Building Contracts Archives - Page 4 of 7

Is A Trustee Under Payment Bond Obliged To Advise Potential Beneficiaries Of The Existence Of The Bond?

The Alberta Court of Queen’s Bench recently considered an interesting issue relating to labour and material payment bonds. When a contractor requires a subcontractor to obtain such a bond, does the contractor have a duty to tell the subcontractors about the existence of the bond so that they can make a timely claim under it, particularly when the contractor is shown in the bond to be a trustee for those subcontractors? In Valard Construction Ltd. v. Bird Construction Co., the court said No. Is this the just result?

Background

Bird was the general contractor and Langford was the subcontractor on a construction project. Bird required Langford to provide a CCDC 222-2002 payment bond. Valard was an unpaid sub-sub-contractor of Langford. It was unaware of the existence of the payment bond until after the notice period in the bond had expired, and its claim was accordingly rejected by the bonding company. It submitted that Bird, as trustee under the bond, had a duty to inform it of the bond’s existence within the relevant notice period in the bond.

Decision of the Application Judge

The judge hearing the application held that the trusteeship wording in the bond was solely for the purpose of avoiding the rule in contract law that third parties cannot sue on a contract and to enable the sub-subcontractors to sue on the bond even though they were not parties to it. The trusteeship wording did not create a fiduciary duty toward Valard obliging Bird to tell Valard of the existence of the bond. The judge noted as follows:

“In order to avoid the application of the third party beneficiary rule, the standard bond wording provided, and still provides, that the obligee is “trustee” for the benefit of all beneficiaries/claimants. Significantly, the bond expressly states that the obligee is not obliged to do or take any act, action or proceeding against the surety on behalf of any of the claimants to enforce the provisions of the bond. It provides, however, that claimants may use the name of the obligee to sue on and enforce the provisions of the bond….The express negation of any requirement on the part of the trustee to take action on behalf of the beneficiaries, combined with the ability of claimants to sue in the name of the trustee support the conclusion that the trustee wording is used in the Bond in order to avoid the obstacle raised by the third party beneficiary rule.

The court noted that this issue had been addressed by the Ontario county court some 45 years ago in Dominion Bridge Co v Marla Construction Co, [1970] 3 OR 125. In that case, Judge Grossberg asked the following questions:

“I asked in argument: when did the duty arise? At what point of time? What exactly was that duty? Must Sun Oil embark upon inquiries who were the labourers? Who were the creditors? Who were the suppliers? Must Sun Oil seek out the creditors and suppliers? If the contention of counsel for the plaintiff be upheld, Sun Oil would be obliged to acquire knowledge of all materials purchased, all labourers on the job from day to day and to keep a constant surveillance. The consequence of the submission must be that Sun Oil must seek out material, men, suppliers, labourers, subcontractors, etc., of Marla and acquaint each that there was a bond in existence. No such duty is imposed by the bond itself…”

In the Valard case, the court concluded that “the sole purpose of the trust wording in the Bond is to address the difficulties that the identities of the claimants cannot be ascertained at the time the bond is entered into, and that the third party beneficiary rule would otherwise prevent a claimant from suing the surety.”

The application judge was not impressed with the equities of the situation from the standpoint of Valard, the sub-subcontractor. He said:

“In any event, a simple standard inquiry by Valard would be a more reliable means of obtaining the information. While it may be that employees of subcontractors may not always be aware of the possibility of a bond, this does not explain why a large and sophisticated entity such as Valard would not have in place a mandatory protocol under which bond information is requested on all subcontracts, especially given the state of the law on the issue. In this case, we are not dealing with the disadvantaged and infirm, but rather with a large sophisticated company with five or six hundred employees in Canada which has its own surety or bonding company.”

Accordingly, the court held that Bird had no duty to advise the sub-subcontractors of the bond.

Valard had originally sought relief from forfeiture in respect of its claim against the bonding company. But during the application, that claim was withdrawn since the bonding company was able to establish actual prejudice arising from the delay in making the claim.

Discussion

The court seems to have been heavily influenced by the long period of time since the Dominion Bridge case was decided and the apparent acceptance of that decision in the construction industry. Yet, this decision seems hard to reconcile with the trustee obligations which contractors assume when they require a payment bond to be obtained by the subcontractor.

Which is the greater burden: if there is a payment bond, for the contractor to find out which sub-subcontractors are beneficiaries of the bond and notify them of the bond; or for every sub-subcontractor on every construction project to ask whether there is a payment bond?

Even though the latter seems to be the more burdensome approach, it seems to be the law based on the Dominion Bridge and Valard decisions.

See Heintzman and Goldsmith on Canadian Building Contracts (5^th ed.), chapter 15, part 10

Valard Construction Ltd. v. Bird Construction Co., 2015 CarswellAlta 342, 2015 ABQB 141

Building Contracts – Bonds – Payment Bonds – Duties of Trustee – Rights of Subcontractors

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

www.heintzmanadr.com

www.constructionlawcanada.com

What Damage Due To Faulty Workmanship Is Excluded From A Builders’ Risk Policy?

Last week I reviewed the decision of the Alberta court of Appeal in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance. In that decision, the Alberta Court of Appeal held that damage done by one contractor to the work of another was not recoverable under a Builders’ Risk policy because it fell within the exclusion for “faulty workmanship”.

This week, let’s review the decision in Acciona Infrastructure Canada Inc. v. Allianz Global Risks Insurance Co. In this decision, the British Columbia Supreme Court held that the “faulty workmanship” exclusion did not apply.

Background

Acciona was the design-build contractor for a hospital project. Campbell Construction Ltd. (“CCL”) was the principal sub-contractor for the construction of the concrete structure, including designing and building the concrete formwork, placing and finishing the concrete and undertaking the required shoring. During construction, there was cracking and over-deflection of the concrete slab.

The trial judge found that the over deflections and cracking were caused by the failure of the formwork/reshoring procedures to account for the unusually thin design of the slabs. The trial judge also found that the over deflection and cracking of the concrete slabs fell within the Policy and constituted damage that was fortuitous.

