Unlicensed Architect Cannot File A Legal Hypothec: Quebec Court of Appeal

In Urbacon Architecture inc. c. Urbacon Buildings Group Corp., the Quebec Court of Appeal has recently held that an architectural firm that was unlicensed in the Province of Quebec is not entitled to file a legal hypothec, the Quebec law equivalent of a construction or builders lien. The court so found notwithstanding the cross-Canada reciprocal arrangements that allow architectural firms from one province to become licenced in another. It so held because the architectural firm, which was registered in Ontario, had not taken the steps to become licensed in Quebec. This decision raises issues about the status of the unlicensed architects and other professions under the construction and lien legislation in other provinces or under building contracts generally.

Background  

Urbacon Architecture was an architectural firm that was licensed to practice architecture in Ontario. It did not employ any Quebec architects but its sole shareholder had been licensed in Quebec between 1968 and 1984.

Urbacon Buildings entered into a contract with Bell Canada for the design and construction of a building. The principal of Urbacon Buildings was the son of the principal of Urbacon Architecture. Originally the building was to be built in the Ottawa region, but finally the building was built in Gatineau, Quebec. That building contract stipulated that Urbacon Architecture would be the consultant.

In the preliminary stages of the project, Urbacon Architecture prepared architectural, structural, electrical and mechanical drawings. The drawings were then approved by architectural and engineering firms in the province of Quebec.

Due to its dis-satisfaction with the work that had been done, Urbacon Buildings terminated its dealings with Urbacon Architecture. Urbacon Architecture demanded payment for its work from Bell Canada, and when it was not paid it filed a legal hypothec in the province of Quebec. Urbacon Buildings applied to the Quebec Superior Court for an order setting aside the legal hypothec and that order was granted. The Court of Appeal upheld that decision.

Articles 2724 (2) and 2726 of the Quebec Civil Code

Articles 2724(2) and 2726 of the Quebec Civil Code read as follows:

  1. 2724. Only the following claims may give rise to a legal hypothec:

(2) claims of persons having taken part in the construction or renovation of an immovable;

  1. 2726. A legal hypothec in favour of the persons having taken part in the construction or renovation of an immovable may not charge any other immovable. It exists only in favour of the architect, engineer, supplier of materials, workman and contractor or subcontractor in proportion to the work requested by the owner of the immovable, or to the materials or services supplied or prepared by them for the work. It is not necessary to publish a legal hypothec for it to exist.

In the application of these articles, Urbacon Architecture argued that the court should have regard to the reciprocity agreement between the architectural profession in Quebec and those in other provinces of Canada, known as the l’Accord sur le commerce intérieur and the l’Accord de commerce et de coopération entre le Québec et l’Ontario.

Decision of the Quebec Court of Appeal

The Court of Appeal held that the statutory regulation of the architectural profession in Quebec is for the protection of the public and a matter of public order. Articles 2724 and 2726 contain extraordinary protections for architects and others to recover their fees and other amounts due to them in respect of a building project. Accordingly, those articles should be strictly interpreted. If unregistered firms could use those provisions to recover their fees, then the protection of the public would be undermined. For these reasons, the word “architect” in Article 2726 should be interpreted to refer only to a firm that is registered as an architectural firm in Quebec.

The court did not accept the argument of Urbacon Architecture based upon the interprovincial accords between the architectural professions in Canada. The court did not agree that the licensing of a non-Quebec firm under those accords was simply an “administrative” formality.” Rather, having failed to register as an architectural firm in Quebec, Urbacon Architecture, and any other non-Quebec firm that did not become licenced in the province of Quebec, was simply not entitled to the benefits accorded to the architectural profession in Quebec, including Articles 2724 and 2726.

Discussion

Two aspect of this decision are notable.

First, in its decision the Court of Appeal did not refer to two more recent decisions of the Supreme Court of Canada dealing with the issue of illegality of contracts. The most recent Supreme Court decision that the Court of Appeal considered was the 2001 decision in Fortin v. Chretien. Since then, the Supreme Court has decided KRG Insurance Brokers (Western) Inc. v. Shafron, [2009] 1 S.C.R. 157 and Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1S.C.R. 249. In those decisions, the Supreme Court has tended to alleviate against the harshness of the traditional doctrine of illegality of contracts. Presumably, the Quebec Court of Appeal considered that those cases from common law provinces did not affect its interpretation of articles of the Quebec Civil Code or the particular amendments to the statutes relating to building contracts and legal hypothecs in Quebec.

Perhaps, also, the Court of Appeal was of the view that the present case did not deal with the alleged illegality of a contract –but rather the alleged unenforceability of a statutory right or privilege. But the Court of Appeal did refer to and rely upon Fortin v. Chretien, which was concerned with the alleged illegality of a contract made by a non-licensed person (a former lawyer). The Court of Appeal did not analyze the exact inter-relationship, if any, between the doctrine of illegality of contracts, and the unenforceability of statutory rights and privileges.

Second, one wonders about the limits and application of this decision. Will it be applied to construction and builders lien statutes outside Quebec, so as to invalidate liens filed by professionals, or indeed any firm, that are not properly licensed in the applicable province? Could it have an effect upon building contracts, so that if a professional firm is not registered in the applicable province, then its functions as “architect” or “engineer” under a contract will be invalidated if the firm is not properly registered?

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 1, part 3(c) and chapter 16, part 4(a)(i()II.

Urbacon Architecture inc. c. Urbacon Buildings Group Corp., 2016 CarswellQue 2972, 2016 QCCA 620

Building contracts –legal hypothecs, and construction and builders liens –illegality

Thomas G. Heintzman O.C., Q.C., FCIArb                                     May 29, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

General Lien Provision Inapplicable If Main Contract So Provides: Ontario Court Of Appeal

A construction and builders lien claimant may, in some circumstances, file a general lien. The general lien allows the claimant to claim a lien over a number of properties to which it has supplied services or materials.

Section 20(2) of the Ontario Construction Lien Act (the Act), unlike the lien statutes in other provinces, enables the parties to contract out of the general lien provisions. But the question remains: who may contract out of those provision: the owner and the contractor with whom the owner contracts, or the contractor and a subcontractor or supplier? And if it’s the former, is that contract binding on the subcontractor or supplier?

The Ontario Court of Appeal has recently answered these questions in Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1998) Ltd.. The Court of Appeal held that the owner and general contractor may contract out of the general lien provisions, and their agreement is binding on the subcontractor or supplier.

