Alberta Court Of Appeal Holds That A Court Action Is Not A Notice Of Arbitration

In previous articles I have warned readers about the dangers of the limitation period in relation to arbitration claims. You can look at my prior articles dated July 17, 2011, February 26, 2012 and August 26, 2012. These dangers are highlighted by the recent decision of the Alberta Court of Appeal in Lafarge Canada Inc. v. Edmonton (City).  The court held that that a Statement of Claim in an action is not a notice of arbitration under an arbitration clause. This may mean that an arbitration claim subsequently commenced is outside the limitation period.

Background

Lafarge entered into a contract with the City to provide cement pipe for a light rail transit project. The City alleged that Lafarge had not delivered the pipe in a timely manner and it set off the delay costs against Lafarge’s invoices. The supply contract contained an arbitration clause which stated that “if any disputes arise under the Contract and the parties are not able to resolve it, the parties shall appoint a single arbitrator to conduct an arbitration in accordance with the Arbitration Act.”

On May 28, 2009, or about 22 months after the dispute arose, Lafarge and the City entered into a standstill agreement.  That agreement provided that the limitation period did not run during the term of that agreement, that the parties could terminate that agreement and that if they did then the parties had 3 months to commence proceedings before the limitation period would apply. Lafarge terminated the standstill agreement on February 2, 2011 and commenced an action on February 11, 2011.  The City served its Statement of Defence on March 14, 2011, the City pleading inter alia that the parties had agreed to submit any disputes arising under the contract to arbitration. In delivering the Statement of Defence, the City’s solicitor said: “I think arbitration may be mandatory but we [sic] happy to discuss future process”. In July 2012 Lafarge delivered its documents and the City said that it would move to stay the action on the basis of the arbitration clause, and also asserted that Lafarge’s claim was now statute barred.  The City’s motion was not brought until June 2012.

Chamber Judge’s Decision

The chambers judge held that the Statement of Claim in the action was a sufficient notice of arbitration under s. 23 of the Alberta Arbitration Act. Section 23 states an arbitration may be commenced in any way recognized by law, including the following:

(a)   a party to an arbitration agreement serves on the other parties notice to appoint or to participate in the appointment of an arbitrator under the agreement; and

(b)   a party serves on the other parties a notice demanding arbitration under the arbitration agreement.

The judge therefore found that there were no limitations defence which applied and that the arbitration process had been sufficiently notified to the City by Lafarge in time under s. 23 of the Arbitration Act. The chambers judge held that in those circumstances it was unnecessary for him to address alternative issues concerning delay and attornment.

Alberta Court of Appeal’s Decision

The Alberta Court of Appeal reversed the chambers judge’s decision, holding that the Statement of Claim was not a notice of arbitration under section 23 of the Alberta Arbitration Act. The court held that to treat the Statement of Claim “as a form of notification of arbitration under s. 23 does not amount to giving a liberal reading to s. 23 of the Act but bursts its conceptual boundaries,” and that “to characterize what amounts to the opposite of notice to commence arbitration as being the same as notice to commence arbitration would take s. 23 outside the scope of predictable meaning.”

The Court declined to decide any issues arising from its decision, and in particular whether the City had attorned to the court’s jurisdiction or whether its delay precluded it from bringing the stay motion. The Alberta Court of Appeal returned the matter to the Court of Queen’s Bench to consider whether there should be a stay of the lawsuit in light of waiver, including attornment and delay in the stay application.

Discussion

As I have said in my prior articles, people tend to forget about limitation periods in respect of arbitration claims because they think they already have a contract so there must be an entitlement to assert an arbitration claim. Since there is no court office in which to start the arbitration claim, people tend to assume that there is no formality to the commencement of the arbitration claim. Not so. The provincial Arbitration Acts have very specific criteria about what amounts to the commencement of an arbitration claim. If those criteria are not met, then no arbitration claim has been commenced and the limitation period continues to run.

So, in the present case, Lafarge commenced an action within the limitation period stated in the standstill agreement but not an arbitration claim as defined in the Alberta Act. The Alberta Court of Appeal has held that the action did not amount to an arbitration claim.  While Lafarge may be held entitled to continue with its action by reasons of the City’s waiver, attornment or delay, the Alberta Court of Appeal’s decision means that it has not commenced an arbitration claim so far as the limitation period is concerned.

The fairness of this decision could be questioned. If the City knew of the claim through the commencement of the action, should it thereafter be able to rely on a limitation period? Should the City be required to renounce a limitation defence in the arbitration when seeking a stay of the action?  There are old cases holding that if a defendant seeks to stay an action on the ground that the courts of another country are the more convenient forum, then the defendant must give an undertaking not to raise a limitation defence in the other forum. Should this rule be adopted on motions to stay actions based upon an arbitration clause?

Some might object to this rule on the ground that it will encourage parties to commence actions in the face of arbitration clauses and then insist on a waiver of the limitation period in the arbitration.  After all, so it goes, arbitration clauses are obvious and can and should be adhered to.

But such a rule does seem sensible. After all, an action is a perfectly proper way to commence a claim. In fact, outlawing a court action is contrary to public policy. It is only if the other party insists on the arbitration clause that arbitration becomes mandatory; if the other party does not, then the court action is perfectly proper. The commencement of the action tells the defendant that there is a claim.  If the defendant invokes the arbitration clause, there is an element of fairness in requiring the defendant not to assert the limitation defence in the arbitration. Maybe the further proceedings in the Lafarge case will explore this issue.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), chapter 10, parts 3, 5,6

Lafarge Canada Inc. v. Edmonton (City), 2013 ABCA

Arbitration –  Limitation periods – Stay of action or arbitration – Building contracts – Public contracts – Alternative dispute resolution  – Relation of arbitration to court proceedings

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                     January 12, 2014

 www.heintzmanadr.com

www.constructionlawcanada.com

 

Can A Company Be Made Liable On A Contract By “Piercing The Corporate Veil”?

An incorporated company is the most common form of business organization, and this is no truer than in the construction industry.  One of the purposes of incorporation is to ensure that the liability for the business activities of the organization is solely that of the company and not that of the shareholders.  But what happens when the other party to the contract with the company alleges that the company is not the real party to the contract, but rather the controlling shareholder of the company is the real party to the contract? This allegation is called “piercing the corporate veil”.

The United Kingdom Supreme Court has recently examined this issue in two decisions:  VTB Capital Inc. v. Nutritek International Corp. and Prest v. Petrodel Resources Limited.  These are extremely important decisions because the U.K. Supreme Court analyzed in great detail whether, and in what circumstances, contractual liability can be imposed upon an entity which has not signed a contract, namely its controlling shareholder.  I have written a lengthy article on this subject with Brandon Kain: Through the Looking Glass: Recent Developments in Piercing the Corporate Veil.  The article is posted on this website. I will not repeat the full contents of that article but will provide the highlights of it in the hopes that readers will turn to the article for a full analysis of these decisions.

Basically, the U.K. Supreme Court has held that the corporate veil of a corporation cannot be pierced to make another entity, the controlling shareholder of the corporation, liable on the contract unless the controlling shareholder is liable on that contract under other legal principles, such as the law of agency. The use of the corporation for “bad purposes” (my words) does not make the controlling shareholder liable on the contract.  In particular, establishing a corporation so that it is responsible for the contractual obligations, and not the controlling shareholder, is not a “bad purpose.”

In the VTB Capital case, the U.K. Supreme Court held that the corporate veil of a Russian Bank which had in fact loaned money to the plaintiff could not be pierced in order to make the controlling shareholder of the bank liable on the loan facility agreement. Lord Neuberger said:

“Subject to some other rule (such as that of undisclosed principal), where B and C are the contracting parties and A is not, there is simply no justification for holding A responsible for B’s contractual liabilities simply because A controls B and has made misrepresentations about B to induce C to enter into the contract. This could not be said to result in unfairness to C: the law provides redress for C against A, in the form of a cause of action in negligent or fraudulent misrepresentation.”

This view of the law was repeated in Prest.  The U.K. Court acknowledged that the controlling shareholder of a corporation may be liable for abusive conduct even if a contract is made by the corporation, and to this extent the “corporate veil” may be pierced. But the circumstances in which that can occur are limited. The court divided the “corporate veil” issue into two circumstances.

The first circumstance is one of evasion. The controlling shareholder is the real party to the original contract, and inserts the corporation in order to evade liability.  For example, A is party to a non-compete agreement with B, obliging A not to compete with B in a certain area for three years. A then sets up a company, C, which then proceeds to compete during the three years. In that circumstance, A cannot evade its liability under the original contract and to this extent the corporate veil of C is pierced.

The other circumstance is concealment. For example, A is a trustee for B and A secretly sets up a company, C, to receive payments which A would be precluded from receiving as trustee. Again, A is liable and to this extent the corporate veil of C is pierced.

In both these situations the liability of A is independent of the liability of the corporation C.  In these circumstances there is a “limited principle” under which the A is liable if A :

“…is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrated by interposing a company under his control.”

But if C is the original party to the contract, then A cannot be made liable on a contract to which it is not a party on the ground that reliance on the corporate existence of C is abusive. As Lord Sumption said:

“It is not an abuse to cause legal liability to be incurred by the company in the first place. It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller’s because it is the company’s. On the contrary, that is what incorporation is all about. “

The Prest case involved a matrimonial dispute and the question was whether certain assets owned by corporations controlled by the husband should be accounted for when determining the assets and income of the husband. The U.K. Supreme Court held that this issue was largely a factual matter and could be dealt with under straight forward principles of property and corporate law without the necessity of any corporate veils being pierced.

The case law in Canada appears to assume that the corporate veil can be pierced in exceptional circumstances, and then sets out to define those circumstances.  What is lacking in Canadian case law is a principled examination of why the corporate veil should be pierced at all.  Only once that examination occurs can a satisfactory basis be established for the exceptions to the general rule of limited corporate liability.

It is likely that the VTB Capital and Prest decisions will spawn a further debate in Canada about what the Canadian law should be regarding piercing the corporate veil.  Brandon Kain’s and my article explores the unresolved issues under Canadian law and the likely arguments that will be made when the corporate veil issue is raised once again in Canadian courts.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 1, part 1(a)(i)(E).