With respect to the exclusion for “faulty workmanship”, the trial judge found that the formwork and shoring/reshoring procedures constitute a defect in workmanship, which fell within the exclusion. The judge then considered what damages were so excluded: the entire claim, as submitted by the insurer, or only those costs that would have been incurred to remedy or avoid the resulting damage, those being the costs of implementing proper formwork and shoring/reshoring procedures, as submitted by the insured. The trial judge adopted the latter submission and set forth his reasons as follows:

Read in its entirety, I find that the intent of clause 5(b) is to exclude those costs rendered necessary by one of the named defects, but is limited to costs “which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.” In other words, the excluded costs are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred, but the exclusion does not extend to exclude the cost of rectifying or replacing the damaged property itself; the excluded costs crystallize immediately prior to the damage occurring and are thus limited to those costs that would have prevented the damage from happening. … The approach is to exclude the cost that would have been incurred to rectify the defect if that effort had been put in hand immediately prior to the damage…..

The “damage” in issue here is the cracking and over deflection of the concrete slabs. The “defect in material workmanship” is the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs. Applying clause 5(b), the excluded costs are those that would have remedied or rectified the defect before the cracking and over deflections occurred i.e. the costs of implementing proper formwork and shoring/reshoring procedures or incorporating additional camber into the formwork. (underlining added)

Discussion

The contrast between this decision and that in Ledcor v. Northbridge could not be starker. In this decision, the court held that the insured was entitled to recover the full damages resulting for the mis-installation of the concrete slab. Certainly, the slab and the faulty work in installing it were connected, yet the B.C. court held that the purpose of the exclusion was only to eliminate the recovery of the cost of the faulty work, not the resultant damage. In Ledcor v. Northbridge, the Alberta court of Appeal disallowed the damages claimed in that case because they were connected, physically or systematically, to the faulty work.

It seems that the words in the Builders’ Risk policy providing for the exclusion for “faulty workmanship” and the exception for “resulting damages” are speaking like the Delphic oracle, and only the Supreme Court of Canada can solve the riddle.

Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.

(2014), 33 C.L.R. (4th) 210, 2014 CarswellBC 2471

Building contracts – Builders’ risk Insurance- Exclusion for faulty workmanship – Exception for resulting damages

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

www.heintzmanadr.com

www.constructionlawcanada.com

builders' risk insurance Building Contracts exception for resulting damages exclusion for faulty workmanship

When Is Faulty Workmanship Excluded From A Builders’ Risk Policy?

One of the most difficult issues in construction law is the proper interpretation of an exclusion for faulty workmanship in a Builders’ Risk policy. The amounts in issue can be huge and if the exclusion applies, the absence of insurance can be serious.

Take for example the recent Alberta decisions in Ledcor Construction Limited v Northbridge Indemnity Insurance Company. Window cleaners were hired to clean the windows of the newly constructed building in the final clean up of the site. The cleaners scratched the windows, which necessitated very expensive replacement of the windows. The trial judge held that the damage was covered by the Builders’ Risks insurance policy, and not excluded by the faulty workmanship exclusion. The Alberta Court of Appeal has just held that the damage was excluded by that exclusion. This decision raises serious questions about the viability of Builders’ Risk insurance with respect to damage to another contractor’s work. I wrote about the trial decision in this case on December 29, 2013.

Background

A company known as Station Lands retained Ledcor as the construction manager to coordinate the construction of the EPCOR Tower in Edmonton, Alberta. Station Land also contracted with various trades to construct the building. The owner obtained an All Risk Builders’ insurance policy from Northbridge. The policy covered all “direct physical loss or damage except as hereinafter provided”. The named insureds were the owner and Ledcor, and the additional insureds were the owners, contractors, sub-contractors, architects, engineers, consultants, and all individuals or firms providing services or materials to or for the named insureds. The policy was a “blanket” policy, designed to cover all actors and activities on the site.

The policy contained the “faulty workmanship” exclusion and “resultant damage” exception to that exclusion found in most Builders’ Risk policies. Those provisions read as follows:

“Exclusions…This policy section does not insure:. . .

(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage. (underlining added)

The windows were supplied and installed by one of the trade contractors. Station Lands retained another contractor, Bristol, to do the “construction clean” of the exterior of the building, including the windows.

Station Lands’ contract with Bristol was in a standard CAA format which provided that the owner would maintain “all risks” property insurance for the project naming the owner and construction manager as insureds and the consultants, contractors and subcontractors as additional insureds.

The Court of Appeal’s Decision

The Court of Appeal went through the following logic to arrive at its conclusion that the damage to the windows did not fall within the policy:

Cleaning involves workmanship

The court rejected the respondents’ argument that cleaning is not workmanship because it does not create some physical product. In Bristol’s contract, work included “services” and the contract refers to Bristol’s “workmanship.” In the court’s view the “construction clean” was as much a part of the construction of the building “as the designing of the foundations, the hammering of the nails, and the pouring of the concrete.”

Multiple contractors do not create “resultant damage”

The respondents argued “that the exclusion does not apply to damage caused by one contractor to the work of another…. All other damage it is argued, particularly damage to the work of other contractors, is “resulting damage”. The “cost of making good” only relates to the making good by any contractor of its own work product.”

The court noted that “this argument contains echoes of the argument that what Bristol Cleaning was doing was not “workmanship”, because the exterior cleaning involved did not create any physical product or structure.” The court rejected this argument for many reasons.

First, it held that:

“it is artificial (especially in the context of an all risks blanket insurance policy) to try to draw a dividing line between the product created by the work of other contractors, and the work to be done by Bristol Cleaning. GC 2.4 requires Bristol Cleaning to repair any damage it does to the work of other contractors. In effect Bristol Cleaning’s “Work” included replacing the damaged glass, even if it was installed by another trade contractor. To say that the exclusion in the policy only applies to a trade contractor “making good” its own work seeks to sever that replacement work. The “cleaning” work that Bristol Cleaning was required to do under the contract is said to be of a different character than the “repair of damage” work that is also required to be done by GC 2.4. Yet all this work had to be done before Bristol Cleaning could claim substantial completion.”

Second, the court noted that the respondents conceded that the exclusion is not limited to the cost of re-doing the cleaning and that there must be some “physical damage” caught by the exclusion. But, applying their theory, they could not point to any physical damage excluded in a case like the present one.

Third, this policy was a “blanket” wrap-around policy covering the entire project and all participants in the project. In this context, it was the court’s the view “it does not make sense to interpret the policy such that the damage would be covered by the insurance if the work was done by two trade contractors, but not if it was all done by one trade contractor.

Fourth, this policy was a multi-year policy. It does not make sense, in the opinion of the court, that activities occurring later in the project would be covered merely because they damaged work done earlier in the project. In its words: “Whether something is the “cost of making good faulty workmanship” for the purposes of a multi-year insurance policy, related to a single construction “Project”, does not depend on the exact sequence or timing of the various constituent tasks required to build such a complex building.”