The statutory provisions

Section 20 of the Act states as follows:

  1. (1) Where an owner enters into a single contract for improvements on more than one premises of the owner, any person supplying services or materials under that contract, or under a subcontract under that contract, may choose to have the person’s lien follow the form of the contract and be a general lien against each of those premises for the price of all services and materials the person supplied to all the premises.

(2) Subsection (1) does not apply and no general lien arises under or in respect of a contract that provides in writing that liens shall arise and expire on a lot-by-lot basis.(underlining added)

The Background

Nortown entered into contracts with two owners to carry out plumbing work on houses being built on subdivisions owned by each owner. Each contract stated that liens under the Act were to arise and expire on a lot-by-lot basis. One of the contacts also stated that for the purposes of the Act, “each individual unit (lot or building) on which the Contractor performs Contract Work shall be considered as comprising a separate contract.”

Yorkwest contracted with Nortown to supply plumbing equipment to each project. The agreement was oral and that agreement did not address any matter relating to Yorkwest’s entitlement to a general lien nor did the parties have any discussions about that matter.

Yorkwest registered a general lien against each subdivision within the applicable time from its last supply of materials to each project. Yorkwest did not allocate the amount of materials it had supplied to the individual lots in the subdivisions, but rather claimed the full amount owing to it by Nortown against the remaining, unsold lots of each project.

Nortown became insolvent. The owners paid the amount of liens into court and discharged the liens, and then sought summary judgment dismissing the lien claim on the basis that Yorkwest was not entitled to a general lien because the owners’ contracts with Nortown stated that all liens were to arise and expire on a lot-by-lot basis. Both the motion judge and the Divisional court agreed with the owners, and the issue was then appealed to the Court of Appeal.

Decision of the Ontario Court of Appeal

The Court of Appeal agreed with the courts below for the following reasons:

  1. The legislative history of the sub-section (2) demonstrated that the sub-section was adopted to address problems that owners had faced in obtaining mortgage financing, due to the general lien section. The legislative history showed that the intent of the sub-section was to allow the owner, and the contractor with whom the owner contracted, to agree that the general lien provision would not apply. That intention could not be achieved unless it was that agreement, not a subcontract or supply agreement, which was the operative agreement under both sub-section (1) and (2).
  1. On a plain reading of the two sub-sections, the “contract” in s. 20(2) must be the contract between the owner and the contractor. The Court of Appeal said:

“That is because it is only that contract that can be the “single contract” referred to in s. 20(1), which allows the general lien to arise and to be applicable to each of the premises for the price of all services and materials that the lien claimant provided to all of the premises. Because s. 20(2) provides that no general lien arises “under or in respect of” the “lot-by-lot” contract with the owner of the multiple lots, no one who claims a lien under that contract or in respect of that contract can claim a general lien.”

  1. Giving effect to Yorktown’s submission would re-create the mischief that s. 20(2) was intended to address. It would allow the subcontractor or supplier to file a general lien even if the owner and contractor had opted out of the general lien provision. It would therefore force the general lien’s impact onto the remaining lots held by the owner, thereby adversely impacting the owner’s financing.
  1. It was not unfair to impose this result on subcontractors and suppliers because they were capable of using, s. 39(1)(1) of the Act to ask the owner or contractor whether their contract provides in writing that liens will arise and expire on a lot-by-lot basis.

The Court of Appeal refused to grant the alternative relief sought by Yorktown.

First, Yorktown asked that its general lien be treated as excessive liens under section 35 of the Act. The Court of Appeal said that to do so would undermine sub-section 20(2). It would allow the subcontractor to achieve the very result that the amendment was intended to prevent.

Yorktown also asked for its claim against the owners to be amended to include claims for unjust enrichment and quantum meruit. The Court of Appeal refused to permit this amendment due to the wording of section 55 of the Act. That section permits a line claimant to also make a claim for breach of contract. Yorktown made no such contract claim against the owners. Moreover, section 55 does not mention claims in unjust enrichment or quantum meruit, so that section cannot be used to join those sorts of claims in the lien action. The Act was intended to provide a summary means for dealing with lien claims, and introducing equitable claims into lien actions would not promote that objective.

Discussion

Normally, lien statutes are interpreted as having the legislative purpose of protecting lien claimants. In this case, however, the amendment to section 20 of the Ontario Act was demonstrably enacted for the protection of the owner and to facilitate financing by the owner. With that purpose in mind, an interpretation that undermined that purpose was not acceptable.

This decision also shows that, while the court will generously protect the lien claimant’s fundamental rights enshrined in the Act, it will restrictively interpret the Act at the edges so as not to interfere with the rights of other parties. Here, once the interpretation of sub-section 20(2) showed that the general lien was not available, the court was not willing to use the procedural provisions of the Act to protect the lien claimant. Since this was the first time that the court had considered whether subcontractors and suppliers had to agree to a waiver of the general lien provision, the court might have, on a one-time basis, allowed the liens to be treated as excessive liens. But the court was not willing to make that accommodation.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 16, part 4(e)

Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1998) Ltd., 2016 CarswellOnt 6411, 2016 ONCA 305

Building contracts – construction and builders liens – general lien – amendment of lien claim – combining lien claim with unjust enrichment claim

Thomas G. Heintzman O.C., Q.C., FCIArb                                     May 8, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

 

Contractor Liable To Flooring Subcontractor For Failure To Provide Proper Sub-Floor

An owner is obliged to provide the contractor with proper access to the site for the performance of the work. That principle of construction law is well known. What is less well appreciated is that the contractor has the same or similar obligation to the subcontractor. And this obligation has an important ingredient to it: while a construction project is a dynamic process, the contractor must nevertheless provide the work space to the contractor in a condition in which the subcontractor can perform its work.

In McCabe v. Finn Way General Contractor, the Ontario Superior Court recently applied this principle to a general contractor and a flooring subcontractor. The court found that the sub-flooring was not in a condition which was fit for the installation of the flooring. The court held that it was the general contractor’s obligation to install the sub-flooring so that the flooring could be installed. While the subcontractor made efforts to install the flooring, the subcontractor ultimately refused to further proceed unless the sub-flooring was fixed. When the contractor told the subcontractor to “pick up your tools”, the subcontractor took that instruction as a termination of the subcontract.