Building Contracts – Liability – Corporations – Piercing the Corporate Veil

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                  October 30, 2013

www.heintzmanadr.com

www.constructionlawcanada.com 

 

Does The CCDC Dispute Resolution Clause Require Arbitration?

Most building contracts contain dispute resolution clauses which refer to arbitration.  A dispute resolution clause can be mandatory – it can require arbitration – or it can be permissive – it can permit arbitration if all parties agree to arbitration when the dispute arises. One would think that the most important thing to make clear in a dispute resolution clause is whether arbitration is mandatory or not.

Yet, there has been some doubt whether the dispute resolution clause in the CCDC standard form construction contract makes arbitration mandatory or permissive.  That is because the key wording in that clause contains the word “may”, which is typically a word that designates a permissive procedure, while the word “shall” designates a mandatory procedure.

The Ontario Superior Court of Justice recently addressed this issue in Bondfield Construction Co. v. London Police Services. The court held that the CCDC dispute resolution clause creates a mandatory obligation to arbitrate. The court accordingly stayed an action which had been bought in relation to the CCDC contract.

The Facts

In November 2007, Bondfield as general contractor entered into a contract with the London Police Services Board as owner for the renovation and expansion of the Board’s headquarters. The contract was in the standard form CCDC-2 Stipulated Price Contract.  Paragraph 8.2.6 of that contract reads as follows:

“By giving a notice in writing to the other party not later than 10 working days after the date of termination of the mediated negotiations under para. 8.2.5, either party may refer the dispute to be finally resolved by arbitration under the latest edition of the Rules of Arbitration of CCDC 2 Construction Disputes. The arbitration shall be conducted in the jurisdiction of the Place of the Work.”  (underlining added)

The work began in November 2007. Bondfield alleged that conduct of the Board delayed the completion of the project by 17 weeks. In May, 2008, Bondfield gave notice to the architectural consultant of its claim for delay.  In January, 2009, the consultant recommended that the dispute be resolved pursuant to the contracts’ dispute resolution process.

In June, 2010, Bondfield invited the Board to enter into a dispute resolution process involving an “independent third party” to avoid lengthy litigation. In July, 2010, the Board replied that it wanted to follow the contract’s dispute resolution clause and asked the consultant to deal with the Board’s deficiency claims, which the consultant did in October 2010.  In November 2010 Bondfield wrote a “dispute” to the consultant’s report and suggested that a project mediator be appointed, and the Board then suggested a person to be the mediator.

In June 2011, Bondfield delivered a claims brief to the Board which referred the brief to the consultant for a report. In July, 2011 the Board’s lawyers said that they hoped for an answer on the claim from the Board by the middle of that summer. On July 29, 2011, this action was commenced.  The Board delivered its defence in November 2011 and in that pleading alleged that the action was commenced outside the Ontario 2-year limitation period.   Bondfield then  brought a motion to stay its own action on the ground that arbitration was mandatory under the dispute resolution clause in the CCDC contract. The Board resisted the motion on the ground that the action commenced by Bondfield was the preferable procedure to resolve the dispute.

The Decision

The Ontario Superior Court held that arbitration was mandatory under the CCDC-2 contract and stayed the action by Bondfield.  The court referred to prior decision in Brock University v. Stucor Construction Ltd. (2002), 33 CLR (3d) 182 ( Ont. S.C.J.) as being on point on the same clause.  In that case, the owner sought a stay of a mechanics’ lien action brought by the contractor on the basis of the dispute resolution clause in the CCDC-2 contract between the parties, and the court granted the stay.  The court also referred to the decisions in Automatic Systems Inc. v. E.S. Fox Limited [1995] O.J. No. 461 [Gen. Div.];  Merit Sinclair Developments v. O.R. Haemet Sephardic School, [1998] O.J. No. 5225[Gen. Div.] and  Atyscope Richmond Corp. v. Vanbots Construction Corp., [2001] O.J. No. 638 (S.C.J.) as evidencing the same approach.

The court held that the arbitrator should deal with all the objections raised by the Board, with respect to whether the dispute fell within Article 8.2 of the CCDC contract, the alleged dilatory pursuit of its remedies by Bondfield and the limitation period, and otherwise.

The court also concluded that, in bringing the application to stay its own action, Bondfield was entitled to rely upon Article 8.2 of the contract and section 106 of the Courts of Justice Act . The normal route to a stay an action brought in the face of an arbitration clause is Section 7 of the Arbitration Act, but that section was unavailable to Bondfield since it only allowed “another party”, not the party bringing the action, to seek a stay of the action. However, section 106 of the Courts of Justice Act permitted the court to stay the action and it was available to Bondfield since it was available to “any person, whether or not a party” to the action.  The court also noted that the alleged dilatory pursuit of its remedies by Bondfield might be answered by Article 1.3.2 of the CCDC contract which states that “ No action or failure to act by the Owner, Consultant, or Contractor shall constitute a waiver of any right or duty afforded any of them under the Contract, nor shall any such action or failure to act constitute an approval of or acquiescence in any breach there under, except as may be specifically agreed in writing.”

Discussion

Reading this decision, one would conclude that the mandatory effect of the dispute resolution provision, Article 8, in the CCDC-2 contract has been definitively determined.  Perhaps it has, but not yet by an appellate court.  While the principle in this decision may well be upheld by an appellate court, there are several issues which are lurking under the surface which have not yet been addressed by the courts.

The first has to do with the words “may” and “shall” in Article 8.  As noted above, the pivotal clause in Article 8 is clause 8.2.6. That clause says that “either party may refer the dispute to be finally resolved by arbitration….”  Normally the word “may” means that arbitration is permissive, and there are many cases holding that “may” in an arbitration clause means that arbitration is not required.

Moreover, the word “may” in Article 8.2.6 stands in stark contrast to the word “shall” in virtually all the prior clauses within Article 8.2.  Thus, Article 8 8.2.1 says that “the parties shall appoint a project mediator…”. Article 8.2.2 says that a “party shall be conclusively deemed to have accepted a finding of the Consultant…” unless certain steps are taken.  Article 8.2.3 says  that the “parties shall make all reasonable efforts to resolve their dispute…”  Article 8.2.4 says that “the parties shall request the Project Mediator to assist the parties to reach agreement….”  Article 8.2.5 says that if the dispute is not resolved within 10 working says, then the “Project Mediator shall terminate the mediated negotiations….”  And then Article 8.2.6 uses the word “may”.

Normally one would think that by using a different word in Article 8.2.6, the parties intended a different meaning, and the normal difference between “shall” and “may” is that the latter is permissive.   One would think that some analysis or reasoning of the use of those words would be necessary to arrive at the conclusion that arbitration is mandatory.

It is true that Article 8.1.1 starts with mandatory wording:  “ Differences between the parties to the Contract as to the interpretation, application or administration of the Contract….shall be settled in accordance with the requirements of Part 8…” So there is a mandatory requirement to use the procedures in Article 8.2.  But that leaves open the questions: What are those procedures? And do they include mandatory or permissive mediation?

The second issue left open for discussion is the actual workings of Article 8.2.6.  It seems fairly clear that, even if Article 8.2.6 does permit one party to refer the dispute to arbitration, that party can only do so “within 10 days after the termination of mediated negotiations…”  If neither party does so, then Article 8.2.7 says that “the arbitration agreement under paragraph 8.2.6 is not binding on the parties… and the parties may refer the unresolved dispute to the courts…”

So Articles 8.2.6 and 8.2.7 appear to create an opt-in regime in which one party may force the other party to arbitrate, but must do so within 10 days of the termination of the mediated negotiations.  Exactly why the CCDC contract created an opt-in arbitration regime is unclear, but that is the regime that is apparently intended.  And the concept of an opt-in arbitration regime gives sense to the word “may” in Article 8.2.6, since it means that either party may, but need not, refer the matter to arbitration; if either party does then the arbitration agreement is binding;  but if either party does not, then the arbitration agreement is not binding.

But if that is the meaning of the arbitration regime in Article 8.2 of CCDC-2, then how does it apply to the facts in this case? The mediation procedures referred to in Article 8.2.1 to 8.2.5 have tight timeframes, none of which were observed in this instance.  Unless the consultant was the “project mediator” which does not seem to have been the case, the mediation procedures never occurred.  The “termination of the mediated negotiation” referred to in Article 8.2.6 never happened, so the 10 Working Days in which either party could refer the matter to arbitration never occurred.

What does all of this mean?  At least two results seem possible. The first could be that the procedures under Article 8.2 are mandatory and a precondition to any substantive rights to litigate arising.  If this is so, then the limitation period never started running and the parties have to “go back to GO” and start all over again, right back at mediation under Article 8.2.1. Article 8.2.1 says that if the parties neglect to appoint a project mediator within 20 days of signing the contract, then the mediator shall be appointed within 10 days of one of the parties making that request.  Are the parties back at that point in the process?  And does the court have the power to appoint a mediator if the parties do not agree on one?   Or is Article 8.2 an agreement “to have an independent third party resolve the claim…” within section 11(1) of the Ontario Limitations Act, 2002 so that the limitation period does not start running until the attempted resolution process is terminated or one party terminates or withdraws from the agreement? Or does that section only apply to agreements made after the dispute arises?

The other result could be that, since the mediation procedures weren’t used, then the normal procedural and limitation rules are applicable.  In this case, it would seem that the opt-in arbitration regime has not been used and therefore recourse to the courts is permissible. Does this mean that the limitation period is running in the meantime?  That result may have serious repercussions in terms of the limitation period and the lengthy time that had transpired since Bondfield first gave notice of its delay claim in 2008. This case highlights, once again, the limitation dangers inherent in mediation and arbitration clauses.

These questions may not be debated publicly in this proceeding since the court has ordered that the action be stayed and the dispute dealt with by arbitration.  But in some future case, an appellate court may have to address exactly what Article 8.2 of CCDC-2 means and what are the consequences of not following the regime set forth in that article.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10, parts 1, 4 and 6

Bondfield Construction Co. v. London Police Services, 2013 ONSC 4719

Arbitration – mediation – building contracts – obligation to arbitrate – limitations

Thomas G. Heintzman O.C., Q.C., FCIArb                                                      September 2, 2013

www.heintzmanadr.com

 

What Is The Priority Between Building Mortgages And Construction Liens In Respect Of Holdback Amounts Greater Than The Statutory Holdback?