Fifth, “the scheme of the insurance policy is that all activities on the site are to be covered by one policy. There is nothing in the policy wording to suggest that coverage varies depending on the contractual relationships of the parties; the coverage depends on the type of “damage”.

Sixth, there was “nothing in the wording of the policy to support the respondents’ argument that the key to the exclusion is the identity of the person who performed the work that is subsequently damaged.”

The court’s problem with the respondents’ position was summed up in the following paragraph:

“The respondents’ argument leads to the conclusion that coverage under the policy depends on how the work is divided up. Under the respondents’ theory, if a single contractor is retained to supply the glass, install the glass, and do the construction cleanup, the scratches on the windows would not be covered by the insurance. However, because some other contractor supplied the windows, the very same damage caused by Bristol Cleaning is covered. This approach might create an incentive to artificially divide up the work as finely as possible, as then the maximum amount of damage would be covered by insurance. On the other hand, it would be dangerous for the owner to hire a single contractor to do all the work, as then nothing would be covered. That cannot have been the expectation of the parties, and is not a commercially reasonable outcome. It is, as noted, inconsistent with the philosophy behind a “wrap-up” policy covering all contractors.

The physical or systemic connectedness between the work and damage underlies the coverage and exclusion

The court accepted a variant of the insurer’s approach to defining the ambit of the coverage and the “faulty workmanship” exclusion. In doing so it relied upon the provision in Bristol’s contract requiring it to repair damage caused by it to the work of other contractors. It said:

“If the workmanship itself directly causes the damage, then both re-doing the work and fixing the damage from the first attempt easily fall into the expression “making good faulty workmanship”. This test identifies a class of physical damage that is excluded from coverage by the exclusion clause, while recognizing a significant class of physical damage that would be “resulting” and therefore covered. It is also consistent with GC 2.4, which requires Bristol Cleaning to repair any damage it does to the work of other contractors. While that covenant is expressly found in this construction agreement, it would likely be implied in any construction contract; it is natural that if a contractor causes damage while doing its work, it should be required to repair that damage as the consequence of its own poor workmanship. The appellants’ interpretation is consistent with commercial expectations.” (underlining added)

However, the court slightly altered the test proposed by the insurer as follows:

“The proper test can more properly be described as a test of the connectedness between the work, the damage and the physical object or system being worked on. The application of the test will depend on an examination of the factual context, but the primary considerations will be:

(a) The extent or degree to which the damage was to a portion of the project actually being worked on at the time, or was collateral damage to other areas. The test will be relatively easy to apply when the damage is caused directly by the work to the very object being worked on. There may be cases where several parts of the project work together as one system. Work on one part of the system may cause damage to another part, but repairing that damage might still properly be characterized as the cost of making good faulty workmanship if there is sufficient systemic connectedness;

(b) The nature of the work being done, how the damage related to the way that work is normally done, and the extent to which the damage is a natural or foreseeable consequence of the work itself. If the damage is a foreseeable consequence of an error in the ordinary incidents of the work, then it presumptively results from bad workmanship; and

(c) Whether the damage was within the purview of normal risks of poor workmanship, or whether it was unexpected and fortuitous.” (underlining added)

The court concluded this analysis by saying that the “degree of physical or systemic connectedness is the key to determining the boundary between “making good faulty workmanship” and “resulting damage”. (underlining added)

Here, the court said:

“the scraping and wiping motions that caused the damage were the actual “Work”. The damage was not “accidental” or “fortuitous”. The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done. Fixing the resulting damage is “making good the faulty workmanship” that caused the damage.”

The Court of Appeal acknowledged that the test it was propounding might lead to “extreme results in extreme cases”. It posed the situation of the window cleaner using a flammable solvent and causing the building to burn down. It acknowledged that such a loss would normally fall within the policy but said that “[e]xtreme cases should be decided when they arise. Whether these extreme situations call for a separate test, or are merely an exception to the connectedness test, need not be explored in this decision.”

The Court of Appeal concluded its analysis with this over-all approach:

“The key is to find the dividing line between physical damage that is excluded as “making good faulty workmanship”, and physical damage that is “resulting damage” which is covered by the policy. As demonstrated in the previous discussion, the wording of the policy and the weight of the case law supports the test for physical or systemic connectedness. The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.

“The principle just stated reflects the proper interpretation of this wording of the insurance policy. The presumptive test is that damage which is physically or systemically connected to the very work being carried on is not covered. Whether coverage is nevertheless extended under that test in the factual context of any particular case will depend on the consideration of the factors listed above (supra, para. 50). Those factors all engage elements of “causation” and “foreseeability”, concepts which are well known in the common law, when applying the policy wording to particular factual situations. The presumptive test stated above reflects the proper interpretation of the policy, but these collateral factors will come into play in applying the policy wording to particular factual situations, especially in extreme cases.”

On this basis, the Court of Appeal held that the damage to the windows did not fall within the policy.

Contra Proferentem did not help

The Court of Appeal held that there was no need to resort to this rule of interpretation. These provisions of the Builders’ Risk policy had been interpreted many times and their meaning did not become ambiguous just because the circumstances raised difficult questions of the application of the policy to the particular facts.

Discussion

This decision is a very important one and will take some time to digest. On a first reading, however, some of the remarks and the basis of the decision raise some apparent conflicts with prior decisions and raise fundamental issues about Builders’ Risk insurance.

The Court of Appeal relies upon the provision of Bristol’s contract, requiring it to repair the work of others which Bristol damages, to supports the court’s “physical or systemic connectedness” test. Yet, that submission appears to be similar to the one which was rejected by the Supreme Court of Canada in the Commonwealth Insurance v. Imperial Oil There, the Supreme Court explained that the contractor’s obligation to repair work might well require it to perform work within the deductible but did not disentitle the contractor to protection under the policy. As the Supreme court said at paragraph 39 of that decision:

“That paragraph [in the building contract] does not negate the basic proposition that everyone involved in the construction of the project will be insured under a policy issued to all as a group. The reference to fault occurs because this policy stipulates a deductible of $10,000 and because it contains a number of exclusions, e.g., error in design and latent defect; that reference has no other purpose.”

The Court of Appeal makes reference to the insurance contract not being a “construction warranty agreement.” That submission is one often relied upon by insurers, but was rejected in the Progressive Homes v. Lombard Insurance decision of the Supreme Court of Canada, where the court said that the proper approach is to interpret the policy, not arrive at a presumption as to what it means by saying that it will convert the policy into something else. At paragraph 45 of its decision, the Supreme court said:

“Lombard argues that interpreting accident to include defective workmanship would convert CGL policies into performance bonds. In my opinion, these general propositions advanced by Lombard do not hold upon closer examination.”

