the Supreme Court decides, it seems that the CCDC will have the final word so far as the future use of this specific payment bond. It can alter the bond to expressly state that the Obligee has, or does not have, the obligation to notify potential beneficiaries of the payment bond. Should it do so?

The trial judgment in this case was reviewed by me in an article dated April 15, 2016.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 15

Building Contracts – Payment Bonds – Fiduciary Duties – Notice of Existence of Bond

Thomas G. Heintzman O.C., Q.C., LLD. (Hon.), FCIArb                         May 25, 2017

www.heintzmanadr.com

www.constructionlawcanada.com