The priorities between lienholders and mortgagees under the Construction Lien Act are not easy to understand.  They are even more difficult to understand and apply when the owner holds back more than the statutory minimum, and when the liens are discharged by security provided by the owner or mortgagee.

Under sub-section 44(1) of the Act, the court shall discharge the lien upon the payment into court or the provision of security of the full amount claimed as owing in the claim for lien, and the lesser of $50,000 or 25 per cent of the amount of the claim as security for costs. Under sub-section 44(2), the court may vacate the lien upon the payment into court or provision of security in a reasonable amount.

If the liens are vacated upon payment of the full amount of the liens, who is entitled to the difference between that amount and the 10 percent statutory minimum holdback?  Recently, in Basic Drywall Inc. v. 1539304 Ontario Inc. (Receiver of), the Ontario Divisional Court held that the mortgagee had priority to that disputed amount. The decision raises three important questions relating to the Ontario Construction Lien Act:

  • the priorities established in Section 78
  • the lien notice provisions in Sections 24 and 78
  • and the vacation of lien provisions in Section 44

Background

Basic was a subcontractor on the project and had not been paid. It registered a lien for $312, 859. The amount and timeliness of the lien was not disputed.  Other subcontractors also registered liens. When Basic’s lien was registered, the owner owed the general contractor about $276,000 and this amount was never paid. The work was certified as complete.

ICICI Bank Canada provided the mortgage financing for the project. Its mortgage was what is commonly called a “building mortgage”, and is dealt with under sub-section 78(2) of the Act.   The bank posted letters of credit to vacate the liens of Basic and other lienholders.  The Bank agreed that the amount of work certified as complete was about $506,000.  The Bank asserted that the 10 percent holdback that the owner should have maintained was, therefore, about $50,600. The owner had in fact not paid the contractor a much larger amount.

The issue in the case was this:  what amount was available for distribution to the lienholders out of the security provided by the Bank to discharge the liens?  Were the lienholders correct in asserting that $276,000 should be distributed to the lienholders, being the total amount owing by the owner to the general contractor? Or was the Bank correct in asserting that the lienholders were only entitled to $50,600, being the statutory holdback arrived at by applying 10 percent to the amount or work certified as complete? If it was the latter amount, then the Bank was entitled to the disputed amount, being the difference between the two figures, out of the security it had provided to discharge the liens.

The Decision

The Ontario Divisional Court agreed with the Bank.  It held that the lienholders were only entitled to the amount of the statutory holdback. It arrived at that conclusion for three reasons.

First, it held that no notice of any additional lien claim, over the statutory amount, had been given by the lienholders to the owner under section 24 of the Act.  So that section could not enlarge the lienholders’ rights. In any event, section 24 only applied to a “payer” and the Bank was not a payer, and therefore it was not governed by section 24.

Second, the posting of security by the Bank could neither increase nor diminish the rights of the parties, except to the extent that the Act specifically said so.  But section 44(6) of the Act, the court found, specifically said that that upon payment into court or the provision of security, the owner “shall be in the same position as if the lien had not been preserved or written notice of the lien had not been given.”  The court held that the effect of those words was that the “posting security removes ‘notice holdbacks’ as security for lien claimants by the specific language of s. 44(6).”  The court concluded by saying that “the specific language of s. 44(6) restricts an owner’s ‘notice holdback’ obligation from being extended to the posted security.”

Third, the issue between the parties was “a priority dispute.”  The court heldd that “under section 78(2) of the Act, ICICI, as mortgagee, has priority over all but the 10 per cent holdback of $50, 596.98.”

Discussion

This decision deals with a number of important principles in the Act, most particularly the operation of the priority code established in section 78 of the Act, the role of notice of lien to the owner or mortgagee and the effect of vacating a lien upon the provision of security.

Section 78(2)

The first question relates to the proper interpretation and effect of sub-section 78(2) of the Act. That sub-section states as follows:

“Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage …to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV… “

On its face, that sub-section does not create rights for the mortgagee. It creates a specific right for lienholders. That right is to priority over building mortgages (that is, mortgages taken out to “secure the financing” of the improvement). That right is presumably given to lienholders as against building mortgagees because building mortgagees are akin in interest to the owner and are providing financing for the improvement, knowing that lienholders’ rights will be created by that improvement. In other words, building mortgagees are not like other mortgagees who are loaning based on the value of the land and the strength of the mortgagor’s covenant, and may be totally unconcerned as to whether a building is being built and lien rights are being created. Building mortgagees are loaning with the very expectation that lien rights will be created with the monies they are advancing and the Act contemplates that they should ensure that owners maintain the statutory holdback when the mortgage advances are being made. So their rights, unlike other mortgagees’ rights, are always subject to the statutory holdback provision.

Sub-section 78(1) of the Act provides further context for sub-section 78(2). Sub-section (1) states as follows:

“Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises.”

So sub-section 78(1) states the premise for the whole priority code set out in section 78.  That premise is that lienholders have priority unless section 78 states otherwise.  Mortgagees must find their priority in section 78.  Sub-sections 78(3) to (8) do create specific priorities for mortgagees. But otherwise, sub-section (1) says that lienholders have priority.

The Bank’s argument was that the word “only” should be read into section 78(2), so that it would read that the lienholders’ priority over the mortgage would be “…only to the extent of any deficiency in the holdback required to be maintained.”  In effect, the court agreed with that submission because it held that “under s. 78(2) of the Act, ICICI, as mortgagee, has priority over all but the 10 percent holdback…”  The present question is whether that is the proper interpretation of that sub-section.

Sub-section 78(2) does not explicitly establish any rights in the building mortgagee.  It creates rights for lienholders that do not exist against other mortgagees. Interpreting the sub-section as the Divisional Court’s has done creates better rights for building mortgagees than other mortgagees, limiting their maximum exposure to the statutory holdback  when, at least on its face, the subsection sets a minimum exposure to the statutory holdback (presumably so that building mortgagees will ensure that owners maintain that holdback).  Is the inference of rights in favour of the mortgagee reasonable in those circumstances?

The Notice Provisions in the Act:  Sections 24 and 78

The second question relates to the proper interpretation of the notice provisions in the Act.

As the Divisional Court indicated, section 24 permits a lienholder to give notice of its lien to the owner.  If that notice is given, then the owner may no longer pay out 90 percent of the amounts due to the contractor. The Divisional Court said that if lienholders give such notice then “the lien claimant has security against the owner’s interest in the land to the full extent of the amount the owner, as payer, owes to the general contractor.”  The Divisional Court reasoned that the lienholders had not given notice to the owner of their claim but that “there is no time limit in the Act for giving written notice of a lien to an owner, so any notice before actual payment would suffice to create security against the full unpaid amount vis-a vis the owner.”  However, the court said that the Bank was not a “payer” so section 24 did not apply.

The present question is whether the provisions in section 24 of the Act relating to notice to the owner have any application to the priority issues between mortgagees and lienholders arising under section 78 of the Act. Sub-section 78(1) says that, if the mortgagee is to find any priority, it must find it in section 78. There is specific reference in section 78 to a mortgagee’s priority relating to notice given by leinholders and it is set out in sub-sections 78(4) and (6).   Those sub-sections refer to written notice of a lien to “the person making the advance.”  Absent such a notice to the Bank – and there does not appear to have been any – the Bank might well have been entitled to priority. But determining whether the Bank did have priority would require the application of sub-sections 78(4)-(8), not sub-section 78(2) and not section 24 relating to notice to the owner.    Whether the Bank had priority under sub-sections 78(4) and (6) would have depended upon a number of additional facts besides whether notice of the liens was given to the Bank.  Those facts would have included whether the mortgage was registered before the first lien arose or whether the mortgage advances were made before the time that the first lien arose or was registered. None of those facts were considered by the Divisional Court.

In effect, the priority section, section 78, has its own notice provisions.  Those provisions require the lien claimant to notify the mortgagee making the advance, not the owner.  Unless those provisions afford the mortgagee priority, the lienholders have priority. The notice provisions in section 24 apply to the owner and payments by the owner, not to the mortgagee and the payment of advances made by the mortgagee.  The present question is whether  the Divisional Court was correct in inferring into section 78 the notice provisions is section 24, and then using the absence of notice to the owner to find a priority for the mortgagee through sub-section 78(2).

Vacation of Lien under Section 44

The third issue relates to the effect of the vacation of liens upon the granting of security under section 44 of the Act. The Divisional Court appears to have found that, upon such a vacation of lien occurring, sub-section 44(6) has the effect of putting the lienholders in a position as if they had never filed a lien and never given notice of a lien.  That interpretation raises questions about the efficacy of section 44.

The Divisional Court focused on the words in sub-section 44(6) stating that the owner “shall be in the same position as if the lien had not been preserved or written notice of the lien had not been given.” From these words, the court concluded that “posting security removed the ‘notice holdback’ as security for lien claimants.”  If posting security had that effect, then it is hard to see why it would not have the same effect on the lien itself since sub-section 44(6) refers to both.

The words in sub-section 44(6) should be carefully examined to determine whether the Divisional Court’s interpretation is the intended one.  That sub-section states that upon security being given and the lien being discharged:

“…..the lien ceases to attach to the premises and ceases to attach to the holdbacks and other amounts subject to a charge under section 21, and becomes instead a charge upon the amount paid into court or security posted, and the owner or payer shall, in respect of the operation of sections 21, 23 and 24, be in the same position as if the lien had not been preserved or written notice of the lien had not been given.” (emphasis added)

This sub-section has repeatedly been interpreted to mean that the posting of security does not enlarge the rights of lienholders or give them rights of recovery that they did not have against the land itself. All the sub-section does is replace the land with the security or monies in court.

If this is so, the present question is whether the sub-section should be read to diminish the rights of lienholders in the security or monies in court. What could be the reasons for such a conclusion? Section 46 is an aid to the owner or mortgagee, to allow liens to be vacated by paying into court or providing security, so the job can be completed.  Why would lienholders agree to an order vacating their liens upon the provision of security, and why would the court so order, if that order diminishes the lienholders’ priority as against the mortgagee?