The Court of Appeal equated Bristol’s work (“the scraping and wiping motions that caused the damage”) with intentional harm (“The scraping and wiping forces that caused the damage were intentionally applied to the windows, as a core part of the work to be done.”) and then concluded that “fixing the resulting damage is “making good the faulty workmanship” that caused the damage.” This is a curious conclusion because it does not seem possible that Bristol intended to damage the windows. The damage occurred negligently, but fortuitously; otherwise the policy would not apply at all. As the Supreme Court said in Progressive Homes v. Lombard;

“Fortuity is built into the definition of “accident” itself as the insured is required to show that the damage was “neither expected nor intended from the standpoint of the Insured”. This definition is consistent with this Court’s core understanding of “accident”: “an unlooked-for mishap or an untoward event which is not expected or designed” ….When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.

The basic proposition of the Court of Appeal appears to be that a Builders’ Risk policy does not cover damage caused by one contractor to the work of another contractor on the site. One must ask: where does the policy say that? Damage by one contractor to the work of another contractor seems such a foreseeable event. If the policy does not apply to that damage, should the policy clearly say so? And is this proposition consistent with the purpose of Builders’ Risk insurance as described by the Supreme Court in the Commonwealth v Imperial Oil decision:

“On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in court. By recognizing in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements opening the doors of the job site to the tradesmen, the courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, e.g. ,the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.” (underlining added)

Based upon this decision, contractors and subcontractors may want to obtain additional insurance to cover damage to each other’s work and property during the project. It appears that a Builders’ Risk policy may not cover that damage.

See Heintzman and Goldsmith on Canadian Building Contracts (5^th ed.), chapter 14, paragraph 3(b)(ii)

Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 ABCA 121

Building contracts – Insurance – Exclusion for faulty workmanship – Exception for resultant damage

Thomas G. Heintzman O.C., Q.C., FCIArb March 30, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Building Contracts exception for resultant damage exclusion for faulty workmanship insurance

Owner Awarded Nominal Damages For Deficient Construction Not Affecting Market Value

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

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

Background

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

Decision of the New Brunswick Court of Appeal

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

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

the diminution in the value of the property:

the savings by the contractor by the breach; or

the loss of amenities to the owner.

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

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

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

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

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

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

Justice Robertson then went on to make the following points:

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

A different damage rule could possibly be justified when “the innocent party is a consumer who complains of contract deviation,” as opposed to the situation when “both the owner and builder are commercial parties.” Justice Robertson did not hold that there should always or necessarily be a different approach in the two cases, saying:

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

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

Justice Robertson was strongly influenced by the absence of evidence about the impact of the deviation on the value of the property. Since the building was for rental purposes, in his view it would have been a “relatively simple matter to assess damages based on the lower of the cost of reinstatement or diminution in value of the work done. Had the appraisal revealed the fair market value of the property to be lower, because of the contract deviation, and by an amount less than the cost of the reinstatement, the court would be compelled to award damages based on the property’s diminished value. On the other hand, had the cost of reinstatement been lower than the diminished value of the property, the court would normally be compelled to award damages equal to the former….In the absence of expert evidence regarding the impact of the contract deviation on the property’s value, it cannot be assumed that an award of damages equal to the cost of reinstatement is reasonable.”

However, Justice Robertson was satisfied that Consolidated was entitled to an award of nominal damages, either for lost expectations or a presumed diminishment in value. He pointed out that, to date, Consolidated has experienced no loss as a result of this missing square footage since the tenant had accepted the building as provided, and paid the rent as negotiated. Consolidated’s view that a future tenant might not be so accommodating was speculative, and Consolidated had not allowed Diotte to rectify the problem. In these circumstances, the trial judge’s award of $2,000 nominal damages was reasonable.

Discussion

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

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

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

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

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

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

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

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Breach of Contract Building Contracts Damages measure of damages

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

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

Background

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

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

Decision of the Ontario Court of Appeal

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

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

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

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

Comments

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

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

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

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

Building Contracts – Tenders – Subcontracts – Implied Representations and Conditions

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

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Agreement Building Contracts implied representations and conditions Mistake subcontracts Tenders

Has The Limitation Period For Constructive Trust Claims Been Thrown Wide Open?

Constructive trust claims are a natural for construction projects. Unpaid subcontractors and suppliers may have improved the land owned by or secured to the owner or mortgagee. But they may have a worthless claim against a bankrupt contractor and may have let the time for filing a construction lien claim pass by. In these circumstances an unjust enrichment claim with a constructive trust remedy may be their last hope.

But what is the limitation period for a constructive trust claim? In McConnell v. Huxtable, the Ontario Court of Appeal recently held that it is ten years and not the normal two years. If that limitation period is available for constructive trust claims arising from unjust enrichment, then a lengthy period is available for subcontractors and suppliers to assert claims arising from a building project.

The Decision

The decision arose from a family law dispute. Ms. McConnell and Mr. Huxtable lived together for about 14 years. During that time, Mr. Huxtable bought several houses with his money. When the couple parted, Ms. McConnell knew that she had a potential claim for unjust enrichment and constructive trust. But she did not start her claim until five years later, after the two year limitation period in the Ontario Limitations Act, 2002 had expired but well within the 10 year limitation period in section 4 of the Ontario Real Property Limitations Act.

Ms. McConnell commenced a claim for unjust enrichment in which she asserted a constructive trust remedy over Mr. Huxtable’s houses. Mr. Huxtable brought a summary judgment motion to dismiss the action on the ground that it was commenced outside the two year limitation period in the Limitations Act, 2002. The Court of Appeal agreed with the motion judge that the proper limitation period for the claim was the ten year limitation period in the Real Property Limitation Act.

Section 2(1) of the Limitations Act, 2002 states the Act applies to claims other than those governed by other specific statutes, including the Real Property Limitations Act. Section 4 of the latter statute applies to “an action to recover land or rent” or to “a right to make entry or distress”. Mr. Huxtable’s argument was that the Real Property Limitations Act applies to claims relating to adverse possession, that the word “recovery” means that the person asserting the claim must have once had possession or title to the land and that a constructive trust claim does not fall within section 4. The Court of Appeal rejected those arguments and held that the statutory history showed that the legislature intended to leave all claims in relation to land outside the new Limitations Act, 2002, including constructive trust claims.