The Principle

The court stated the principles in a clear fashion:

It is a principle in construction law….that a contractor must present to a subcontractor a project site capable of receiving the scope of the subcontractor’s work, in order to be in a position to tax the subcontractor with default for failure to perform…… The same principles apply whether the relationship is between owner and contractor or between contractor and subcontractor….Put positively, it stands as an implied term in construction contracts that performance by a subcontractor depends upon the proper performance by a contractor in ensuring that the worksite is properly prepared to receive the subcontractor’s work. Failure by the contractor to ensure this condition precedent will represent a breach of the contract by the contractor that allows the subcontractor to terminate the contract and sue for damages…”

The application of the Principle

The court then showed how the principle should be applied to the facts of the case:

  1. The specification showed the preparatory work that must be done before the floor was installed.
  2. The installation of the sub-floor was the contractor’s and not the sub-contractor’s responsibility, and this was admitted by the contractor.
  3. The evidence demonstrated that the deficiencies were with the sub-flooring, not the flooring, and the contractor knew this.
  4. The guidelines of the flooring material supplier demonstrated that the problem was with the sub-floor.

The court concluded that the contractor had was responsible for allowing a defective sub-floor to hinder the [subcontractor’s] ability to install his flooring in a workmanlike manner, and refused to relieve the plaintiff of his warranty over the work that formed the scope of his contract,” and had thereby made it impossible for the subcontractor to fulfill its responsibilities under the subcontract. Accordingly, it was the contractor which thereby breached the subcontract, not the subcontractor who walked off the job in those circumstances.

Discussion

This decision provides a clear statement of the principle that a contractor – just like an owner – must provide the construction site to the subcontractor in a condition in which the subcontractor can perform its work. This nature of the contractor’s obligation may be more complicated than the obligation of the owner. Unless the owner is itself doing some of the work, the owner’s obligation is largely static and involves the delivery of the site to the contractor at the beginning of the project in an unobstructed condition.

The contractor faces a more difficult challenge for two reasons.

First, its obligation to the subcontractor is a dynamic one as the project progresses. As the contractor may have its own forces on the job, and will likely have several subcontractors, the contractor has an ongoing responsibility to ensure, from time to time and from subcontractor to subcontractor, that the work space for one subcontractor – in this case the flooring contractor – is ready for the subcontractor to work on.

Second, its obligation may be multi-layered. The job and material specifications may dictate an order in which the work must be done. The contractor will have to determine which contractor is to perform which work, and in what order.

Coordinating the work-cycle and specification-cycle order of work may not be an easy job, but it is the essence of good contracting. It is also the essence of contractual performance. As this case demonstrates, when the contractor does not coordinate the project and then refuses to deal with the problem, then it is the contractor which repudiates the subcontract, not the subcontractor which refuses to continue to work.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 4, part 2(b) and 7(d)(ii)(B), chapter 7, part 6(c) and (d) and chapter 12, part 6.

McCabe v. Finn Way General Contractor, 2015 CarswellOnt 19200, 2015 ONSC 7557

Building contracts – subcontracts – availability and condition of site

Thomas G. Heintzman O.C., Q.C., FCIArb                                          March 1, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

 

Claims By Equipment Supplier And Consultants Fall Within All Risk Insurance Umbrella

Claims By Equipment Supplier And Consultants Fall Within All Risk Insurance Umbrella

The owner and general contractor on a building project typically provide an “insurance umbrella” for the project. That umbrella will usually be referred to in the insurance clause in their building contract. That clause will provide that the owner or contractor will take out an All Risk Insurance policy which will apply to the project. That insurance clause, and the insurance policy taken out by one of them as a result of that clause, are of vital concern to all the subcontractors and other participants in the project, as they may be sued as a result of damage occurring during the project and they will want to have protection under the insurance.

There are a number of contract law and insurance law principles that apply to this situation. Often, those principles do not all arise or are not applicable in one situation. However, recently in DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., the Ontario Superior Court applied all of those principles to arrive at the conclusion that a subcontractor, equipment supplier and consultants could not maintain third party claims because all the claims fell within the insurance umbrella.

Background

DCMS was the owner and developer of a retirement residence. It hired a concrete forming contractor, Outspan Concrete Structure, to do the concrete forming work on the project. Outspan hired Caribbean Tower Cranes (CTC) to provide a crane and crane operator. CTC in turn hired Magna Tech to inspect the crane before and after erection at the project site. Magna Tech was owned by a Mr. Perri. Magna Tech in turn hired a professional engineer, Lee, to review and supervise the inspection reports.

During the project, the crane fell onto and significantly damaged the partially completed residence.

The contract between DCMS and Outspan stated the following regarding the “All Risk Property Insurance” which DCMS was to take out and maintain during the project:

“All Risks Property Insurance, subject to the exclusions of the policy, against all risks of physical loss or damage occurring, including but not restricted to: earthquake, flood and will cover all materials, property, structures and equipment purchased for, entering into, or forming part of the work while at the site of the work and during construction, erection and installation. ..

The insurance shall cover the Owner on its behalf, the construction manager acting as agent or representative of the owner, all consultants and engineers (except for their professional liability), trade contractors, subcontractors and others having an insurable interest in the work, engaged in or connected with the construction, site preparation and related operations all as related to the project. …” (emphasis added)

The All Risk insurance policy which DCMS took out with Aviva stated that: “The Insurer hereby waives the transfer of such [subrogation] rights…of any Insured included in this policy against any other Insured…..” That policy named DCMS as the Insured, did not define or extend the meaning of Insured, and in particular, did not provide an expanded definition of Insured to include subcontractors or anyone else.

The insurer, Aviva, paid the loss arising out of this incident and then commenced an action in DCMS’s name against all the other participants in the project, including Outspan, CTC, Magna Tech, Perri and Lee. That action was discontinued by DCMS against Outspan and CTC, but those companies had in the meantime been third partied by Magna Tech, Perri and Lee. Outspan and CTC brought a summary judgment motion to dismiss the third party claims against them and to be removed entirely from the action.

Decision

The motion judge granted the summary judgment motion. So far as Outspan was concerned, it was a party to the building contract which contained the insurance clause and was entitled to enforce that clause. Under that clause, DCMS had agreed to take out all risk insurance and had thereby assumed the risk of loss falling within the policy.