Sub-section 44(6) only refers to the rights of the “owner or payer”.  It does not refer to the lienholders. It does not say that the lienholders rights are diminished at all, and does not state that the lienholders’ rights are to be determined as if the lien had not been preserved or notice of the lien had been given.  Nor does sub-section 44(6) refer to mortgagees or to section 78. It does not say that the priority rights established in section 78 do not apply after a lien has been vacated and security has been provided.  Should sub-section 44(6) be interpreted to affect the rights of lienholders and mortgagees when those rights are not mentioned in the sub-section?

Also, sub-section 44(6) says that the owner or payer shall in respect of the operation of section 21, 23 and 24 be in the same position as if the lien had not been preserved or notice of lien not given. Those underlined word appears to mean that, so far as the obligations of the  owner or payer are concerned and since the liens claims are now secured by the monies in court or other security, the lien is no longer a charge against the holdback  (section 21), the owner is not personally liable for those secured amounts (section 23), and the owner  need not retain monies (under section 24) and can resume payment of the contractor.  Can those words be inferred to affect other rights, and in particular the priority rights in section 78?

These sections of the Act relating to priority, notice of lien claims and vacating of liens are some of the most important sections in the Act. It is to be hoped that the three questions raised in the Basic Drywall decision will be given further consideration by the courts in the near future.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 13, parts 2(g) and (h)

Basic Drywall Inc. v. 1539304 Ontario Inc. (Receiver of) (2013), 114 O.R. (3d) 219 (Div.Ct.)

Building Contracts  –  Construction and Builder Liens  –  Hold-back  –  Priorities  – Notice of Lien – Mortgages -Vacating Liens

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                           July 3, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Can A Lien Be Sheltered Under A Claim By A Lienholder Further Down The Supply Chain?

 

The sheltering rights under the Construction Lien Act are fundamental protections for contractors, subcontractors and suppliers on a building project. But the definitions of what circumstances give rise to protected sheltering are somewhat vague.  One question is whether the liens of “superior” contractors or suppliers can shelter under an action commenced by an “inferior” contractor. In other words, when a contractor hires a subcontractor or supplier, can the contractor shelter its lien under the claim of the subcontractor or supplier? It may seem odd that the word “shelter” could apply to a contractor in relation to a subcontractor hired by the contractor, and that the subcontractor’s lien could provide shelter for the contractor’s lien. But that was recently held to be valid sheltering in the decision of Master Wiebe of the Ontario Superior Court of Justice in The State Group Inc. v. Quebecor World Inc. and 4307046 Canada Inc.

Background

The applicant, Kemp was a contractor on a project in which 4307046 was the owner. The project included a modification of an existing building and the construction of a new building.  The project was an owner-supervised project in which Kemp acted as a sort of general contractor and supervised other contractors, including Cee Elevator Services Ltd. (“Cee”) and George and Asmussen Limited (“GAL”).

Kemp sought to shelter its lien upon the perfected liens of Cee and GAL. The 90 day period for the perfection of the Kemp lien started to run on January 15, 2008.  So a lien which was perfected between January 15, 2008 and April 15, 2008 in relation to the same lands could potentially shelter the Kemp lien.  The purported perfection of the Cee and GAL liens took place within this time period. So those liens could potentially shelter the Kemp lien.

Reasons of the Court

Master Wiebe said that under section 36 of the Ontario Construction Lien Act the work of the lienholder (being Kemp) seeking to shelter its lien must be in respect to the same alterations, additions and repairs as the work of the lienholders, being Cee and GAL, under whose claim Kemp sought to shelter. The court also noted the Act does not require that “the work of the sheltering liens was in fact connected to the work of the sheltered lien.”  In the court’s view, such a requirement “smacks too much” of the proposition that sheltering must be “vertical”, a proposition which was essentially overturned by the Divisional Court in Sesco Ltd. v. Life Centre Non-Profit Housing Corp. (Ajax), (1998) 37 O.R. (3d) 764, 38 C.L.R. (2d) 66 (Div. Ct.; leave to appeal dismissed 1998 Carswell Ont 1430) (“Sesco”) . There is no need to establish a commonality of “services and materials,” as long as the work was “in respect of the same improvement.”   Master Wiebe said:

“I do not see how a party that supervises the work of the lien claimants under whose liens it purports to shelter can be doing its work on anything other than the same improvement.  To rule otherwise, would lead to the rather bizarre conclusion that the supervision of the work is somehow divorced from the work that is supervised to such an extent as to render them separate improvements.  This is not how the CLA section 36(4) was meant to be interpreted.”

Comments

Section 36(4) (b) of the Ontario Construction Lien Act states that a “sheltered claim for lien is perfected only as to the defendants and the nature of the relief claimed in the statement of claim under which it is sheltered.”  In Sesco, at first instance, Justice Ferguson held that the practical effect of second part of clause (b) was that the claim in the sheltering lien action had to refer to work claimed in the lien seeking to be sheltered.  He held that a lien could not be sheltered under a lien claim in another chain of work and payment on the project (which was the situation in Sesco), at least when that lien claim made no claim in respect of the work referred to in the lien sought to be sheltered.

In that decision, Justice Ferguson said:

 “I agree…that for practical purposes a lien seeking shelter can probably find it only under a perfected lien advanced by someone higher in the same payment stream.”  (emphasis added)

With Justice Ferguson’s decision having been over-turned, the court in State Group v Quebecor has now found that a circumstance is covered under the sheltering section which Justice Ferguson thought would not be covered, namely the sheltering by a higher lienholder under a lienholder’s claim lower in the payment scheme. So, not only is it not necessary that the sheltered lien be in the same payment stream as the sheltering claim (as held in Sesco).  In addition, within the same payment stream a lower claim can provide shelter for a higher lien.

As a result, the remedial reading of the Act in Sesco has resulted in much broader application of the sheltering provisions of the Ontario Act.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., Chapter 11, part 2(f)

The State Group Inc. v. Quebecor World Inc. and 4307046 Canada Inc. 2013 ONSC 2277, 2013 CanLII 19660 (ON SC).

Building Contracts  –  Construction and Builders Liens  –  Validity of liens  –  Sheltering

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                               June 25, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Can An Owner Look Behind A Bid And Find It Non-Compliant?

Is an owner entitled to look behind a bid submitted in response to an invitation to tender and determine whether it is compliant with the terms of the invitation to tender, even though on its face the bid is compliant? And if the owner does so, and determines that the bid is non-compliant, can the owner then disqualify the bid?  According to the recent decision of the Ontario Superior Court in Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139, the answer to both questions is yes.

This decision raises important issues about the discretion of an owner once it decides to look behind a bid. In Double N Earthmovers v. Edmonton (City), 2007 SCC 3, the Supreme Court of Canada held that the owner is not obliged to go behind a bid which is compliant on its face, to determine whether the bid really complies with the tender documents. The Rankin decision deals with the implications for the owner and the bidders if the owner decides to do so.

The Background

In 2005, Rankin was a pre-qualified bidder in an invitation to tender issued by the Ministry of Transportation of Ontario (MTO) for the widening of Highway 406 near Niagara Falls, Ontario.  The tender package provided an advantage for using Canadian domestic steel.  It did so by allowing a 10 per cent discount to the tender price to arrive at the Adjusted Total Tender. That adjustment did not apply, however, to imported steel and each bidder was required to declare the amount of imported steel in its bid.

The MTO specifications called for the supply of H-Piles made of rolled steel.  The H-Piles were to be driven into the ground to provide support for bridge structures. Rankin did not declare the H-Piles to be made with imported steel. In fact, they were manufactured in the United States. The value of the H-Piles in Rankin’s bid was about $500,000 out of a total adjusted bid of about $18.6 million or about 2.7 per cent.  All the other bidders declared the H-Piles to be made of imported steel.

The tenders were opened and Rankin’s bid was the lowest, both as to the total tender and the adjusted tender.  The MTO then received complaints that Rankin’s bid was non-compliant due to its failure to declare that its H-Piles were made of foreign steel.

MTO’s practice was not to ask for supporting documents or other proof of bidder’s declarations. Apart from one previous occasion, the MTO had never reviewed a bidder’s declaration of imported steel. Nevertheless, a local MTO investigator undertook an investigation and reported that the contract should be awarded to Rankin. That report was not accepted by the local MTO manager who recommended that Rankin’s bid be rejected and the contract be awarded to the next highest bidder. That recommendation was accepted and after consultation with the MTO’s legal department, the contract was awarded to the next highest bidder. No reasons for rejecting its bid were given to Rankin.

The MTO witnesses testified that Rankin’s bid was rejected to maintain the integrity of the bidding process. While the MTO had, under its Instructions to Bidders, the right to reject any or all tenders and to waive irregularities “in the Ministry’s interest”, the MTO witnesses said that a waiver of the non-compliance would compromise the bidding process.

The MTO argued that Rankin’s bid was non-compliant and accordingly, no Contract A came into being under Ron Engineering formulation. Therefore, MTO asserted that it owed Rankin no contractual duties.  Rankin argued that its bid was compliant on its face and that MTO was not entitled to investigate Rankin’s tender and then, based on that investigation, rule that tender to be non-compliant.

Reasons of the Trial Judge

The trial judge noted that the situation in the present case was the opposite of that presented in Double N.  There, the Supreme Court held that the owner was not obliged to go behind an apparently compliant bid. Here, the MTO had gone behind Rankin’s bid and investigated its compliancy and the issues were “whether an owner is disentitled to carry out such an investigation, and whether, if it does so at the instance of a rival bidder, [the owner] thereby breaches an obligation to the low bidder whose bid is found to be non-compliant as a result of the investigation.”

The trial judge held that the contract formed in the tender process, Contract A in the Ron Engineering analysis, should not be found to contain a term prohibiting the owner from “investigating whether a bidder is capable of fulfilling the material terms of its bid, in the face of information that it may not be.” In his view, such a term would not

“promote the integrity of the bidding process. Public sector owners, such as the MTO in this case, have a long-term interest in protecting of the integrity of the bidding process. Their concern is not necessarily restricted to the individual project under consideration, but with the maintenance of a vigorous and competitive tendering process on future projects.  Anything which would dissuade potential bidders from participating in the bidding process in the future, due to a perception of unfairness in the process, would not be in the public interest.”

