How Many Times Can A Contractor Sue The Owner Under The Same Construction Contract?

Can a contractor bring several claims against the owner arising from the same building contract?  Multiple proceedings arising from the same contract certainly seem like a waste of time and money.

And even if the contractor can do so, can those claims be asserted first in arbitration and then in court litigation?  Once again, different proceedings before different tribunals seem abusive.

The Alberta Court of Appeal recently held that multiple proceedings by the contractor are justified in some circumstances.  In Hnataik v. Assured Developments Ltd, the Court held that the contractor could sue the owner after bringing an arbitration claim against the owner.  The Court allowed the court claim to proceed because that claim was different than the claim in the prior arbitration and was not reasonably known to the contractor at the time when the pleadings were delivered and evidence was led in the arbitration.

The Background

 The Hnatiuks hired Assured to build them a new house.  In 2004, the Hnatiuks sued Assured alleging a fireplace problem and other related problems. Assured brought a motion to stay the action, asserting that the claim must be arbitrated under the provincial New Home Warranty Program. The motion was not heard and the parties proceeded straight to arbitration, and the action was left in abeyance.

After the evidence was heard and during the final argument in the arbitration, the Hnatiuks became aware of mould problems in the house.   On May 15, 2006, the arbitrator rendered his decision in the Hnatiuks’ favour.

On May 29, 2006 the Hnatiuks commenced a new action based on the mould problem.  Assured delivered a Statement of Defence asserting that the Hnatiuks were obliged to arbitrate their claim and then brought a motion to stay the action but did not proceed with that motion. The Hnatuiks’ action proceeded through discovery to trial.  At the opening of trial, the trial judge raised the issue of whether the action was barred by the prior arbitration.  He decided that it was and dismissed the action based on res judicata and abuse of process.  On appeal, the Court of Appeal reversed that decision.

The Court of Appeal decided that res judicata and related doctrines did not apply for three reasons.

First, the subject matter of the arbitration claim (faulty fireplace and related issues) was not the same as the subsequent court action (mould). On this basis, the Court held that “res judicata is not made out.”  The Court said that:

“causes of action are specific…If someone sues over a particular breach of contract and then later the defendant commits a second but different breach of contract, nothing forbids a second suit over that new breach….If a building contractor twice sets fires in the same building, working under the same ongoing maintenance contract, would that be the same cause of action?  Even if the fires were five years apart?  Surely not.”

Second, issue estoppel did not apply because the issue decided in the arbitration (relating to a faulty fireplace) was not the same as the issue in the subsequent action (mould).  The Court of Appeal said: “[Assured] seems not to suggest any arbitration finding contrary to some significant fact now alleged by the plaintiffs. It lists other claims, but they are plainly different. ”

Third, the Court of Appeal held that, while res judicata and related doctrines would preclude the Hnatiuks from bringing an action based on a claim which they ought to have asserted in the arbitration, there was no evidence that established that they ought to have included the mould claim in the prior arbitration.  That issue required the Court to analyze the arbitration proceedings. The Court said the following:

“The trial judge found that the plaintiffs probably saw mould by the close of argument in the arbitration.  But there is no evidence that its extent, cause or significance could be reasonably appreciated then…..It may be that the arbitrator could have consented to stop the arbitration, add new envelope items to the submission, hold a new hearing on them and then adjudicate on all items.  But the parties agreed he did not have to.”

The Court of Appeal also noted that including the mould claim might cause real problems under the provincial scheme in which claim was being arbitrated:

Adding a whole new set of claims to the arbitration could be troublesome to the arbitrator.  There would be money problems. The New Home Warranty Program….calls for a time estimate, and for a deposit toward the arbitrator’s fees….And of course it calls for pleadings… And there would be time problems in adding a large new claim at a later stage.  The program imposes a 30-day time limit after conclusion of the hearing for the arbitrator to deliver his award and account.  The power to amend the award is narrow…. So adding a big new claim to the arbitration, after the end of the evidence would be difficult.  It might well not be possible without the consent of both parties. The defendant builder never suggested that it would have consented, and indeed hints that it would not have.”