The Implications of the Decision

This decision may have far reaching implications. The Court of Appeal held that its decision was not based upon the fact that Ms. McConnell’s claim was a family law claim. The court made it very clear that its ruling applies to any claim in relation to land, including a claim for constructive trust arising from unjust enrichment. Conversely, it held that a claim that seeks only monetary compensation falls within the two year limitation period in the Limitations Act, 2002, including a claim for unjust enrichment. And a proceeding that asserts both a claim against land and a monetary claim falls within the ten year limitation period in section 4 of the Real Property Limitations Act.

Constructive claims to land may be important for family law but they are equally important for construction law because the potential claimants – subcontractor and suppliers – improve the land involved in the construction project and they can claim that it is unjust if the owner or mortgagee is benefited and they are unpaid. However, unjust enrichment claims in the construction industry will run into two obstacle: the building contract with the contractor and the construction lien legislation. Both those legal regimes provide a justification for the owner or mortgagee benefiting from the improvement to the land. So if the owner or mortgagee has paid the proper amount to the contractor and withheld the proper amount under the construction lien legislation, it will be difficult for the subcontractor or supplier to successfully assert an unjust enrichment claim.

But there can be circumstances in which such a claim could be made. For instance, in Atlas Cabinets & Furniture Ltd. v. National Trust (1990), 38 C.L.R. 106, the mortgagee assured a subcontractor that it would be paid if it continued to work on the project, even though the contractor was in serious financial condition. After the mortgagee foreclosed on the property, the British Columbia Court of Appeal held that the subcontractor was entitled to a constructive trust remedy over the property, although a monetary remedy was found to be sufficient and was awarded. Based on McConnell v. Huxtable, the limitation period for asserting this sort of constructive trust claim may be much longer than the normal two year limitation period.

McConnell v. Huxtable, (2014), 118 O.R. (4^th) 561.

Building contracts – unjust enrichment – constructive trust – limitation period

Thomas G. Heintzman O.C., Q.C., FCIArb May 1, 2014

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Building Contracts Constructive Trust Limitation Period

Does An Informal Agreement To Mediate Stop The Limitation Period From Running?

Mediation seems like apple juice: no harm in taking it and it might do some good. But mediation has a trap: — the limitation period. If a party enters into mediation and lets the limitation period go by, then that’s real harm.

In a number of reported cases, one party to a mediation did exactly that because it entered into a mediation agreement that was not enforceable. When the other party mediated until the limitation period passed, the first party was left without a remedy. That is what happened in Federated Insurance Co of Canada v. Markel Insurance Co. of Canada, 2012 ONCA 218, 2012 CarswellOnt 4051 (Ont. C.A.).

Fortunately, there is protection for this situation in Ontario which is not well known. It is found in Section 11 of the Limitations Act, 2002. By reason of a recent decision of the Ontario Court of Appeal, that protection just improved.

In Sandro Steel Fabrication Ltd. v. Chiesa, the Ontario Court of Appeal held that section 11 applies whenever there is an agreement to appoint a mediator, whether the agreement is formal or informal. That means that section 11 provides broad and practical protection against the expiry of the limitation period during mediation.

Section 11 states as follows:

“11. (1) If a person with a claim and a person against whom the claim is made have agreed to have an independent third party resolve the claim or assist them in resolving it, the limitation periods established by sections 4 and 15 do not run from the date the agreement is made until,

(a) the date the claim is resolved;

(b) the date the attempted resolution process is terminated; or

Five aspects of this section should be noticed:

First, the section does not depend on a contract to mediate, only an agreement to mediate. So the section does not state that the agreement must meet the requirements of a contract, such as consideration, certainty of terms, etc. All there has to be is an agreement to mediate.

Second, and this is the point of the Santro decision, the agreement need not be in any particular form. It need not be a formal written agreement and it need not refer specifically to section 11. The respondent in the Sandro case asserted that section 11 could “only be triggered by express written agreement referencing the specific claim sought to be tolled and, in this case, the alleged agreement to mediate …was void for want of mutual intention to the agreement in all essential terms required by the law of contract.”

The Court of Appeal rejected that submission. It held as follows:

“… the motions judge made a finding that there was an agreement to mediate the claim resulting from the collapse of the building which included the Sandro remediation damages. This finding is owed deference. Based on the evidence before him, this was a reasonable conclusion. As such, by virtue of s. 11(1) of the Limitations Act, 2002, the limitation period was suspended.”

The motion judge also held that section 11 applied even if there is ambiguity surrounding the existence of an agreement. The Court of Appeal was not prepared to endorse that view, but was satisfied that the motion judge had correctly held that there was an agreement to mediate.

Third, section 11 states with relative certainty the events which terminate the protection against the running of the limitation period. Each of the three events mentioned in sub-section 11 can be determined with objective certainty, and presumably it is the earliest of these events which ends the protection. Section 11 does not provide an uncertain event for the end to that protection, such as the termination of “good faith efforts” to settle as some mediation clauses do.

Fourth, section 11 does not terminate a mediation agreement, only the limitations protection of that agreement. So even if the obligation to mediate under the mediation clause continues, the protection against the running of the limitation clause does not. In these circumstances, once the protection under section 11 ends the party wishing to make a claim must commence the claim within the re-started limitation period even if the obligation to mediate continues. For this reason, those drafting mediation clauses should use the termination language in section 11 so that there is not a disconnect between the obligation to mediate and the limitation period protection.

Fifth, section 11 provides protection that can be used whenever a decision to mediate is made. The protection does not have to be in the original contract under which the dispute arises, if there was such a contract. Indeed, section 11 could apply to a tort or other non-contractual claim. So section 11 is a convenient protection to use whenever a dispute exists which the parties wish to mediate.

The Sandro decision confirms that there is a safe harbour for mediation against the possibility of the limitation period expiring during the mediation. Any parties contemplating mediation should use this safe harbour carefully, by copying the wording of section 11 into the mediation agreement, or at least into a letter or email confirming the agreement to mediate: “this confirms our agreement to have an independent third party resolve the claim or assist the parties in resolving it.”