CTC was also entitled to the benefit of the insurance clause in the contract between DCMS and Outspan, for three reasons:

  1. The Third Party Beneficiary Rule: CTC was performing part of the work referred to in the DCMS-Outspan contract. Therefore, it was entitled to the protections contained in that contract to the same extent as Outspan, under the third party beneficiary principles stated by the Supreme Court of Canada in such cases as in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd.: “(1) the parties to the DCMS agreement intended to extend its benefit to CTC given that it is a “subcontractor” within the meaning of the insurance covenant; and, (2) the activities performed by CTC were within the scope of the DCMS agreement as it supplied the crane for the project which Outspan was required to provide under the DCMS agreement.”
  1. The No Liability Rule. Outspan and CTC could not be third partied by the other defendants since those other defendants were not liable to DCMS as they were themselves protected under the Third Party Beneficiary Rule: “…there can be no claim for contribution against Outspan and CTC by the other defendants as they are protected from liability by reason of the agreement between DCMS and Outspan.” This principle (that a defendant cannot assert a claim for contribution and indemnity if that person is not liable to the plaintiff) was stated by the Supreme Court of Canada in Dominion Chain Co. v. Eastern Construction Co.
  1. The No Subrogation against An Insured/Uninsured Interest Rule: Outspan and CTC were unnamed insureds under the Aviva policy because they had “an insurable interest in the construction project.” Accordingly, under basic insurance principles, Aviva could not maintain a claim against other insureds under the policy, even though those insureds were unnamed. In arriving at this conclusion, the court applied the principles stated by the Supreme Court of Canada in Commonwealth Construction Co. v. Imperial Oil Ltd. and sometimes this rule is referred to as the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.. As the Supreme Court said in that case, the “ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole” creates an insurable interest of all participants in the project.

Comments

This case provides a neat cross-reference to three contract and insurance principles that operate in the context of building projects. It is always a question of interpreting the building contract and/or the insurance policy taken out in respect of the project. But if the language of the building contract and policy reflect that intention – and the insurance policy should be written to reflect the insurance deal in the building contract – then it is logical that all three of these principles should either support (or contradict) the same conclusion, namely that the subcontractors and other persons engaged on the project are (or are not): carrying out the work of the general contract; not liable (or are liable) because the general contractor is not (or is) liable to the owner; or (or are not) engaged in the same project as the general contractor.

The factual matrix of the third party claims in this action was important. The damage occurred when the crane was on the site. Would the same result have occurred if the damage occurred off the site or arose from the supply of defective materials by a supplier? Would the language of the contract between the owner and DCMS (which referred to “equipment purchased for, entering into, or forming part of the work while at the site of the work”), or the Aviva policy have precluded such a claim? In other cases, suppliers have been found not to be unnamed insurers and not to fall within the rule in Commonwealth Construction Co. v. Imperial Oil Ltd.

One aspect of this decision seems somewhat ironic. In applying the No Liability Rule, the court held that the other defendants, Magna Tech, Perri and Lee. were not liable to DCMS. Based on that finding, DCMS’s claim against those parties – which apparently were the only claims left by DCMS -must be dismissed. That result would seem to bring the action to an end. Yet, DCMS was not represented on the motion.

DCMS GP (Dufferin-Steeles) Inc. v. Caribbean Tower Cranes Ltd., 2015 CarswellOnt 12593, 2015 ONSC 4125, 258 A.C.W.S. (3d) 312

Building contracts – insurance – subrogation – third party beneficiaries

Thomas G. Heintzman O.C., Q.C., FCIArb                                           January 10, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

Interpretation Saves Contract From Penalty Doctrine

Contract law contains a fundamental rule: penalty clauses are prohibited and liquidated damage clauses are permitted. But in its recent decision in Ottawa Community Housing Corp. V. Foustanellas, the Ontario Court of Appeal held that there is another way to look at this rule. The clause is valid if, properly interpreted, the clause delays, but does not permanently affect, the exercise of the contractor’s rights. In this case, the clause is not a penalty or liquidated damages clause at all. Parties about to enter into a building contract should examine this decision to see if there are ways to draft the contract to avoid the penalty doctrine but achieve much of the desired result.

Background

Ottawa Community Housing Corp. (OCHC) entered into a contract with Argos Carpets, of which Foustanellas was the principal. OCHC later determined that Argos was overbilling OCHC. OCHC then notified Argos that it was withdrawing the remaining work under the contract and withholding payment of the past amount due under the contract. At trial, Arogos argued that the contractual provision in question amounted to a liquidated damages clause and limited, to the withheld payment, the amount which OCHC could recover against it.

Clause 1.6.1 of the contract entitled OCH, in certain circumstances, to “take the whole operation, or any part of the operation out of the hands of the Contractor.” The owner relied upon that clause to take the remaining work out of Argos’ hands.

Clause 1.6.3 stated that:

     “…where any or all of the work has been taken out of the hands of the Contractor, the Contractor will not be entitled to any further payment, including payments then due and payable but not yet paid. The obligation of the Owner to make payments will cease, and the Contractor will be liable upon demand to pay the Owner an amount equal to all of the losses and damages incurred by the Owner for the non-completion of the work.”

Decision of the Ontario Court of Appeal

The Court of Appeal held that clause 1.6.1 entitled the Owner to terminate the contract on the happening of events which triggered that clause. If that occurred, the courts said, then the owner was entitled to invoke clause 1.6.3.

The Court of Appeal agreed with the trial judge that clause 1.6.3 was neither a penalty clause nor a liquidated damages clause as recognized in established contract case law. Rather, clause 1.6.3 had two effects:

“ First, it relieves the owner (OCHC) from any obligation to make payments to the contractor, including in respect of unpaid receivables, pending determination of the owner’s losses and damages arising from the contractor’s non-compliance with the carpet contract. Second, it establishes the contractor’s (Argos’) liability to the owner (OCHC) for an amount equal to the owner’s losses and damages occasioned by the contractor’s non-completion of the work provided for under the carpet contract.

Thus, properly interpreted, clause 1.6.3 functions as a “stop payment” provision. It is designed to halt the owner’s contractual obligation to make any payments to the contractor pending the determination of the owner’s losses and damages arising from the contractor’s breach of contract.”

The Court of Appeal found that several ingredients of the contract supported its interpretation of clause 1.6.3.

First, the clause did not state a specific amount which was recoverable by the owner, such as one would expect to find in a penalty or liquidated damages clause.

Second, the amount due to the contractor could vary widely from job to job, making the clause a sensible delay of the rights of the contractor on all jobs until the owner’s damages could be assessed.

Third, the fact that the clause gives the owner the right to set off its claims against the contractor’s entitlement to payment for work “does not convert clause 1.6.3 into a penalty or liquidated damages provision.”

Discussion

Clause 1.6.3 might have been held to be an unenforceable penalty clause if its effect was to forfeit the monies due to the contractor when the balance of the contract work was taken out of its hands. Or, if the amount of the forfeiture was a reasonable estimation of the owner’s damages – an apparently unlikely scenario – the clause might have been held to be effective as a liquidated damages clause which set the amount of the owner’s maximum entitlement as the amount owed to the contractor when the work was taken out of its hands, as the contractor argued. Instead of determining the dispute according to the traditional penalty/liquidated damages debate, the trial and appeal court took the debate to an entirely different debate – one about the proper interpretation of the contract.   And they found that all the clause did was defer the contractor’s right to enforce its claim to monies due until the owner’s claim for damages was determined.