In colourful words, the Court of Appeal then said:

“We cannot see any advantage in trying to hitch such a trailer to that van, especially as it is probable that the trailer would have been far bigger and slower than the van.”

The Court of Appeal then drew a line in the sand, saying that the time for a new issue to be raised in the arbitration was at the time of pleadings or at the latest, at the close of evidence. In the present circumstances, there was no basis to conclude that the Hnatiuks ought to have raised the mould issue by either of those stages of the arbitration.

So far as abuse of process, the Court of Appeal held that the application of that doctrine required that the questions in both proceedings be the same; and/or that the plaintiffs’ second action be in the nature of misconduct, lack of diligence or harassment.  The Court found none of those ingredients in the present case.

Finally, the Court of Appeal held that Assured had waived or acquiesced in the second claim being brought by way of action and not by arbitration.  While Assured pleaded that the second claim ought to have been included in the prior arbitration and served a motion to stay that action, it did not proceed with that motion and fully participated in the action.  The Court of Appeal held that Assured had “plainly” waived its right to arbitration and attorned to the jurisdiction of the court.  Moreover, under section 7 of the Alberta Arbitration Act (the Act), the court’s duty to stay the action based on an arbitration agreement does not apply if the defendant’s stay motion is “brought with undue delay.”  Here, Assured never in fact brought such a motion and the raising of the arbitration issue at trial amounted to “gross” delay.


This decision raises many issues relating to whether contractors can bring multiple claims against owners arising out of the same building project.  Contractors may want to tuck this decision away and rely on it in a variety of situations because, on its face, the decision could countenance multiple claims by contractors before multiple adjudicators arising from the same building contract.

However, a wise reading of this decision would give it a narrow application, and indeed raise serious issues for contractors.  If the issue raised in the second proceeding is the same as the issue raised in the first proceeding, then the contractor may not be able to raise the same issue in two proceedings.  If the same factual issue arises twice during a building project under the same contract, then the decision in the first proceeding may bind the parties if a second proceeding is commenced, and the contractor may be obliged to make every effort to bring the second claim within the first proceeding.

Clearly, there are two inter-related factors at work here: how similar are the two issues; and how much did the contractor know about the second issue when the first issue was being adjudicated.  In this case, the Court of Appeal found that these issues were at one extreme end of the spectrum: the two issues were very different, and the contractor knew little or nothing about the second issue when the first issue was being arbitrated .  If these factors were different, then the contractor could well be barred by the determination in the first proceeding.

Two other aspects of the decision of the Court of Appeal’s decision do raise questions.

First, the Court said that “it is far from clear” that res judicata is as readily applied to arbitral decisions as to court decisions, and that in any event “the court has a discretion not to find or enforce res judicata flowing from a tribunal’s decision.”  These remarks will be troubling to all those who maintain that the arbitral regime is not a second-class dispute resolution system and that the arbitration process should be fully supported by judicial decisions.

Second, the builder’s reliance on section 7 of the Act and “undue delay” raises the question of the proper purpose of that section.  Its apparent purpose is to deal with an existing and future proceedings and to permit a court proceeding to go forward if a stay motion is not brought expeditiously.  It seems to have nothing to do with past proceedings and the application of res judicata and related principles arising from a past decision.  Put in another way, if res judicata does apply but the question is whether those principles can be waived and have been waived, then that question does not seem to be answered by resorting to section 7.

In the result, the Hnatiuk decision contains a potpourri of issues that contractors and owners may resort to when multiple proceedings arise from the same building contract.  The decision provides us with circumstances in which multiple claims by the contractor were allowed.  It also provides a useful spectrum of conduct or events which may influence or determine whether multiple claims will be permitted in the future.  And it raises questions about how supportive the courts will be in giving effect to arbitral decisions based upon res judicata and related principles.