The Santos and Federated Insurance decisions are two of the triumvirate of cases decided recently by the Ontario court of Appeal dealing with mediation and limitations. The third is L-3 Communication SPAR Aerospace Ltd. v. CAE Inc., 2010 ONSC 7133, 2010 CarswellOnt 10046 (Ont. S.C.J.), affirmed 2011 ONCA 435, 2011 CarswellOnt 4543 (Ont. C.A.). In that case the Court of Appeal held that under the contract in question, mediation was a pre-condition to a cause of action arising, so the limitation period did not commence until the mediation was concluded. These three decisions provide an essential legal framework for the impact of mediation on the limitation period and vice versa.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed., chapter 10, part 6

Sandro Steel Fabrication Ltd. v. Chiesa, 2013 CarswellOnt 8520, 2013 ONCA 434.

mediation – building contracts – limitation period

Thomas G. Heintzman O.C., Q.C., FCIArb April 13, 2014

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Building Contracts Limitation Period Mediation

Can An Entire Agreements Clause Make A Party To An Agreement Also A Party To Another Agreement?

In construction projects, there will often be several agreements between the various participants. Those agreements may contain “entire agreement” clauses to ensure that the parties are bound only by the terms of the agreement they sign. But could the entire agreement clause have the opposite effect if it refers to one of the other agreements?

In One West Holdings Ltd. v. Greata Ranch Holdings Corp. the British Columbia Court of Appeal recently answered Yes to this question. As a result, the entire agreement clause became an incorporation by reference clause, incorporating an arbitration clause from one agreement into another.

Background

Several parties joined together to buy the Greata Ranch in British Columbia and to subdivide and develop the land for resale. There were three agreements:

the limited partnership agreement between the participants (LPA);

the project management agreement between the limited partnership and the management company One West (PMA); and

the agreement to purchase the ranch (PA). One West was not a party to the LPA or PA although it was affiliated to a company that was.

The PMA and PA each had an entire agreements clause that said that the PMA, LPA and the PA “and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties and/or affiliates and supersede all previous communications, representations and agreements, whether oral or written, between the parties with respect to the subject matter hereof.…”.

The LPA had an entire agreements clause that said that “This Agreement constitutes the entire agreement between the parties hereto with respect to all of the matters herein and its execution has not been induced by, nor do any of the parties hereto rely upon or regard as material, any representations or writings whatsoever not incorporated herein and made a part hereof.”

The LPA had an arbitration clause requiring the arbitration of “all disputes arising out of or in connection with this Agreement, or in respect of any legal relationship associated therewith or derived therefrom….” The PMA and PA had no arbitration clauses.

When disputes arose, arbitration proceedings were commenced, and One West was joined as a respondent. One West said that it could not be joined as a party to the arbitration as it was not a party to the LPA and therefore was not a party to the arbitration agreement.

The Decisions

The arbitrator held that, because of the entire agreements clause in the PMA, One West was a party to another agreement, the LPA, and therefore a party to the arbitration agreement in the LPA. On appeal, a judge of the B.C. Supreme Court disagreed, holding that the entire agreements clause in the PMA did not make One West a party to another agreement, the LPA, and to the arbitration agreement in the LPA. The B.C. Court of Appeal disagreed with that decision and agreed with the arbitrator.

The Court of Appeal’s conclusion about the entire agreement clause in the PMA was as follows:

“Article 17.1 does two things: it defines the agreement of the parties and it limits the scope of inquiry. The judge’s approach appears to eliminate the first part of the provision merely because it is called an “entire agreement” clause. It is necessary, as was done by the arbitrator, to look at the opening words of the provision: “This Agreement, the Partnership Agreement and the Purchase Agreement and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties”.
There is nothing ambiguous or unclear about this language. It defines the agreement of the parties. The balance of the provision limits the sources on which the parties can rely and to which the court can look. It reflects the traditional purpose of an “entire agreement” provision, but it does not supplant the agreement of One West that the LPA is part of the agreement between the parties. That agreement contains an arbitration commitment that is binding on One West.”

In effect, the court held that, by reason of the wording of the entire agreements clause in the PMA, One West had agreed that it was a party to the LPA and the arbitration clause in that agreement.

The Court of Appeal gave a second reason for its decision:

“The scope of the arbitration commitment extends to legal relationships associated with or derived from the LPA. The “entire agreement” clause in the PMA extends to the parties and their affiliates.”

In this passage, the Court of Appeal is saying that the arbitration clause itself was sufficient to sweep One West into the arbitration as an affiliate of the party which signed the LPA, quite apart from the argument that the LPA and its arbitration clause were incorporated into the PMA through the entire agreements clause.

Comments

This decision arrives at startling conclusions about both the entire agreement and the arbitration clause. As to the former, entire agreement clauses are not usually thought of as creating new rights but as ensuring that there are no rights other than those contained in the written contract. If this is the purpose of the clause, then when the clause appears in one contract of a number of related contracts to which a number of entities are parties, the clause can be taken to mean that there are no rights in the contract other than those in the respective contract or contracts, not that new rights are created in one contract that are not otherwise there. But that is the very argument that the court appears to have rejected.

As to the affiliate issue, the PMA and PA said that they constituted the entire agreement between the parties and/or affiliates of the parties. So far as the reasons of the court disclose, the PMA or PA did not apparently state that they were being executed by one party on behalf of its affiliates who were thereby made a party to and bound by it. So, again, it seems arguable that the statement about affiliates was that there were no other agreements between all these parties, not that the affiliates were parties to every agreement. But again, that seems to be the argument rejected by the court.

So far as the arbitration clause is concerned, the court’s decision is that an entire agreements clause in one agreement (the PMA in this case) effectively operates as an “incorporation by reference” clause and brings the arbitration agreement from another agreement (the LPA in this case) into the first agreement. This is a very significant issue for construction law.

There are many cases holding that an arbitration clause is not incorporated from one agreement into another without there being a specific incorporation of that clause. Thus, it has been held in many cases that an arbitration clause in the main contract between an owner and contractor will not be incorporated into the subcontract between the contractor and subcontractor merely because the subcontract states that the terms of the main contract are incorporated into the subcontract: it takes something much more specific to incorporate the arbitration clause from one agreement into the other.

Yet in this case, the court has held that an entire agreements clause –which on its face doesn’t appear to be an incorporation by reference clause at all– is not only an incorporation by reference clause, but it incorporates an arbitration clause from one agreement into another.

With this decision in mind, those involved in preparing building contracts will have to carefully scrutinize their entire agreement and arbitration clauses to ensure that they have the intended ambit and effect.