This decision is a good example of the rule of contract interpretation known by its Latin name: ut res magis valeat quam pereat: or, that the thing shall have effect rather than perish. In other words, if there is an interpretation that saves the validity of the contractual provision, it should be preferred over one that would cause it to perish. In this case, interpreting the clause to delay the rights of the contractor gave force and effect to the clause which might otherwise have been an ineffective penalty clause.

A party negotiating a building contract should consider this decision when deciding what remedies it really wants in the event of a breach of the contract by the other party. If the party really wants a definitive fixing of the amount due by the wrongful party, then this decision will not help it. In that situation it will have to face up to the penalty/liquidated damages rule and all the perils that the rule involves. If the amount fixed is later considered by the court to be an unrealistic estimation of the damages flowing from the breach, then the clause may be struck down as a penalty clause.

But if the party really wants a means to forestall the other party from collecting monies due under the contract until its own damages are determined, then this decision offers a way to accomplish that result.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 2, part 3(d), Chapter 4, part 3(h) and Chapter 9, part 6(j).

Ottawa Community Housing Corp. V. Foustanellas (2015), 125 O.R. (3d) 539

Building contracts – interpretation – penalty clauses – liquidated damages clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 14, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Can A Change To A Construction Contract Be Set Aside For Duress Or Coercion?

Building projects often give rise to heated discussions. When a change order is made in that sort of situation, can one party later say that the change order was made under duress or coercion? The Newfoundland Court of Appeal said Yes in the recent decision in Hickey’s Building Supplies Ltd. v. Sheppard.

Background Facts

This decision was reviewed in the last article June 7, 2015. To refresh our memories the facts were as follows:

Mr. and Mrs. Sheppard hired Hickey’s to build them a retirement home. Mrs. Sheppard suffered from a type of sensory neuropathy that meant that she had no sensation from her elbows to her hands and below her knees, and both feet were amputated. She moves on two prosthetic feet and a wheelchair. Hickey’s understood that the home was being constructed to suit Mrs. Sheppard’s requirements. The construction of the home was more than a year late. When constructed, the flooring was not level and there was a quarter inch difference in height between the ceramic tile flooring in the kitchen and the hardwood flooring in adjacent rooms. The flooring deficiencies were aesthetically objectionable and presented tripping hazards to able-bodied people, but especially to Mrs. Sheppard.

One of the issues in the case was whether the Sheppards had agreed to a change in the height of the ceiling from 9 feet to 8 feet. The contractor said that he had discussed the height of the ceiling with Mr. Sheppard who had agreed to the lower ceiling. The contractor submitted that the Sheppards had waived any requirement of 9-foot ceilings.

Mr. Sheppard said that when he met with the contractor, the meeting degenerated into shouting. Mr. Sheppard said that he agreed to the 8-foot ceilings because he could not countenance any further delays in the project. Mrs. Sheppard said that the contractor was adamant that “we’re not getting nine foot walls.”

Decision of the Court of Appeal

The Court of Appeal adopted the following definition of waiver:

“waiver…arises where one party to a contract, with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal.”

The court then adopted the following test as to whether waiver had occurred:

“…a finding of economic duress is dependent initially on two conditions precedent:

(i) the contractual variation must be extracted by pressure in the form of a demand or threat;

(ii) the exercise of pressure must be such that the coerced party has no practical alternative but to comply with the demand or threat.

If these two conditions are met, the focus shifts to whether the party consented to the contract variation. The factors to be considered are (i) whether the promise was supported by consideration (ii) whether the coerced party protested the variation or executed it on a “without prejudice” basis and (iii) [if not,] whether the coerced party took steps to disavow the variation on a timely basis.”

Based on this test, the court concluded that:

“the evidence regarding the heated discussion between Mr. Sheppard and the Contractor leads to the conclusion that there was a demand amounting to pressure on Mr. Sheppard to agree to the eight-foot rather than nine-foot walls. In the circumstances, the Sheppards had no practical alternative but to accept this change. The change was not supported by any consideration from the Contractor. Finally, the Sheppards vehemently protested the variation.”

The Court of Appeal accordingly upheld the trial judge’s conclusion that the contractual requirement for 9-foot ceilings had not been waived by the owners.

Discussion

Parties to a building contract should remember that the negotiation for changes to some building contracts may be a fragile exercise, at least in some circumstances. One of the parties to the contract may be under a financial, emotional, physical or other handicap or impairment. That party may be the owner, but it also may be a supplier or subcontractor which is in a position of financial vulnerability. If that party has no real option but to acquiesce in the demand for a change in the contract, and if there is no consideration for that change, then the conduct of the party demanding the change may be later seen as over-bearing and coercive. If it is, then that conduct may be set aside and the change order, or waiver of the original contract, may be nullified.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 8, section 7(b)(ii)

Hickey’s Building Supplies Ltd. v. Sheppard (2014), 36 C.L.R. (4th) 15, 2014 CarswellNfld 353

Building contracts – change orders – waiver – duress and coercion – rescission

Thomas G. Heintzman O.C., Q.C., FCIArb                                                       June 15, 2015

www.heintzmanadr.com

Can General Damages Be Awarded For The Breach Of A Building Contract?

Generally speaking, damages for a non-financial loss are not awarded for the breach of a business contract. That is because those sorts of damages are not foreseeable. The breach of a business contract may give rise to anxiety and distress, but that result is usually thought of as part of the vicissitudes and rough and tumble of commerce.

But, according to the Supreme Court of Canada’s decision in Fidler v. Sun Life Assurance Co. of Canada [2006] 2 S.C.R. 3, non-financial losses for mental distress can be awarded in certain circumstances. . The court acknowledged that “a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration.” However, the court said that it “is otherwise….when the parties enter into a contract, an object of which is to secure a particular psychological benefit.” Accordingly, general damages for breach of contract may be awarded if that sort of damage was “in the reasonable contemplation of the parties at the time the contract was made,” and that will be the case if

(1) an object of the breached contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and

(2) the resulting degree of mental suffering was of a degree sufficient to warrant compensation.

Can a building contract satisfy those conditions and give rise to damages for mental distress? According to the recent majority decision of the Newfoundland Court of Appeal in Hickey’s Building Supplies Ltd. v. Sheppard, the answer to that question is Yes.