Hnatiuk v. Assured Developments Ltd.                                                                                                                                                                 

 Building contracts  –  arbitration  –  stay of arbitration  –  res judicata

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                 June 10, 2012


Can A Contractor Use Its Own Mistakes To Withdraw Its Bid?

A contractors’ worst nightmare is making a mistake in a tender and being stuck with a low bid.  The next worse nightmare is submitting a winning bid but one which contains errors which arguably make the bid non-compliant.

What happens when both occur?  Can the contractor get out of its low bid by its own errors?  That is the issue that the Manitoba Court of Queen’s Bench recently dealt with in Manitoba Eastern Star Chalet Inc. v. Dominion Construction Co Inc.

The Supreme Court of Canada has revolutionized the law of tender by its Contract A/Contract B regime for tenders.  Under that regime, Contract A is the contract formed by the contractor submitting a tender in response to the owner’s invitation to tender, and Contract B is the subsequent construction contract awarded by the owner.  Contract A converts what appear to be unilateral acts in the tender process into an enforceable contract.

The courts will typically imply terms into Contract A.  Thus, the owner will generally have an implied duty not to accept a non-compliant bid absent a term in the invitation to tender to the contrary.  The contractor will have a duty not to withdraw its bid during the period stated in the invitation for the owner to accept a bid.

But what happens when the contractor’s bid is allegedly non-compliant due to the contractor’s own faulty bid, and the contractor wants to withdraw it because it is seriously underpriced?  Can the contractor do so?  The Manitoba Queen’s Bench has said No, unless the non-compliance is clear from the face of the bid.  In its decision, the Court has provided an extensive and useful analysis of the law on this subject.

The Background

Dominion was one of three bidders on an extension to a seniors housing complex being constructed by Manitoba Eastern Star Chalet.  Dominion’s bid was more than $600,000 under the next bid on a project worth about $2.5 to $3 million, or about 25% under the next bidder.

When it was notified that its bid was accepted, Dominion sought to withdraw the bid on two grounds.

First, that it had failed to provide a resolution of its board of directors authorizing the signatory to the bid to sign it.

Second, that its bid failed to refer to Structural Addendum #4 included in the tender documents.

Dominion said that these items were required by the invitation to tender, and therefore its bid was non-compliant and incapable of acceptance by the owner.  Admittedly, it was Dominion’s own fault that these items were omitted, but Dominion maintained that the Contract A regime applicable to tenders precluded the owner from accepting its bid.

The trial judge rejected Dominion’s position.  In the course of his reasons, he examined the Contract A/Contract B law, all the way from the 1981 decision of the Supreme Court of Canada in Ron Engineering up to its 2007 decision in Double N Earthmovers.   The trial judge agreed that, unless the invitation to tender states otherwise, Contract A requires the owner to only accept a compliant bid.  Therefore, if Dominion’s bid was truly non-compliant under Contract A, then the owner could not accept it and Dominion could withdraw it, even if that non-compliance was entirely due to Dominion’s fault.

The trial judge noted that an attempt by a contractor to withdraw its bid based on non-compliance due to its own fault gives rise to “mischief” which “effectively reward[s] a bidder who has made a mistake in its bid, but then can utilize its non-compliance for the purposes of not honouring a contract.”  Nevertheless, the court held that logic and previously decided cases led to the conclusion that a contractor can do exactly that, if the circumstances permit it to do so.

However, the court held that the circumstances did not permit Dominion to withdraw its bid.  As to Structural Addendum #4, the court held that it was effectively included in Dominion’s bid, when the whole bid was properly read.  In the alternative, the order of precedence in the contract documents overcame any error arising from the absence of this addendum.

In addition, the amount of the cost of this addendum was insignificant in relation to the total cost of the project.  In the result, Dominion’s bid was substantially compliant with the invitation to tender with respect to this issue.