The trial judge found that there was nothing in the MTO’s procurement policies which precluded the MTO from investigating Rankin’s bid, even if it was not MTO’s practice to do so. In addition, the trial judge said that, even if those policies had that effect, Rankin could not rely on them because the terms of the tender were governed by the tender documents, not MTO’s policies. Unless the MTO’s procurement policies were incorporated into the tender package, a deviation from those policies did not give rise to any breach of duty to a bidder.  Those policies were not expressly incorporated into the tender package, and an implied incorporation would “give rise to unnecessary uncertainty and potential confusion and would therefore be unjustified.” Accordingly such incorporation would satisfy neither the business efficacy nor officious bystander tests for implying a term into the tender contract.

The trial judge found that Rankin’s declaration of imported steel was “crucial” to the determination of the lowest bidder. The process for declaring imported steel was “integral and fundamental” to the tender scheme. Even though the resulting price difference was only $50,000 (10 per cent of the $500,000 value of imported steel H-Piles) and even though Rankin would still have had the lowest adjusted bid and total bid if H-Piles had been properly declared, that was not sufficient, for the following reasons:

“[The] materiality [of the non-compliance} is to be determined objectively having regard to the impact of the defect on the tendering process and the principles and policy goals underlying the process. The focus is not on the impact of the defect on the outcome of the particular tender process, but on the impact on the process itself, including the reasonable expectations of the parties involved in the process, including rival bidders….three elements [are] to be considered on an assessment of materiality of the non-compliance, namely, whether it undermines fairness of the competition or the process of tendering, impacts the cost of the bid or performance of Contract B, or creates a risk of action by other (compliant) bidders. This list is stated disjunctively, and accordingly, not all of them need to be present in order for there to be a finding of material non-compliance..…To require the MTO, at the stage of determining compliance with the tender documents, to undertake a consideration of whether an inaccuracy in the Declared Value of Imported Steel will in fact alter the ultimate outcome of the tender process, as a pre-condition to a finding of material non-compliance, would, in my view, be inappropriate and could introduce an element of uncertainty to the process and the imposition of an unjustified risk on the MTO.”

The trial judge then found that the owner, MTO, was “incapable of accepting a bid containing a material non-compliance” and that, therefore, “once the material non-compliance in the Rankin bid was discovered, the MTO was bound to rule it to be non-compliant and therefore not capable of acceptance.”

The trial judge also dealt with a paragraph of the tender documents which required the MTO to notify bidders whose tenders had been rejected within 10 days of the opening of bids.  He found that this paragraph did not apply because, by its heading it only applied to unbalanced tenders and discrepancies and not to non-compliant bids, and because the Rankin tender was not “rejected” but simply non-complaint.

The trial judge found that, in any event, the MTO was protected by an exclusion clause which read as follows:

“The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in the acceptance of a Tender, except as provided in the tender documents.”

The trial judge applied the reasoning of the Supreme Court of Canada in Tercon Contractors Ltd. v British Columbia (Transportation and Highways), [2010] 1 S.C.R. 69 and held that, unlike in that case, the exclusion clause covered MTO’s alleged misconduct and was a complete defence. Applying the unconscionability and public policy test in Tercon, the trial judge found that the exclusion clause was not invalid. In his view, even if the MTO erred in investigating whether Rankin’s bid was compliant, it did so, “not to subvert the integrity of the tender process in order to gain some unfair advantage, but rather to promote the integrity of the process.” Accordingly, its conduct was protected by the exclusion clause.

Comments

The background and the reason of the trial judge have been dealt with at some length because they address many of the “hot button” issues relating to tenders. Here are a few issues which arise by comparing the Rankin decision to the decision of the Ontario Court of Appeal in Bot Construction Limited v. Ontario (Transportation), 2009 ONCA 879:

  1. The trial judge found that the owner was prohibited from accepting Rankin’s tender once it found it to be non-compliant.  In Bot, the Court of Appeal was, again, dealing with a MTO tender and foreign steel components.  The successful contractor, Cavanaugh, specified welded steel components in its bid when the tender package called for rolled steel.  The Divisional Court held that this change made Cavanagh’s bid non-compliant, in the same fashion as the trial judge did in the Rankin case. The Court of Appeal in Bot reversed the Divisional Court and held that a standard of reasonableness should be applied to the MTO’s decision and that the decision that Cavanagh was compliant with the tender process fell within “a range of possible, acceptable outcomes that are defensible in respect of the facts and law.”
  2. The decision in Rankin may be at odds with the decision in Bot on another point, namely the degree to which the non-compliancy mattered.

Here is what the Court of Appeal said in Bot:

“The amount of steel required for the bridge beams was small (1.14 per cent of the total steel required for bridges by the Contract) and minor (0.26 per cent of the value of the Contract). …  Even if the use of Canadian steel required a change in the project specifications, this change would be a minor one and would be readily approved.  Finally, even if Cavanagh had declared imported steel for use on the bridge beams, it would not have affected the order of bidders because of the large gap ($2,259,000 in the total bids, $2,230,000 in the adjusted bids) between Cavanagh, the lowest bidder, and Bot, the second lowest bidder”.

These are the sort of factors that Rankin pointed to, unsuccessfully, so far as its bid was concerned.

3.  But where Bot and Rankin may come together is the different effect of a stated or unstated non-compliance.  In Bot, the successful bidder expressly and openly bid Canadian welded steel and asked for it to be accepted within the bid or that any non-compliancy be waived by the owner. In Rankin, Rankin’s tender contained a non-compliancy which was not apparent on the face of its bid. That non-compliance might have slipped through a DoubleN type of bidding process, namely one in which the owner does not examine into the bids which on their face meet the requirements of the bid.

So a bidder faces a choice if its tender contains a potential non-compliancy:

 If the bidder openly states the compliancy issue, then the bidder faces the possibility of being disqualified. But if the issue is accepted by the owner as not involving a non-compliancy, or if the non-compliance is waived by the owner, then the owner’s decision to accept the tender may be upheld as reasonable, according to Bot.

 If the bidder does not openly state the non-compliance issue, then the bid may be accepted as being apparently compliant, under Double N.  But if the owner does investigate and decides that the bid is non-complaint, then its decision may be upheld, according to Rankin.

See Heintzman and Goldsmith on Canadian Building Contract, 4th ed. chapter 1, part 1(f). 

Rankin Construction Inc. v. Her Majesty the Queen in Right of Ontario, 2013 ONSC 139

Building Contracts   –   Tenders   –   Non-Compliant Tender   –   Waiver

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                           April 6, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

Does A Mediation Agreement Suspend The Limitation Period Or The Period To Set Down A Lien For Trial?

An agreement to mediate is often found in arbitration and building contracts. Yet, the impact of mediation upon court or arbitral proceedings is uncertain. Does an agreement to mediate mean that, until the mediation occurs, there is no cause of action and therefore there is no entitlement to commence arbitration or an action?  In that case, the limitation period would be effectively extended. In L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133, 2011 ONCA 435, the Ontario Court of Appeal held that, until a contractual obligation to negotiate a compromise had been fulfilled or terminated, no cause of action arose and the limitation period was not running.   

Or is an agreement to mediate simply not enforceable because an agreement to negotiate is not enforceable? If this is the case, then the limitation period is running and either party can ignore the mediation agreement and go to court or commence arbitration. The Ontario Court of Appeal so held in Federation Insurance Co. of Canada v. Markel Insurance Co of Canada, 2012 ONCA 218.

The uncertainty about the enforceability of mediation agreements creates real dangers for those engaged in dispute resolution under arbitration and building contracts. Fortunately, in Ontario there may be at least a partial solution in section 11 (“section 11”) of the Limitations Act, 2002 of Ontario (“Limitations Act”). This solution is often forgotten but in the recent decision in Tribury v. Sandro, the court held that a mediation agreement, once made, does effectively stop the limitation period from running.

However, there are other dangers arising from mediation agreements and limitation and procedural periods.  The Tribury decision did not expressly determine whether the mediation agreement would suspend the limitation period even if it was not an enforceable agreement to mediate.  In addition, section 11 only applies to limitation periods prescribed under the Limitations Act.  Thus, in Tribury, the court did not apply section 11 to the two year period for setting a lien action down for trial under section 37 of the Construction Lien Act (“section 37”).  What is the effect of mediations on all the other procedural and limitation sections found in Ontario statutes?

Section 11(1) states as follows:

“ If a person with a claim and a person against whom a 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

(c) the date a party terminates or withdraws from the agreement.”

Background

Tribury was the general contractor on a construction project for Laurentian University.  Sandro was the structural steel subcontractor and Edward was Sandro’s structural steel consultant.  The project started in 2006 and ground to a halt in June 2007 due to the alleged failure of certain steel connections. Apparently, all parties accepted that the claims between the parties were “discovered” in June 2007 for the purposes of the Limitations Act. As will be seen later, one of the issues in the motions in question was whether some of the subsequent proceedings were brought within the basic two year limitation period set out in section 4 of the Ontario Limitations Act or, in effect, by June 2009.

In October 2008, Sandro commenced a construction lien claim against Tribury and Laurentian. The other issue in the motions in question was whether Sandro had set that lien claim down for trial within two years of that date as required by section 37 of the Construction Lien Act, or, in effect, by October 2010.

In December 2008, Tribury counterclaimed in Sandro’s lien action.  In April 2009, Tribury started its own action which was substantially the same as its counterclaim in Sandro’s lien action. While Tribury agreed to withdraw that counterclaim, the order dismissing the counterclaim was not made until November 2010.

The Mediation

In March 2009, Sandro suggested mediation to all parties. In April 2009, counsel for all the parties participated in a conference call and all the parties, with the exception of one party, agreed to participate in mediation. That agreement was confirmed by a letter from Tribury which suggested the names of mediators, proposed deadlines for the mediation briefs and confirmed the parties’ tentative consent to a cost sharing for the mediator’s fees. In July, 2009, Sandro delivered its mediation brief to Edward. In March, 2010 the parties chose a mediator. In August, 2010, a mediation date in November 2010, was scheduled.  On November 10, 2010, counsel for Edward advised the other parties that Edward was not prepared to mediate the “Sandro remediation costs”, namely the remediation costs which Sandro itself had incurred and was now claiming against Edward (as opposed to remediation claims being asserted by others against Sandro which Sandro claimed over against Edward). The mediation was cancelled.