Background

Mr. and Mrs. Sheppard lived in Labrador City. They hired Hickey’s to build them a retirement home. Mrs. Sheppard suffered from a type of sensory neuropathy that meant that she had no sensation from her elbows to her hands and below her knees, and both feet were amputated. She moves on two prosthetic feet and a wheelchair. Hickey’s understood that the home was being constructed to suit Mrs. Sheppard’s requirements.

The construction of the home was more than a year late. When constructed, the flooring was not level and did not adhere to the under padding. Most importantly, there was a quarter inch difference in height between the ceramic tile flooring in the kitchen and the hardwood flooring in adjacent rooms. Hickey’s installed transition strips at this juncture but those strips interfered with Mrs. Sheppard’s wheel chair being able to run from one room to the other, causing the wheel chair to “bring up solid” against the transition strips. In addition, the strips cracked and splintered and the floorboards popped up from the floor. The flooring deficiencies were aesthetically objectionable and presented tripping hazards to able-bodied people, but especially to Mrs. Sheppard. The Sheppards counterclaimed against Hickey’s for general damages for mental distress as a result of these deficiencies.

The Courts’ Decisions

The trial judge awarded the Sheppards $15,000 non-pecuniary damages for mental distress. The trial judge held that the Sheppards had met the test in Fidler. The Newfoundland and Labrador Court of Appeal was divided on the issue. The majority agreed with the trial judge and upheld the general damage award. The dissenting judge held that the Fidler test had not been met and would have dismissed the claim for general damages.

The central issue was whether the contract contained a “peace of mind” component. The dissenting judge said No:

“Regardless of the Sheppards’ special circumstances with respect to wheelchair accessibility, the contract to build their house did not engage the “peace of mind” component that would ground the necessary foreseeability criterion related to securing a psychological benefit as referenced in Fidler. It is true that the hardwood flooring was not properly installed and that the Contractor chose to comply with National Building Code standards in using transition strips. However, these deficiencies could be corrected and damages awarded to address the required remediation. This was not a situation in which the house was rendered uninhabitable.

The majority came to the opposite conclusion:

“…Hickey’s concedes in its factum that the contract can fairly be characterized as a “peace of mind” contract, and does not allege that the trial judge made any factual or legal errors relating to foreseeability. Hickey’s “had actual knowledge of the plaintiff’s particular sensibilities”…

It is inherent in a home construction contract that the finished flooring will be hazard-free. The flooring Hickey’s delivered was far from hazard-free. Foreseeable mental distress may ensue for any home purchaser who did not receive this basic contractual promise, but is particularly foreseeable that mental distress would ensue in this case.

Accordingly, it was within the contemplation of the parties that the purpose of the contract was to provide the Sheppards, in a timely fashion, with a safe retirement home accommodating Mrs. Sheppard’s needs. Hickey’s did not deliver what they promised with respect to the flooring and delay in completion. It was therefore foreseeable that these breaches of the contract between the Sheppards and Hickey’s would cause mental distress to the Sheppards. Given the foreseeability of their mental distress, damages for it are recoverable if they are sufficient to warrant compensation.”

The court also concluded that the Shepards’ mental distress was “more than the ordinary annoyance, anxiety and fear arising from a bad building contract. In sum, the mental distress suffered by both Mr. and Mrs. Sheppard is serious, prolonged and far from trifling. It is sufficient to warrant compensation.”

Accordingly, the award of general damages for mental distress was upheld.

Discussion

The upshot of these decisions appears to be that contracts cannot be put into water-tight compartments so far as damages for mental distress are concerned. In each case, the nature of the contract and the circumstances of the parties to it must be examined to determine if mental distress is reasonably foreseeable.

The notion of “peace of mind” may be more suited to some contracts and to the circumstances of some parties to contracts. In some cases, perhaps, the very nature of the contract will tend to make it a “peace of mind” contract; such as a vacation contract, or disability or pension contract. Whether this decision is saying that a building contract for a home is a “peace of mind” contract depends on the way one reads this decision. Some of the language in the majority decision suggests that virtually any home building contract is for the “peace of mind” of the homeowner. The underlined words above suggest that foreseeable mental distress can arise from any improper construction of a home. On the other hand, the dissenting judge was clearly not of this view, and other language in the majority judgement suggests that it was only the particular disabilities of Mrs. Sheppard that made this building contract a “peace of mind” contract. It will be interesting to see which approach other courts in Canada follow.

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

Hickey’s Building Supplies Ltd. v. Sheppard, (2014), 36 C.L.R. (4th) 15, 2014 CarswellNfld 353,

Building contracts – general damages – damages for mental distress

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                     June 7, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

Quebec Court of Appeal Awards Impact Damages

When a breach of a building contract occurs, the damages can be extensive because the breach can have an impact on the performance of other parts of the contract. For this reason, a unique aspect of construction disputes is the potential award of what are called “impact” costs or damages.

In the recent decision of the Quebec Court of Appeal in Dawcolectric inc. c. Hydro-Québec, the court awarded impact damages against the owner, even though those damages had been suffered by the subcontractor. In the course of its judgment the Court of Appeal also addressed a number of other construction law issues.

Background

Hydro-Quebec contracted with a general contractor Dawco which granted a subcontract to a subcontractor Solimec which did most of the work on the project. Over 400 change orders were issued by the owner and substantial delays were encountered on the project. The general contractor brought a claim for damages against Hydro-Quebec. The trial judge found that the delays were caused 60 percent by Hydro-Quebec and 40 percent by the contractor. The trial judge found that the collective corporate conduct of Hydro-Quebec amounted to a breach of contract. The trial judge dismissed Dawco’s claim for the impact damages suffered by the subcontractor, Solimec.

Hydro-Quebec appealed on the grounds that it could only be liable for acts of its employees, and there was no such thing as a breach of contract by the corporation without a specific act of an employee amounting to a breach. The contractor appealed from the trial judge’s failure to award impact damages.

Decision of the Quebec Court of Appeal

The Court of Appeal upheld the trial judge’s finding that Hydro-Quebec had, by the collective conduct of its employees, breached the contract. It was not necessary to identify a specific breach of contract arising from an individual employee’s conduct for the court to conclude that, in totality, the owner had breached the contract.

The Court of Appeal held that the trial judge erred in failing to award Dawco the amount of impact damages that had been suffered by Solimec and included in Dawco’s claim.

First, while the contract between Dawco and Solimec was styled as an “Entente de rémunération du risqué” (or “risk reward contract”), nevertheless Solimec was a subcontractor of Dawco. Therefore, the general principle applied that the work done by Solimec was work done by Dawco for Hydro-Quebec and recoverable by Dawco under the main contract with Hydro-Quebec.