As to the failure of Dominion to file with its tender a corporate resolution authorizing the signatory to sign the bid, the court found that Dominion had never done so in any bid, even when the invitation to tender required such a resolution.  The person signing the bid for Dominion had authority to sign the bid and that person intended to sign and submit the tender on behalf of Dominion.  Dominion’s corporate seal was affixed to the tender. The Instructions to Bidders stated that a non-compliant bid could be accepted at the discretion of the owner.  Even giving that discretion a narrow scope, the trial judge held that the non-compliance was not substantial and fell within the owner’s discretion to accept it.

The trial judge also found that the amount by which Dominion’s bid was less than the next bid was not a matter which ought to have alerted the owner to any non-compliance or other reason not to accept the bid.  Any mathematical error in Dominion’s bid was not apparent on the face of the bid.  The trial judge held that “the divergence in the bid numbers did not raise the need for an investigation into the reasons, nor was there a duty to do so”.

At the end of the reasons, the trial judge returned to the issue of whether Dominion was entitled to rely on its own fault to escape its bid.  As noted above, early in the reasons, the trial judge held that, based on logic and previously case law, a contractor should be able to do so.  But at the end of the reasons, the trial judge said:

“If there is any error in my analysis or my findings, I am satisfied that such an error would be sufficiently small that it is incumbent on the court to protect the integrity of the tendering process by not allowing Dominion to point to these alleged incidents of non-compliance to resile itself from a bid which it fully intended when it was submitted to be compliant, to be binding, and to be accepted.”

This statement is strong evidence of the inclination of courts to ensure that the tendering process is not undermined by the faulty and unfair conduct of either the owner or the bidders.  If a bidder asserts that it may escape the consequences of its own faulty bid due to non-compliance, then the court will scrutinize the alleged non-compliance very, very carefully.  The court will place a high burden on the bidder to demonstrate that the non-compliance is so material and substantial as to be a true non-compliance and one not falling within the discretion of the owner to accept non-compliant bids, however that discretion is expressed in the tender documents.

This decision is useful in three other respects:

First, it contains a very helpful collection of the cases that deal with whether a contractor has a right to withdraw from its own faulty bid due to non-compliance.

Second, it addresses two circumstances in which this court held that the non-compliance was not substantial: failure to include reference to drawings (and the impact of the contractual order-of-preference provision on that failure), and the failure to provide a corporate resolution authorizing the execution of the bid.  Anyone dealing with circumstances like these may look to this case for assistance.

Third, the decision effectively assumes, or holds albeit in obiter in the final result, that a bidding contractor may withdraw such a bid.  It is, accordingly, an important update on that principle.

This decision does not address the situation that might arise if the contractor purposefully or recklessly puts a material non-compliant term into its bid, to protect itself from a possible mistake in its bid and hoping to negotiate around that non-compliance if it is awarded the contract. Whether a contractor would ever be so reckless as to do so is another matter.  Whether a contractor could rely on that sort of non-compliance will await another day.

Tenders  –  Non-Compliance  –  Withdrawal of Bid

Manitoba Eastern Star Chalet Inc. v. Dominion Construction Co Inc., 2011 MBQB 320.

Thomas G. Heintzman O.C., Q.C.                                                                                  January 25, 2012

What Amounts to Good Faith Conduct or Repudiation on Construction Projects?

Last week we discussed joint ventures in construction projects.  That issue arose from the important recent decision of the Prince Edward Island Court of Appeal in WCI Waste Conversion Inc. v. ADI International In. 

In this article, we will examine two further issues raised by that decision:

One, the duties of good faith and fiduciary duties in a construction project; and

Two, the degree to which conduct must be wrongful before it will amount to repudiation entitling the other party to terminate a construction contract.

The Background

To refresh our memory from my article last week, in June 2000, a PEI Crown Corporation, Island Waste Management Corporation (“IWMC”), issued a Request for Proposals for the design, construction and operation of a central composting facility to serve the province of Prince Edward Island.  WCI approached ADI about making a proposal together.  The ultimate Proposal was submitted in March 2001 by ADI and it stated that it was prepared by both companies.  In July 2001, IWMC awarded the contract to ADI, with WCI shown as a sub-contractor.