The Impugned Proceedings

On December 3, 2010, Sandro issued a new Statement of Claim against Edward. On December 6, 2010, in Tribury’s 2009 action Sandro served a Statement of Defence, Crossclaim (against Edward) and Counterclaim (against Tribury).

The Motions

Edward then brought a motion to dismiss the December 2010 action and cross claim against it on the ground that the limitation period had expired.

Tribury bought a motion to dismiss Sandro’s lien action on the ground that it had not been set down within the two years period set forth in Section 37 of the Construction Lien Act. Section 37 requires that, within two years of the lien action that perfected the lien, an order must be made for the trial of an action in which the lien may be enforced, or an action in which the lien may be enforced must be set down for trial.  Otherwise, the lien action must be dismissed.

Tibury also sought an order dismissing Sandro’s December 2010 counterclaim on the basis that, by December 2010, the limitation period had expired for that counterclaim to be brought.

The Decision

1.      Section 11

So far as Sandro’s December 2010 claim and cross claim against Edward and its December 2010 counterclaim against Tribury, the Court held that the limitation period for commencing those claims was extended during the whole period from April 2009 to November 2010, and had not expired by the time that Sandro’s December 2010 claim, cross claim and counterclaim were commenced, by virtue of the mediation and the effect of section 11 of the Limitations Act.

First, the Court held that an agreement under section 11 did not have to specify that the limitation period was suspended until the conclusion of the mediation.  The suspension of the limitation period was effected by section 11 itself, without the parties having to say so. Their agreement to mediate, not any words agreeing to a suspension of the limitation period, caused the suspension.

The Court distinguished section 23(3) from section 11 of the Limitations Act. Sub-section 23(3) is the general provision allowing parties to agree to suspend or extend the limitation period.  That sub-section depends, for it to be activated, on the parties’ agreement to do exactly that, namely, suspend or extend the limitation period.  In contract, section 11 depends, for it to be activated, upon the parties’ agreement to mediate. If there is an agreement to mediate, it is section 11 which then suspends the limitation period. The Court said:

Edward has not convinced me that the agreement referred to in section 11 of the Limitations Act requires specific language suspending or extending applicable limitation periods for its efficacy. In my view, what is required is an agreement which is entered into after a dispute has arisen whereby the parties agree to have a third party assist in resolving the dispute, nothing more. In the case before the court, the parties entered into an agreement to mediate in response to a dispute which had arisen among them. They have therefore met the requisite test.

Whether there was an agreement to mediate was disputed. After reviewing the evidence, The Court held there was an agreement to mediate and that it included the Sandro remediation costs.  The Court found as follows:

The correspondence between the parties confirms their mutual intention to mediate the issues which arose following the failure of the steel connectors and I find that all parties decided to mediate these issues on the understanding that all outstanding damages issues would be mediated. Although the confirming letter did not specify which issues were to comprise the subject of the mediation, the agreement was open ended and not restricted in scope. There was a stated requirement in the letter confirming the mediation that both Sandro and Tribury submit damages briefs and there is no evidence that the parties intended that only some of the issues resulting from the failure of the steel connectors were to be mediated.

2.       Section 37

So far as Sandro’s lien claim, the Ontario Superior Court exercised its discretion to permit that claim to proceed as an ordinary contract claim, and struck out the lien itself on the ground that the action had not been set down within the two year period set forth in section 37. In so deciding, it did not consider whether the mediation, and section 11 of the Limitations Act, could extend the time set forth in section 37. Since section 11 only refers to limitation periods in the Limitation Act, the Court presumably thought that it was self-evident that section 11 did not apply to section 37.

Discussion

There is good news (with a condition), bad news and two warnings arising from this decision.

First the conditional good news.  If parties who are involved in a dispute agree to mediate, they thereby suspend the limitation period under section 11.  This is a power that is often forgotten. The parties are not necessarily faced with a “do or die” alternative between commencing the proceeding on the one hand, or mediating and potentially letting the limitation period run out on the other hand.  By reason of section 11, they are protected against the running of the limitation period by a proper mediation agreement.

The condition to the good news is this. In Tribury the Court held that the mediation agreement suspended the limitation period without inquiring whether the mediation agreement was an enforceable mediation agreement, so far as the obligation to mediate is concerned. That is, the Court did not consider whether the mediation agreement contained enough details to make it an enforceable agreement to mediate. There are many recent cases, particularly in the United Kingdom, holding that an agreement to mediate is not enforceable unless that agreement contains sufficient procedural details.

One explanation of the Tribury decision could be that it is not essential that mediation agreement be enforceable as such for it to activate section 11: a           mediation agreement is enforceable to suspend the limitation period by virtue of section 11, even if it does not compel the parties to mediate.

Another explanation is that this issue was simply not considered, and that it is open for another court to conclude that, unless the mediation agreement contains sufficient details, it does not activate section 11.

Second, the bad news. Sections 11 and 23 only refer to limitation periods contained in the Limitations Act. They do not refer to limitation periods in any other Act, including the Construction Lien Act.  For this reason, the parties cannot rely on sections 11 or 23 to extend by agreement the limitation periods for the commencement of a lien action or the statutory period for setting a lien action down for trial.

Nor do sections 11 or 23 apply to limitation periods, or periods for taking steps, in other statutes.  For example, the Arbitration Act, 1991 of Ontario contains a number of limitation periods. Section 52(1) of that Act says that limitation period for an arbitral claim is the same limitation period as for an action. So presumably, sections 11 and 23 should apply to arbitral claims.  Section 47of the Arbitration Act, 1991 establishes a 30 day period for commencing an appeal from an award or an application to set aside an award. Section 52(3) establishes a 2 year period for enforcing an award. Section 3 says that the contracting parties may agree to vary or exclude any provision of the Act, except certain specific mandatory sections.  Sections 47, 52 and 53 are not among the mandatory sections.  So the parties should be able to vary the limitation periods set forth in those sections.

Article 34(3) of the Model Law attached to the Ontario International Commercial Arbitration Act (“ICAA”) establishes a three month period for bringing an application to set aside an international commercial arbitral award.  Article 52(3) establishes a two year limitation period for commencing an application to enforce the award. The ICAA and the Model Law do not contain any express power to grant relief from, or contract out of, those articles.  While the two year enforcement period seems to be based on the two year general limitation period in the Limitations Act, it appears that the parties can vary the latter but not the former, unless a court were to find that parties can generally contract out of the ICAA .

Third –  two warnings:

First, the mediation agreement should be carefully documented. An exchange of correspondence should not be relied upon as that exchange may be subject to dispute and interpretation.  The dispute or disputes that fall within the mediation agreement should be specified. In the present case, Sandro was fortunate that the exchange of correspondence was interpreted by the Court to include all the issues between all the parties.

Second, in a construction lien action, attention should be paid to intersecting limitation and procedural periods, some of which may not be suspended by a mediation agreement. The same warning applies to any action or arbitration involving statutory limitation periods or periods for taking steps which could result in the proceeding being dismissed if not taken. In the present case, Sandro may have thought that the mediation agreement suspended all periods for taking procedural steps.  But it didn’t. It didn’t suspend the two year period for setting the lien action down for trial.

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

Tribury v. Sandro, 2013 ONSC 658

Construction Law  –   Building Contracts   –   Construction and Builders Liens  – Arbitration  –  Mediation  –  Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                     February 24, 2013

www.heintzmanadr.com

www.constructionlawcanada.com    

Which Term Prevails In A Building Contract: The Specifications, Or A Warranty Of Fitness For Purpose?

A building contract usually includes a term requiring that the work or materials supplied adhere to the specifications. The contract may also contain implied or express warranties that the work will be fit for the intended purposes of the building project and free of defects. What happens when those terms result in inconsistent results? What happens when, by adhering to the specifications, the work is not fit for the purposes intended or contains a defect?

In two recent decisions, the courts have held the contractor was liable to the owner when the contractor followed the owner’s specifications and, in doing so, produced work which was not fit for the intended purpose. Is this a fair and proper result? Does this fairly account for the owner’s responsibility for the specifications?  Should there be a sharing of the blame if the specifications result in a defective work?

Double Dutch Construction Inc. v. Colwell    

Mr. and Mrs. Colwell wanted to build a new home. Their draftsman prepared construction plans (the “IFC plans”) based on concrete construction. The Colwells hired Double Dutch as the contractor.  Double Dutch recommended the use of wood construction, instead of concrete, and the Colwells agreed. The Colwells and Double Dutch signed a bare bones contract which the Colwells said resulted in Double Dutch being the general contractor.   Double Dutch said that it was not hired as the general contractor, but only to construct certain specific parts of the building.

During construction, the relationship between the Colwells and Double Dutch broke down, due to disputes over responsibility for work done by other contractors and to difficulties arising from the use of wood instead of concrete. The final inspection by the building inspector found numerous violations of the National Building Code.  In addition, the Colwells pointed out many other deficiencies.

Double Dutch said that the deficiencies were due to the use of the IFC plans prepared by the Colwells’s draftsman and that the Colwells were responsible for those deficiencies. The Colwells said that Double Dutch initiated the changes in the construction method and was obliged to raise any concerns if the changed construction methods raised any issues about using the IFC plans.  Based on the wording of the contract and the evidence about the pre-contract negotiations, the court found that Double Dutch was the general contractor.

The contract contained little in the way of specifications but did state that the building was to conform to the National Building Code.  The court held that “In the absence of any express term in the contract which specifies the manner in which work is to be done, there is an implied warranty in all contracts for work and labour that the work will be carried out in a good and workmanlike manner….”