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

One West Holdings Ltd. v. Greata Ranch Holdings Corp., 2014 Carswell BC 414, 2014 BCCA 67

Building contracts – incorporation by reference – arbitration clauses-third parties –

T.G. Heintzman O.C., Q.C., FCIArb April 6, 2014

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arbitration clauses Building Contracts Incorporation by Reference Third Parties

The Traps And Perils Of Limitation Of Liability Clauses

In Swift v. Eleven Eleven Architecture Inc., the Alberta Court of Appeal recently considered the impact and scope of a limitation of liability clause in a consultant’s contract between an owner and the architects on a building project. The court arrived at three important conclusions.

First, the clause did not apply to and did not bar a claim by a co-owner of the property who had not signed the consultant’s contract.

Second, the clause did not apply to a negligent misrepresentation made by the sub-consultant engineers during the project.

Third, the architects could recover the full amount of the settlement payment made by it to the owners from the engineers on restitutionary principles.

This decision has important ramifications for architect and engineers, and indeed for anyone who is a party to a building contract containing a limitation of liability clauses.

Background

The owner Mr. Swift hired the architects to design a home on property owned by Mr. Swift and his wife, Mrs. Swift. The architects hired engineers as sub-consultants to design the structure of the home. The consultant contract dated April 29, 2005 was only between Mr. Swift and the architects, and Mrs. Swift was not a party to it. The consultant contract contained the following limitation of liability clause:

“3.8.1 With respect to the provision of services by the Designer to the Client under this Agreement, the Client agrees that any and all claims which the Client has or hereafter may have against the Designer which arise solely and directly out of the Designer’s duties and responsibilities pursuant to this Agreement (hereinafter referred to in this Article 3 as “claims”), whether such claims sound in contract or in tort, shall be limited to the amount of $500,000.00.”

The engineers designed the home to a Part 9 standard, not the higher Part 4 standard for seismic purposes, under the British Columbia building code. The contractor became concerned about the structural design of the building from a seismic standpoint and retained an engineer to review the matter. Ultimately the municipality stated to the parties that the building had to be designed to a class 4 standard. The engineers then advised that the building’s design met the Part 4 standard, when in fact it did not. The building of the home was delayed and further costs were incurred due to the structural mis-design. As a result, the owner incurred $1.9 million extra expenses and sued the architects and engineers. Before trial, the architects settled the owners’ claim against them for $1 million. Two claims proceeded to trial: the owners’ claim against the engineers; and the architects’ claim against the engineers to recover the $1 million the architects had paid to the owners.

Trial decision

The trial judge held that the limitation clause applied to the claim of both Mr. and Mrs. Swift as Mr. Swift had acted as Mrs. Swift’s agent in signing the consultant’s contract and that the limitation clause applied to all the Swift’s claims including the negligent misrepresentation claim against the engineers. The trial judge also decided that, by reason of the limitation clause the architect was only entitled to indemnity from the engineers for $500,000 of the $1 million they had paid the Swifts in settlement before trial.

Appeal Decision

Was Mrs. Swift bound by the limitation clause?

The Alberta Court of Appeal held that there was no evidence that Mr Swift had acted as agent for Mrs. Swift in signing the consultant’s contract and that she was not bound by the consultant’s contract and by the limitation of liability clause in it. The court noted that “Mr. Swift testified that he was signing the Agreement on his own behalf only. Ms. Swift testified that Mr. Swift did not have authority to sign an agreement or the Agreement on her behalf. The Architects testified that they did not believe that Mr. Swift was executing the Agreement on Ms. Swift’s behalf. This evidence, together with the language of the Agreement defining only Mr. Swift as the “client”, ought to have ended the discussion on actual authority.”

Moreover, no evidence ought to have been admitted to try to prove that Mrs. Swift was an undisclosed principal to the contract through Mr. Swift’s agency, for two reasons:

First, the consultant’s contract unambiguously showed that Mr. Swift was the only client.

Second, in order for an undisclosed principal to be liable on a contract, the surrounding circumstances must permit the possibility of identifying the undisclosed principal, by showing that the agent was not acting as the real and only principal. That was simply not the case here.

Scope of the limitation clause

The Alberta Court of Appeal agreed with the trial judge that the limitation clause applied to and protected the architects and those which it retained, including the engineers. However, it found that there was a good argument that the clause applied to each wrongful act, so that if there were multiple wrongful acts the client was entitled to multiple times the limit of damages. In light of its decision about the negligent misrepresentation, it held that it did not need to decide this issue.

Negligent Misrepresentation

The Alberta Court of Appeal held that the negligent misrepresentations made by the engineers during the project, that the structural design satisfied the Part 4 standard, was not covered by the limitation clause in the consultant’s agreement. Even if the tort claims contemplated by the original consulting contract were limited by the limitation clause, the negligent misrepresentation claim arising from the conduct of the engineers during the project was not so limited. That conduct occurred in September 2006, long after the consultant contract had been made in April 2005. In response to inquiries from the architects, the municipality and another engineer, the engineers promised to bring the structural engineering of the building up to the Part 4 standard, and then confirmed that they had done so when they had not. That representation caused a delay in starting the remedial work and as construction progressed, it became more expensive to undertake the required work. The court held that “it would be unreasonable to conclude that such negligent misrepresentation was contemplated as being something that “arises solely and directly” out of [the architect’s] duties and responsibilities. This is particularly so given that the structural defects presented a real and substantial danger to its occupants.”

Accordingly, Mr. Swift was entitled to recover the full $1.9 million loss from the engineers. Since he had recovered $1 million from the architects, he was entitled to the further $900,000 from the engineers.

Indemnity

The Alberta Court of Appeal held that the architects were entitled to a full indemnity from the engineers based, not on contract or contributory negligence principles, but upon restitutionary principles. The architects had settled the Swifts’ claim against them for $1 million, and the courts favoured settlements. Since the architects’ liability only arose due to the engineers’ fault, the engineers should indemnify the architects for that full amount.

Comments

There are many issues and questions arising from this decision which could be analyzed. But for the moment, the following advice appears to arise from the decision:

A consultant or contractor which is proposing to enter into an agreement with an owner will want to ensure that it contracts with all the owners and that the owner represents that there are no other owners. In the alternative, the consultant or contractor will want to insert into the agreement a stipulation that the owner is acting as agent on behalf of all the owners which are bound by the contract. Otherwise, an owner which has not signed the contract is not bound by it and may bring proceedings without regard to the provisions of the contract, including the limitation of liability clause.
If it is proposed to include a limitation of liability clause in a building or consultant’s contract, then consideration should be given to whether the wording applies to negligent conduct undertaken during the project. According to this decision, unless the clause refers to that sort of conduct the clause will not apply to it. This result may be desirable from the owner’s standpoint and undesirable from the contractor’s or consultant’s standpoint.
Consultants may want to ensure that the contract between them deals with the impact of liability upon one of them caused by the other, or at least devise an insurance regime that provides adequate protection, not just against liability for the wrongful acts of each consultant but for the liability for the wrongful acts of one consultant which are imposed on the others by way of restitutionary principles.