In May 2001, ADI and WCI entered into a Memorandum of Understanding (“MOU”).  They entered into a further MOU in August 2001 after the contract had been awarded by IWMC to ADI.  A provision of the August MOU stated that, while ADI would be the prime contractor and WCI the subcontractor, the actual working relationship between them would be based upon the general principles of a joint venture agreement.  The majority of the Court of Appeal held that this provision resulted in the parties being joint venturers, not independent contractors.

Under ADI’s contract with IWMC, ADI was to enter into a five year operating contract with IWMC, and under the MOU, ADI was to enter into a five year subcontract with WCI under which WCI was to be the operator.

In its Substantial Performance letter dated October 7, 2001, IWMC accepted ADI’s application for Substantial Performance effective October 1, 2001.  In accepting Substantial Performance, IWMC stated that its concerns about throughput performance were to be addressed by the date of Total Performance, which was to occur on February 1, 2003.  As a result, both ADI and WCI had until February 1, 2003 to demonstrate throughput performance.  Moreover, the majority of the Court of Appeal concluded that, based upon its conduct leading up to the Substantial Performance letter, ADI effectively viewed WCI’s performance with respect to throughput performance as being a deficiency, and not conduct which repudiated WCI’s obligations under the contract.

On November 26, 2002, ADI gave notice to WCI that it was in default of its obligations and gave a five day “cure” notice to WCI.  By letter dated November 29, 2001, WCI denied that it was in default and restated its commitment to improve the throughput performance of the project.  By letter dated December 4, 2002, ADI terminated the contractual relationship between the parties.

Repudiation and Termination

The trial judge held that, as of the date of ADI’s termination of the contract, WCI had not repudiated the contract, and therefore ADI’s termination was unlawful.  This finding was upheld by the majority of the Court of Appeal.  There are several aspects of its conclusions that are important.

First, the majority of the Court of Appeal held that the “cure” notice could not be given by ADI if WCI was not then in default.  Since WCI had until February 2003 to ensure that throughput performance was met, WCI was not in breach of any obligations as of November 26, 2002 when ADI delivered its “cure” notice, and December 4, 2002 when it terminated the contract. The Court of Appeal stated its affirmation of the trial judge’s conclusion as follows:

“The trial judge was entitled to find, as he did that WCI did not by its words or conduct repudiate; that, in any event, the time for correction of the deficiencies in question was not exhausted; and, in the circumstances of the status of the deficiencies, ADI did not show that WCI was incapable of performing its part of the contract.”

This is a very useful check list for a contractor contemplating termination of a subcontractor, particularly when deciding to give or act upon a “cure” notice.  First, by its words or conduct, has the subcontractor really repudiated its obligations?  Second, has the time for performance of the obligations in question really been exhausted?  And third, is the subcontractor really incapable of performing its contract?   And for good measure, can I prove all these elements at a trial?

The second important aspect of the Court of Appeal’s decision is its affirmation of the principle that “when a contract provides a time within which the contract work must be completed, the contractor is entitled to the whole of that time for doing the work” relying on Goldsmith and Heintzman on Canadian Building Contracts (4th ed) at chapter 5, part 1(d).

Third, the trial judge and majority judgment in the Court of Appeal applied the principle of good faith performance of contractual obligations.  The trial judge held that ADI did not act in good faith in seeking approval of Substantial Completion on the basis of throughput performance being achieved by February 2003 and then turning around and terminating the contract with WCI based upon its deficiencies in relation to throughput performance before February 2003.  The Court of Appeal held that a contract must be performed in good faith, that this obligation involves performance within the reasonable expectations established by the contract, and that the trial judge was entitled to find that ADI’s “tactics and motivations” were inconsistent with a good faith exercise of its obligations and contractual duties to WCI.