Furthermore, the court held that Double Dutch had a duty to advise the owners of any inherent dangers in the design proposed by the owner to be used for the building.  The court quoted from the judgment of the Supreme Court of Canada in Nowlan v. Brunswick Construction Ltd., [1975] 2 S.C.R. 523 (SCC) as follows:

 “…[A] contractor of this experience should have recognized the defects in the plans which were so obvious to the architect…. and, knowing of the reliance which was being placed upon it, I think the appellant was under a duty to warn the respondents of the danger inherent in executing the architect’s plans, having particular regard to the absence therein of any adequate provision for ventilation…” (emphasis added)

 The  Brunswick court quoted the following words from the decision of the Supreme Court of Canada in Steel Co. of Canada v. Willand Management Ltd., [1966] 1 S.C.R. 746, which in turn quoted from Hudson’s Building and Engineering Contracts, 10th ed.:

 “….a contractor will sometimes expressly undertake to carry out work which will perform a certain duty or function, in conformity with plans and specifications, and it turns out that the works constructed in accordance with the plans and specifications will not perform that duty or function. It would appear that generally the express obligation to construct a work capable of carrying out the duty in question overrides the obligation to comply with the plans and specifications and the contractor will be liable for the failure of the work notwithstanding that it is carried out in accordance with the plans and specifications. Nor will he be entitled to extra payment for amending the work so that it will perform the stipulated duty. (emphasis added)

 Based upon these principles, the trial judge found that the contract between the parties contained terms that obliged Double Dutch to construct the home in accordance with the ICF plans and the National Building Code and that the work was to be completed in a good and workmanlike manner. Even if the plans were part of the contract, the duty to warn and the duty to build in a good and workmanlike manner over-rode the plans and required Double Dutch to build to that standard, and compensate the Colwells for not doing so.

Greater Vancouver Water District v. North American Pipe & Steel Ltd.

 North American contracted to supply the Water District with water pipes.  The specifications in the contract stated the type of coating for the pipes, being an Enamel Coal Tar Coating in accordance with a particular industry standard. The contract also contained the following warranties:

The Supply Contractor warrants … that the Goods … will conform to all applicable Specifications … and, unless otherwise specified, will be fit for the purpose for which they are to be used. …

The Supply Contractor warrants and guarantees that the Goods are free from all defects arising at any time from faulty design in any part of the Goods. (emphasis added)

The pipe was manufactured according to the Water Board’s specifications, but the pipe contained defects due to the application of a seal coat over an outer-wrapping as required by the Water Board’s specifications.

The trial judge dismissed the Water Board’s claim, and granted North American judgment on its counterclaim. She concluded that the conflict between the specifications and the warranties should be resolved as follows:

“The general rule is that defects caused by an owner’s specification are not the responsibility of the contractor, unless the contractor expressly guarantees that the construction would be fit for a specific purpose, or a warranty can be implied by the owner’s actual reliance on the contractor’s skill and judgment.”

The trial Judge concluded that the contractor had not expressly guaranteed that the coating would be fit for a particular purpose and that the Water Board had relied upon its own expertise for the coating and not that of North American.

The British Columbia Court of Appeal allowed the appeal, basically for two reasons.

First, it held that North American’s obligation to supply pipe in accordance with the specifications was not inconsistent with its warranty and guarantee that pipe so supplied would be free of defects arising from faulty design. The Court said: “These are separate contractual obligations. The fact that a conflict may arise in practice does not render them any the less so. The warranty and guarantee provisions reflect a distribution of risk.”

Second, the Court of Appeal found that the warranty and guarantee were unambiguous:

“Clause 4.4.4 is clear and unambiguous. Reference to authorities that deal with difficulties construing contractual provisions that may contain an implied warranty are of no assistance in this case. North American guaranteed that the pipes would not have defects arising from faulty design. The trial judge held that the pipes did have defects arising from faulty design. In my view, on the plain language of the contract, North American is liable for any damages that resulted from those defects. It does not matter whose design gave rise to the defects. There is no such qualification in clause 4.4.4”.  (emphasis added)

In these circumstances, the Court of Appeal concluded that the judgment of the Supreme Court of Canada in Steel Co. of Canada was a “complete answer.”  In the view of the Court of Appeal, the warranties and guarantees in the two cases were practically identical. The Court of Appeal quoted this passage from the Supreme Court’s judgment in Steel Co. of Canada:

“… [W]hatever the reason may have been, it appears to me that any risk involved in the undertaking was accepted by those who were prepared to tender in accordance with specifications that included the requirement of providing a written guarantee that all material employed in the work as first class and without defect, and that all work… specified would remain weather tight for a period of five years.” (emphasis added) …

The Court of Appeal graphically stated the dilemma for the contractor:

“ Clauses such as 4.4.4 distribute risk. Sometime they appear to do so unfairly, but that is a matter for the marketplace, not for the courts. There is a danger attached to such clauses. Contractors may refuse to bid or, if they do so, may build in costly contingencies. Those who do not protect themselves from unknown potential risk may pay dearly. Owners are unlikely to benefit from circumstances where suppliers and contractors are faced with the prospect of potentially disastrous consequences. Parties to construction or supply contracts may find it in their best interests to address more practically the assumption of design risk. To fail do to so merely creates the potential for protracted and costly litigation.”

The Court further underlined the contractor’s dilemma by pointing out that North American’s witness had testified that if it had submitted a bid with another coating specification, its bid would have been non-compliant, so instead it tendered as required by the specifications and then, having been awarded the contract, it proposed changes to the coating specifications which the Water Board refused to accept!

Discussion

These two decisions show how the express or implied warranties or guarantees in a building contract create a series of Catch-22s for the contractor.

First, as Double Dutch shows, if the contractor supplies work or materials which meet the specification and even if the contract contains no express warranties, the contractor may still be in breach of the implied warranties of fitness for purpose or good workmanship.  That result may not be obvious to the contractor.  The contractor may believe that satisfying the specification is sufficient since the owner set the specification and must surely know what is fit for use or good workmanship.  But if the contractor wants to be certain of that result, then it should insert a provision in the contract excluding all such warranties, whether express or implied, at least in respect of work or materials that meet the specifications.

Second, Double Dutch also shows that the contractor may have a duty to warn the owner if it is or ought to be aware that a specification is unsuitable.  And if the contractor suggests an alternative to the specifications proposed by the owner, then the contractor is even more likely to have a duty to warn about the unsuitability of the alternative,  besides running the risk that the contractor’s bid will thereby be rejected as non-compliant. Again, if the contractor wishes to exclude that duty to warn, it should insert a term in the contract excluding that duty, at least in respect of work or materials adhering to the agreed upon specifications.

Third, Greater Vancouver Water District shows that, if warranties of fitness for purpose and absence of defects are express, then the contractor takes on the entire risk of those warranties even if the contractor’s work or materials comply with the owner’s specifications.  If the contractor is to avoid that risk, then these express warranties should be excluded, again at least so far as the work or materials satisfy the specifications.

Contractors could argue that this result is unfair, and that the owner should be assigned at least some responsibility for having set a specification that authorized the delivery of what turned out to be defective work or materials. If the Negligence Act applied, then the court could apportion responsibility between the parties and allow only partial recovery by the owner against the contractor based on the degree of fault. But so far, the courts have been unwilling to adopt that approach and have placed the entire cost of remedying the defective work or materials on the contractor, even if specified by the owner, if the contractor gave a warranty of fitness for use or a warranty against defects.

See Heintzman and Goldsmith, Canadian Building Contracts, 4th ed. Chapter 5, part 2(b).

Double Dutch Construction Inc. v. Colwell, 2012 NBQB 317

Greater Vancouver Water District v. North American Pipe & Steel Ltd., 2012 BCCA 337

Building Contracts   –   Specifications   –   Implied Duty of Fitness for Purpose and Good Workmanship   –   Contractor’s Duty to Warn of Unfit Design

Thomas G. Heintzman O.C., Q.C., FCIArb                                                         January 13, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

Two Construction Lien Issues: Architect’s Pro-Forma Certificate Is Invalid; GST Must Be Added To Holdback

The Ontario Superior Court recently decided two important issues relating to construction liens. In Wellington Plumbing & Heating Ltd. v. Villa Nicolini Incorporated, the court held that a late-issued pro forma architect’s certificate was invalid, and that GST must be added to a holdback.

Factual Background

Villa Nicolini constructed a retirement home in Vaughan. The project started in 2007 and was to be completed by the fall of 2008. In the spring of 2010, construction was 75% complete and numerous trades were unpaid and had registered liens.

The mortgagees exercised their rights to sell the project lands. To convey title to the purchaser, the mortgagees vacated the registered liens by posting a letter of credit to stand as security for the lien claims in place of the project lands.  The amount of the required holdback was in dispute between the lienholders and the mortgagees.

The lien claimants said that the required holdback was $497,236 while the mortgagees said it was $285,140. The difference between the two figures was due to the parties’ answers to two questions.

First, were the architect’s certificates of completion validity issued?  If not, as the lien claimants submitted, then the releases of holdback based on those certificates did not count toward the holdback and the mortgagees would have to add them to the holdback which had been made by the owner.

Second, was GST required to be maintained as part of the holdback?  If so, as the lien claimants submitted, the amount of GST would have to be added by the mortgagees to the holdback.

The mortgagees argued that the amount of the required holdback was reduced by about $212,000 paid by the owner to subcontractors in accordance with certificates issued by the architect during the project. Those certificates were issued under section 25 of the Construction Lien Act. That section allows the owner to pay subcontractors whose work has been certified by the “payment certifier” as being complete.  The payment certifier is normally the architect or engineer hired for the project.  Section 25 says that, on the basis of such a certificate of completion, the owner may pay the subcontractor “without jeopardy” and the payments reduce the holdback required to be maintained under the Act.

Section 33(2) of the Act says that “where a sub-contract is certified to be completed, the sub-contract shall be deemed to have been completed on the date of certification.”  Section 33(4) says that “within seven days of the date the sub-contract is certified to be completed, the payment certifier or the owner and the contractor, as the case may be, shall give a copy of the certificate” to the sub-contractor, the owner and the contractor.

The lien claimants argued that the architect’s Certificates of Completion did not comply with Act for three reasons:

(i) The certificates of completion were not in the prescribed form (Form 7 under the Act);

(ii) The certificates were not delivered in accordance with Section 33(4);

(iii)  The certificates were prepared after the holdback funds had already been released.