Whether or not one agrees with the conclusions of the Alberta Court of Appeal in this decision, it is certainly a wake-up call about the frailties and hidden traps of limitation clauses in building and consultants’ contracts.

See Heintzman and Goldsmith on Canadian Building Contracts, 4^th ed., chapter 6, parts 2(b)(i)(C) and (ii)(C).
Swift v. Eleven Eleven Architecture Inc. 2014 CarswellAlta 153, 2014 ABCA 49.

Building contracts – limitation clauses – negligent misrepresentation – architects and engineers

Thomas G. Heintzman O.C., Q.C., FCIArb March 30, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

architects Building Contracts Consultants limitation clauses Negligent Misrepresentation restitution sub-contractors

Alberta Court Of Appeal Upholds The Dismissal Of A Claim Which Ought To Have Been Arbitrated

One challenge facing a party to an arbitration clause is preserving a claim against the running of the limitation period. Starting the wrong claim may mean that the claim will be dismissed. That is now apparent from the recent decision of the Alberta Court of Appeal in A.G. Clark Holdings Ltd. v. HOOPP Realty Inc..

In an earlier decision, A.G. Clark Holdings Ltd. v. HOOPP Realty Inc., 2013 ABCA 101 (Alta. C.A., the Alberta Court of Appeal had held that the arbitration clause in this A.G. Clarke-HOOPP agreement was a mandatory arbitration clause and had set the matter back to the Queen’s Bench court. The matter came back to the Court of Appeal after the chambers judge dismissed the action because arbitration of the dispute was mandatory and the limitation period for arbitrating the dispute had expired before any party had taken steps to commence arbitration.

Second Decision of the Alberta Court of Appeal

In this second decision of the Court of Appeal, the court dismissed HOOPP’s appeal for two reasons:

First, it confirmed its decision in Babcock & Wilcox Canada Ltd. v. Agrium Inc. (2005), 42 C.L.R. (3d) 197, 2005 CarswellAlta 208 to the effect that, if the parties have agreed that they must arbitrate a dispute, but instead of issuing a notice of arbitration within the limitation period for arbitration one party issues a statement of claim, then the court must dismiss the action.

Subsection 7(2) of the Alberta Arbitration Act allows the court authority to refuse a stay of an action which is started when the contract contains an arbitration clause. One of the grounds for not staying the action is found in clause (d) which applies if the defendant has unduly delayed in the bringing of the motion to stay the action, as HOOPP accrete had occurred in this case.

Effectively, the Court of Appeal held that, if the action is started in the face of a mandatory arbitration clause and the limitation period for commencing an arbitration has expired, then the discretion to stay the action no longer exists because the alternative of proceeding by way of arbitration no longer exists. The Court of Appeal said that to allow the court to have a continuing discretion to permit the action to proceed would “render s 51(1) of the Arbitration Act and s 3(1) of the Limitations Act meaningless in the circumstances. It would have the effect of allowing a court to indefinitely extend a limitation period expressly set forth in the Limitations Act. In our view, that was not the intention of the legislature.”

Second, the Court of Appeal held that, in any event, there was no undue delay in the bringing of the motion to stay the action.

Discussion

This decision confirms that, at least in Alberta, the court has no discretion to permit an action to proceed once the limitation period expires and there is an effective and applicable mandatory arbitration clause in the contract. This means that a party must, at the very least, commence an arbitration if the contract contains an arbitration clause.

There are at least two further issues that arise

First, it seems that a party with such a claim may be advised to commence an action as well. The claimant cannot be sure that the respondent will agree that the claim falls within the arbitration clause. If the court or arbitral tribunal later holds that the claim falls outside the arbitration clause, then the claimant may then be out of time to commence an action. The claimant may be better advised to at least start an action in addition to an arbitration and let the action be stayed pending the arbitration proceeding and the confirmation of the jurisdiction of the arbitral tribunal.

The second issue is whether the decision in this case applies to the other discretionary grounds in section 7(2) of the Alberta Arbitration Act. Those other grounds include: one of the parties to the arbitration agreement was under a legal incapacity when the arbitration agreement was made (clause (a)), the arbitration agreement is invalid (b), the subject matter is incapable of being arbitrated (c), or the matter in dispute is a proper one for default or summary judgment (e).

It is hard to see how the court’s decision in the present case applies to those situations. So far as clauses (a) to (c), if those facts exist then the arbitration agreement should not or cannot be enforced. Yet, the discretion to stay surely must be operative even if the limitation period has expired if the claim cannot properly be arbitrated, due to the arbitration agreement being invalid or the claim being incapable of being arbitrated or a party being under a disability.

As to (e), the present decision appears to remove the discretionary power to refuse a stay if default or summary judgment could be granted and the arbitral claim is barred by the limitation period. Yet, on its face that clause does not prohibit a plaintiff proceeding with a default of summary judgment even if a limitation period to commence an arbitration has expired.

Perhaps the Court of Appeal is saying that in all these circumstances subsection 7(2) requires that the arbitral tribunal and not the court should decide the issues raised in subsection 7(2) once the limitation period for the claim expires. If so, the question is whether the legislature intended the arbitral tribunal to make those decisions when they were stated in this subsection as being matters to be considered by the court.

Finally, let’s consider subsection 7(5). That subsection permits the court to allow the action to proceed in part if the arbitration agreement deals with part of the claim and it is reasonable allow another part to proceed in court. If the limitation period for the arbitral claim has expired, does that affect the court’s discretion? Can the court include within the action the arbitral part which can no longer be arbitrated due to the expiry of the limitation period?

Until these questions are resolved, it seems best to commence both an arbitral proceeding and an action, and to do so well within any arguable limitation period.

A.G. Clark Holdings Ltd. v. HOOPP Realty Inc., 2014 CarswellAlta 37, 2014 ABCA 20

Arbitration – Limitation periods – Stay of action or arbitration – Building contracts – Alternative dispute resolution –

Thomas G. Heintzman O.C., Q.C., FCIArb February 25, 2014

alternative dispute resolution Building Contracts relation of arbitration to court proceedings stay of action or arbitration