Second, the fact that the limitation period had expired for Solimec to claim those costs from Dawco was irrelevant and was not a defence for Hydro-Quebec to Dawco’s claim. The limitation period for Dawco’s claim against Hydro-Quebec had not expired when Dawco commenced its action. Therefore, Dawco could assert its claim to those costs against Hydro-Quebec, including any claim arising from the work done by Solimec.

Third, the costs in question were in fact and law “impact costs” and not “indirect costs” as contemplated by the change orders. Indirect costs are costs for items like site administration, bonding costs, water and electricity servicing costs, demobilization, etc. They are sometimes called general or project costs.

The costs in question here were the costs of: extra technical and supervisory personnel and additional equipment, over and above those that had been forecast for the work, which became necessary due to the delays and changes demanded by Hydro-Quebec. According to definitions accepted by the Court of Appeal, these costs fall within the concept of “impact costs,” being additional costs resulting from the impact of change order upon the performance of the contract. The Court of Appeal accepted that impact costs are normally the responsibility of the contractor, but they can become the responsibility of the owner when the owner by its conduct becomes liable for damages in a contractual or non-contractual claim.

When negotiating the change orders, Hydro-Quebec had insisted that the only amounts that could be included were costs directly arising from the modification of the work, and specifically excluded from the negotiations of the change orders any consideration of impact and the retarding of the project. In those circumstances, the Court of Appeal held that those costs were not included within the change orders and the change orders could not bar a claim for impact costs associated with those changes.

Accordingly, the Court of Appeal allowed Dawco’s claim for impact costs and awarded 60% of those costs to Dawco.

The Court of Appeal confirmed the trial judge’s award of 13.76% for overhead and profit. Dawco and Solimec led evidence to establish that their historic overhead and profit during the period 1999 to 2005 amounted to 13.76% of their costs. In addition, the contract itself referred to overhead and profit of 15% in another clause in the contract, which was not applicable to the present case. Hydro-Quebec pointed out that Solimec had only anticipated overhead and profit of 4.95%. Nevertheless, the court held that 13.76% was reasonable in the circumstances.

The Court of Appeal allowed in part the appeal by Hydro-Quebec. It set aside the award of additional financial costs allegedly incurred by Dawco. It held that Dawco was, after all, 40% responsible for the delays, and furthermore Dawco was by its decision receiving substantial compensation for its actual losses. After a lengthy review of the facts, the court held that Hydro-Quebec was not at fault such that Dawco’s additional financial costs should be the responsibility of Hydro-Quebec.

The Court of Appeal also allowed Hydro-Quebec’s appeal with respect to Dawco’s claim for damage to reputation, loss of the opportunity to obtain other business and other inconveniences. It pointed out that the trial judge had dismissed Dawco’s claim for punitive damages on the ground that Hydro-Quebec had not purposefully engaged in wrongful conduct. The court concluded that there was no proof of causation between these alleged losses and any wrongful conduct of Hydro-Quebec that had not already been properly compensated, and that these losses were uncertain and unforeseeable.

Discussion

This decision contains a potpourri of issues which are important for construction law. One of the most interesting is that of impact damages: what are impact damages; what sort of clause can eliminate a claim for impact damages; what sort of conduct and documentation during the issuance of change orders can eliminate a claim for impact damages, or allow it to survive?

In this case, the Court of Appeal of Quebec held that the contractor’s claim for impact damages was not excluded by the contract. Nor was that claim excluded by the change order process because the owner had specifically directed that impact costs were not to be included in the change order process. Accordingly, the claim for impact damage was allowable under the contract because they fell within a recognized category of recoverable damage, and the claim had not been nullified by the change order process.

The parties could have agreed to include impact costs in each change order, although the total impact costs arising from all change orders would have been difficult to assess when negotiating each change order. Hydro-Quebec could have taken the position that no impact costs arose from the change orders. In either case, Hydro-Quebec could have then required Dawco to sign a release for any further impact costs arising from the change order process. In those circumstances, Dawco’s claim for impact damages would not have survived. However, Dawco would presumably not have accepted that arrangement if it wished to preserve a claim for those costs, particularly one arising from the cumulative effect of change orders.

This decision shows the importance of the negotiation process and the wording of change orders to the viability of a later claim by the contractor for impact costs. Since those costs may arise from many change orders and usually cannot be determined from any single change order, the owner and contractor must be alive to the potential existence of those costs and how they are to be determined.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter, part 6(f)

Dawcolectric inc. c. Hydro-Québec (2014), 32 C.L.R. (4th) 183, 2014 CarswellQue 4600

Building contracts  – Damages  –  Impact Costs – Delays – Change Order Process

Thomas G. Heintzman O.C., Q.C., FCIArb                         June 1, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Are There Exclusive and Inclusive Definitions Of “Improvement” In The Lien Statutes?

The Saskatchewan Queen’s Bench recently considered the definition of the word “improvement” in the Builders’ Lien Act of Saskatchewan. In Propak Systems Ltd. v. Grey Owl Engineering Ltd., that court held that the lien statutes of some provinces, like British Columbia, contain “inclusive” definitions and others, like Saskatchewan’s, contain an “exclusive” definition that also requires a determination of the parties’ intention to make a permanent improvement. Applying this approach, the court held that storage tanks resting on a pad were not an improvement.

This decision was over-ruled by the Saskatchewan Court of Appeal: see Grey Owl Engineering v Propak Systems Ltd., 2015 SKCA 108, 2015 CarswellSask 612; and my article about this Court of Appeal decision dated November 1, 2015.

Background

Grey Owl was hired by a lessee of land to provide engineering services relating to the lands. Grey Owl hired Propak to install three storage tanks on the land. The tanks rested upon a pad. Propak was not paid and filed a lien. The question in the lawsuit was whether the tanks and pad were an “improvement” to the lands which could give rise to a builders’ lien.

Decision

The court held that the tanks and pad were not an improvement. However, it is the logic by which that result was reached that is interesting. The application judge held:

  1. The application judge held that at the “heart” of the issue was the following question: Is the statutory definition of “improvement” expansive in its meaning or exhaustive and restrictive?

The judge reviewed the lien statutes across Canada and concluded as follows:

“Courts have previously drawn a distinction between legislation that is “broad and inclusive” in its definition, and legislation that is “exhaustive and restrictive”. The British Columbia legislation, which the respondent seeks to rely on, has been characterized as inclusive, and thus, courts are more inclined to rule that the structures are improvements. In contrast, the legislation in Alberta, Ontario and New Brunswick has been characterized as exhaustive.”