Issue 1:              Were the Certificates of Completion Valid?

The court held that, on the facts, each of these deficiencies actually existed. The court then considered whether those facts rendered the certificates invalid.

The court held that the form of the certificates did not make the certificates invalid. While the Act should be strictly construed so far as the existence of liens is concerned, the Act should otherwise be given a purposive interpretation. The difference in form was a minor irregularity and there was no evidence of any actual prejudice. As a result, the failure to strictly comply with the forms required by the Act did not invalidate the certificates.

As to the second ground, the court declined to decide whether the certificates were invalid, due to its finding on the third ground.  However, the court was troubled by the lien claimants asserting this ground of invalidity since, as the court said:

“the lien claimants now before the Court were never entitled to receive notice of the Certificates of Completion. It makes little sense that they should be able to complain about the non-delivery of a certificate that they were never entitled to receive, when the parties actually entitled to receive them are not complaining.”

On the third ground, the court held that the certificates were invalid.  The court explained its decision as follows:

“I have found that the Certificates of Completion in this case were issued by the architect as an after-the-fact attempt to cure payments improperly made to sub-contractors before the certificates were issued. At the time the payments were made, they were made in violation of section of the Act. There is no mechanism in the Act to cure a violation of s. 25 by a subsequently issued Certificate of Completion. Accordingly, even if [the mortgagee] was able to invoke s. 25 of the Act, I find as a fact that Villa violated the section by releasing funds before the Certificates of Completion were issued. Section 25 requires strict compliance with s. 33(1). The release of holdback funds without compliance with s. 33(1) is fatal.”

The court was concerned that the result might appear to be unfair to the mortgagees.  It concluded, however, that the mortgagees knew that they would inherit the owner’s holdback obligation whatever it might be, that “there is nothing unfair in requiring an owner to comply with the provisions of the Act” and that the subcontractors were not obtaining a windfall because there would in any event be a significant shortfall in the amounts owing to them.

Issue 2:              Was GST a required part of the Holdback?

The lien claimants asserted that GST must be added to the basic holdback obligation of the owner, and therefore, the mortgagees. They said that the contract included GST of 6%, that they were obliged to remit GST to the Canada Revenue Agency as a percentage of their gross sales and that the amounts they receive by way of holdback funds would be reduced by the GST.

No case authority was cited to the court which was directly on point, although the Master’s office regularly calculates holdbacks inclusive of GST.  The court acknowledged that “the Act does not mention GST as a component of the basic holdback.” However, GST funds are trust funds and they must be remitted to the CRA.  If the holdback does not include GST then the parties receiving the holdback will not, on a net basis, receive the 10 percent holdback prescribed by statute.  In the course of the project the owner would normally hold back from the progress payments to the contractor the statutory 10 percent plus GST, and pay that holdback amount, including the GST, at the end of the project.  Accordingly, it is appropriate that the mortgagee should pay the GST into court, and the court so ordered.

Conclusion

These two issues are of practical importance to the building industry and to lenders. Certificates of completion allow a building project to proceed smoothly by permitting the owner to pay subcontractors during the job without fear of having to repay those monies again later.  But the court will not permit that permission to be abused.  If the certification process is a mockery, and if certificates are later issued to paper over payments made without adherence to the statutory procedures, they will be ineffective.

There may be border line situations.  What if the architect actually scrutinizes the subcontractor’s work and decides it is complete and so advises the owner before the payment is made, but writes up the certificate of completion sometime later?  What if the architect writes up the certificate and gives it to the owner before inspecting the work and being satisfied that the work is complete, and then inspects the work later and is so satisfied?  Do these situations offend the Act?  This decision has opened these issues to judicial scrutiny.  The limits of validity of certificates of completion will depend on the extent to which the certificate satisfies or abuses the real purposes of the Act.

The requirement that the holdback include GST, or now HST, seems appropriate, especially when the contract itself refers to HST. This requirement will likely impose an obligation on mortgagees to pay the HST into court to discharge liens since it is doing nothing more than the defaulting contractor would have done if it had paid the holdback to the contractor, that is, pay the holdback and the HST.

Wellington Plumbing & Heating Ltd. v. Villa Nicolini Incorporated, 2012 ONSC 5444

Building Contracts  –  Subcontractor  –  Certificates of Completion  –  Holdback

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     December 28, 2012

Supreme Court Denies Leave In Tender Case – Refuses To Re-Write History

The Supreme Court of Canada has recently refused leave to appeal in Trevor Nicholas Construction Co. Ltd. v. Canada. In doing so, it has upheld the decisions of the Federal Court Trial Division and Federal Court of Appeal which declined to permit a bidder to rely on after-the-fact information to overturn an invitation to tender.  These decisions, and the Supreme Court’s decision not to allow an appeal, may signal a growing unwillingness of courts to disturb the tender process based upon facts or events occurring after the tender is completed.

Background Facts

This is a long story, starting 23 years ago in 1989. The summary judgment motion judge summarized the facts as follows.

In 1989 and 1990, Trevor Nicholas submitted the lowest bid on two invitations to tender for dredging contracts issued by Public Works Canada.  In each case, Public Works Canada advised Trevor Nicholas that it was “by-passed” in favour of the second lowest bidder based upon its previous work and apparent incapacity.  Trevor Nicholas submitted bids on three further projects between 1990 and 1993. It was the lowest bidder but was by-passed for the same reasons.

In 1995, Trevor Nicholas sued the federal Crown and alleged that the defendant had treated the plaintiff unfairly during the first four tenders.  Trevor Nicholas also claimed that the Crown had breached an implied term of the contracts which were created when the plaintiff delivered four fully qualified low tenders.

In May, 2001, the Federal Court granted summary judgment dismissing the plaintiff’s claim under the implied term theory.

In January 2011, the balance of the plaintiff’s claim was dismissed on summary judgment, on the ground that there was no genuine issue for trial with respect to the plaintiff’s claim that the defendant breached its obligation to treat the plaintiff fairly. The Federal Court of Appeal upheld that decision and the Supreme Court of Canada has now denied leave to appeal from that decision.

The Federal Court of Appeal’s decision

The Federal Court of Appeal quoted, and agreed with, the following portion of the trial judge’s reasons which stated the ingredients of the duty of fairness in an invitation to tender.  The Federal Court of Appeal underlined the concluding portion of the quote:

“The defendant’s implied obligation to treat the plaintiff fairly flows from its “obligation to treat all bidders fairly in the sense of not giving any of them an unfair advantage over the others” and not unfairly preferring one bidder over another… In assessing whether this obligation was breached, it must therefore be determined whether the plaintiff was treated unfairly, relative to other bidders. This assessment should include a determination as to whether the By-Pass Decisions were made on the basis of considerations that were extraneous to those set forth or implied in the tender documentation…. In my view, the assessment should also include a determination as to whether the defendant was biased against the plaintiff or made one or more of the By-Pass Decisions in bad faith, for example, by basing any of the By-Pass Decisions on facts that the defendant knew or ought to have known were untrue at the time those decisions were made. [underlining added]”

The central argument of Trevor Nicholas was that the Crown knew or should have known at the time of the tender that the information which the Crown relied upon to by-pass Trevor Nicholas was false.  Trevor Nicholas attempted to show the falsity of that information, and the Crown’s contemporary knowledge of it, through cross examination of witnesses on the summary judgment motion. Its difficulty was that all the facts that it relied upon were dated long after the invitation to tender.  Trevor Nicholas was attempting to show that, by virtue of those facts long after the tender, the Crown knew or should have known of the falsity at the time of the tender. But it had no information that the Crown did know that falsity at the time of the tender.

The trial judge and the Federal Court of Appeal were not prepared to allow Trevor Nicholas to proceed to trial on the issue of fairness when Trevor Nicholas based its case on facts occurring long after the tender, and sought to extrapolate backwards from those facts to show unfair conduct by the Crown at the date of the tender.  As the Federal Court of Appeal said:

“[T]he plaintiff had no direct evidence to show that when making his decision not to accept the plaintiff’s tenders, the decision-maker knew that the information before him was incorrect or based upon irrelevant factors. At best, the plaintiff’s evidence took issue with the accuracy of various opinions placed before the decision-maker…[T]he Judge wrote that there was nothing in the plaintiff’s motion record:

[…] that would indicate or suggest in any way that the defendant knew, at the time when it made the By-Pass Decisions, that any of the facts upon which it relied in making those decisions were false, erroneous or misleading. Despite my repeated requests during the oral hearing, the plaintiff was not able to identify any basis for this claim, other than its mere belief that the defendant knew that some of those facts were false.”

The Crown led evidence to show that, at the time of the tenders, it retained and relied upon independent experts to evaluate the bids.  The tender documents explicitly stated the past performance of bidders, and the similarity of work previously undertaken by bidders to the proposed work, would be considered.  The summary motion judge concluded that, in all the circumstances, Trevor Nicholas had not shown that there was any genuine issue for trial on the issue of fairness. The Federal Court of Appeal agreed.

Discussion

The decision brings to an end 23 years of disputes and litigation over tenders. There have been 20 reported decisions in the two actions brought by Trevor Nicholas over these tenders. This is a remarkable amount of unsuccessful litigation.

One can well understand the frustration of a contractor repeatedly losing out on invitations to tender on which it was the low bidder.  This frustration is then fed by discovering later facts which demonstrate, in its view, that the decisions to by-pass it were unjustified.  In invitations to tender, bidders are outsiders to the decision-making process.  When they are excluded for subjective reasons, such as unsuitability or incapacity, there is a natural tendency to blame the process and to jump to the conclusion that the process was unfair.

But the invitation to tender process cannot be run by “monday morning quarterbacking.”  Business is business, and courts are not going to paralyze the tender process by raising the spectre of penalizing owners if facts are later discovered which call into question the wisdom of the tendering decision.  Fairness will be judged by the fairness of the process, and the later discovery of new facts does not render a prior process unfair.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.), Chapter 1, section 1§1(f)    

Trevor Nicholas Construction Co. Ltd. v. Canada, 2012 FA 110

Building Contracts  –  Tenders  –  Fairness  –  Duty of Care  –  Remedies

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                                          December 9, 2012

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www.heintzmanadr.com