The judge then concluded that the definition of “improvement” in the Saskatchewan Act is a restrictive and exclusive definition:

“British Columbia is the only province whose legislation does not include a specific exception to the definition. In this sense, it is much more broad and inclusive than other provinces, and the courts have accordingly held that broader instances of claims fall within the section. The Saskatchewan legislation does not share this feature. Although it may be more inclusive in terms of listing certain features that should be considered improvements, it also does contain an express exception for things that are “not affixed to the land or intended to become part of the land”. This feature is very similar to the legislative definitions found in the other proposed provinces which have been defined as exhaustive and restrictive….. It therefore appears to me that the inclusion of this exception in the Saskatchewan legislation strongly suggests that the definition is not broad and inclusive as suggested by the respondent.”

  1. The application judge also held that some lien statutes introduce an element of intention into the definition of “improvement”, particularly if the statute is of the “exclusive” type, while other provincial statutes do not. He said:

“Another distinction between the jurisdictions is the level of analysis devoted to the intention of the parties when determining whether something is an improvement. As the British Columbia legislation makes no provision for this in the wording of the statute, the courts have tended to base determinations of whether something in (sic) an improvement on the extent of affixation and duration of the object…Therefore, having determined that the Saskatchewan legislation is exhaustive, it must be determined whether the parties intended for the tanks to become affixed to the land or become part of the land.”

The judge then addressed the nature of the evidence relating to intention:

“[R]esort to prior case law seems to indicate that the threshold regarding ability to relocate the object is low. The threshold seems to be that as long as the object is capable of being moved, it indicates intention not to be affixed…..It is my view that based on the foregoing evidence in the matter at hand and in consideration of the related case law, the tanks were not intended to be permanently affixed and become an improvement, and I so find.”

The application judge then concluded as follows:

“The Saskatchewan legislation can most likely be characterized as “exhaustive” within the meaning of the case law. It expressly contains an exception to the definition of “improvement” and directs the Court to examine the intention of the parties in determining each matter. In order to determine whether the tanks in the matter at hand are improvements and, thus, be a thing capable of maintaining a builders’ lien, the Court must examine the intentions of the parties, including the degree of affixation and the ability of the tanks to be moved. Upon considering all of the material before me in this context, I have concluded that the tanks are not improvements within the meaning of the Act.” (underlining added)

Comments

The application judge has drawn a distinction between provincial lien statutes which are “inclusive” and those which are “exclusive”, and between lien statutes which are intention-based and those which are not. However, one has to question whether these distinctions are real or helpful. Virtually all of the definitions in the provincial lien statutes use the words “included” or “including”; certainly the B.C., Saskatchewan, New Brunswick and Ontario statutes quoted by the judge do so, albeit in different locations in the definition. Only the Alberta statute does not. All of these provincial statutes also use the word “intended”. In the absence of a clear indication that each province intended to adopt a different definition, one wonders whether it would be better to approach the definition of “improvement” from a consistent standpoint across Canada.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 16, part 4(a)(ii)

Propak Systems Ltd. v. Grey Owl Engineering Ltd. 2015 CarswellSask 91, 2015 SKQB 43

Building Contracts –Construction and Builders’ Liens – Definitions – Improvement

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

www.heintzmanadr.com

www.constructionlawcanada.com

Does Construction Insurance Apply To The Suppliers To The Project?

An important issue in construction projects is the identity of the persons covered by the insurance coverage which applies to the project. If one of the parties– say the owner or the contractor – takes out the insurance, does it cover subcontractors or suppliers? Typically the courts have been reluctant to find that the project insurance covers suppliers. And in Sable Offshore Energy Inc. v. Ameron International Corp., the Nova Scotia Supreme Court recently held that the construction insurance did not cover suppliers.

Background

Ameron was a supplier to the construction project. The Lloyds’ project insurance policy taken out for the project stated as follows with respect to “additional insureds”:

“Any other company…. including, but not limited to, project managers, contractors, sub-contractors of any tier or with whom the Insured(s) in (a), (b), or this paragraph (c) have issued a Letter of Intent or with whom the Insured(s) have entered into written agreement(s) or contract(s) in connection with the subject matters of Insurance, and/or any works, activities, preparations connected therewith which are included in the Insured values hereunder.

Also to include vendors and suppliers, in respect of contracts solely for supply of raw materials, but only in respect of physical loss or physical damage as may be covered under Section1 of policy wording relating to cargo transits covered hereunder.”

Ameron argued that as a supplier it had “entered into a written agreement or contract” with the insureds and therefore was an additional insured.

Decision

The application judge disagreed, for three reasons:

First, that submission would render the second part of the Additional Insured provision redundant: all suppliers would be covered by the first paragraph. Accordingly, suppliers were only entitled to the more limited insurance referred to in the second paragraph.

Second, a review of the decided cases led the application judge to the view that suppliers are not generally covered by project-related construction insurance policies. The court said:

“The purpose of project insurance in cases such as these is to provide coverage to those who work on the project. In my view, vendors and suppliers are not in the same position. They do not work on the project and are not participants in the construction of the project. This is recognized, I conclude, in the decisions to which I have just referred.”

Third, the background facts persuaded the application judge that suppliers were not intended to be covered by the facts. In addition, the contra proferentem rule was not useful since that rule has a “limited role” and was not applicable when the parties had actually negotiated the provision and when there was no ambiguity in the clause. In any event, Ameron was a stranger to the insurance contract and had no standing to apply the rule.

Commentary

This decision underlines how important it is to negotiate project insurance that each parties wants. This is especially so in the case of suppliers. The court will be reluctant to hold that project insurance is intended to cover suppliers unless that coverage is clear. If a supplier wants to be included within the insurance umbrella, it should ensure that that coverage is explicit.

The finding that Ameron did not have standing to submit that the contra proferentem rule applied seems rather odd. That rule is a rule of construction of contracts. It is used to interpret the contract whoever is relying on it. In particular, if it applies, then it applies against the person who prepared the contract, in this case the insurer. There does not seem to be a good reason why any party relying upon the contract should be precluded from relying upon that rule against the insurer, if the provision in question is ambiguous and the rule is otherwise applicable.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.) at chapter 14, part 3

Sable Offshore Energy Inc. v. Ameron International Corp., (2013), 337 N.S.R. (2d) 10, 2013 CarswellNS 878 (N.S.S.C.)

Building Contracts – Suppliers – Insurance- Additional Insureds

Thomas G. Heintzman O.C., Q.C. FCIArb                                                                  May 3, 2015

www.heintzmanadr.com

www.constructionlawcanada.com