Fourth, in examining the conduct and rights of ADI and WCI, the trial judge and Court of Appeal looked to the conduct and rights as between the owner, IWMC, and ADI.  Thus, IWMC had delivered no “cure” notice or termination notice to ADI in relation to throughput performance.  Why was ADI delivering such a notice to WCI?  At ADI’s request, IWMC had agreed that throughput performance would be established by the date of Total Performance.  Why was ADI not agreeing with WCI to the same date for performance?  Clearly, ADI’s inconsistent conduct or attitude was of crucial concern to the trial judge, and the Court of Appeal upheld the trial judge’s findings based on those concerns.

The minority judge agreed with this conclusion but would have directed a new trial related to the entitlement of ADI to terminate the operating contract with WCI at its sole discretion and whether it had done so in good faith.

All the judges of the Court of Appeal were firmly of the view that the issue of whether or not WCI had repudiated the contract and whether or not ADI had the right to terminate the contract based on repudiation, was to be determined on an objective basis.  The majority held that repudiating is “not lightly to be inferred from a party’s conduct”, and that, as the terminating party, ADI had the obligation to prove WCI’s repudiation and its entitlement to terminate.  Accordingly, there was no element of discretion or deference to be accorded to ADI’s decision to terminate.

In all respects, this decision of the PEI Court of Appeal provides a very useful survey of the issues which must be addressed by contractors and subcontractors when termination for repudiation is contemplated under a construction contract, particularly when a “cure” notice is involved.

Good Faith and Fiduciary Duties

The trial judge concluded that, by reason of the joint venture between them, the parties owed fiduciary duties to each other.  Both the majority and the minority of the Court of Appeal disagreed.  The majority held that a joint venture, unlike a partnership, does not necessarily give rise to fiduciary duties.  Without deciding if fiduciary duties did arise in this joint venture, the majority held that the material findings of the trial judge about the conduct of the parties and the legal consequences of that conduct could be supported without reference to fiduciary duties.

The minority judge found that it was unlikely that, in the circumstances of this case, fiduciary duties would arise.  The minority judge then considered whether the parties had an obligation to exercise their rights under the contract in good faith.  He concluded that there was no such obligation in relation to any of the provisions of the contract which did not involve discretion, and that there was in relation to those provisions that did involve discretion.  He then concluded that under the “cure notice” provision of the MOU, if AWI properly followed the notice provisions and WCI did not cure, then the MOU could be terminated without regard to issues of good faith.  However, he held that AWI’s right to terminate the operating agreement was unilateral and could be exercised “in its sole discretion”, provided it gave the required notice and paid the required termination fees.  In this circumstance, the minority judge concluded that AWI was required to act in good faith in giving a notice to terminate the operating agreement.

The concepts of a fiduciary duty and a duty of good faith are very different.  A fiduciary duty is a duty to act in the utmost good faith and in the other party’s best interest.  An obligation of good faith is not a fiduciary duty.  It is not the obligation to act in the utmost good faith and in other party’s best interest.  It is the obligation to act in accordance with the purpose of the contract and not to undermine its performance.

It is highly doubtful that a true fiduciary duty will arise during a construction project unless the parties call themselves partners.  The commercial setting for the project is not consistent with such an obligation.

On the other hand, it is hard to see why an obligation to act in good faith should not arise.  After all, that obligation simply requires a party not to act in bad faith, not to act for an ulterior motive, that is, a motive which is outside the purpose of the contract.

Making an obligation of good faith dependent upon the existence of discretion, as the minority judge did, is highly problematic.  The element of discretion is usually relevant to determining whether the duty is a fiduciary duty, not whether a duty of good faith exists.  If a cure notice is given properly on its face, but is given for an ulterior motive having nothing to do with the proper completion of the construction project, why should that sort of conduct be valid?  Why is the right to terminate the operating contract any more “unilateral” than the right to give a cure notice?  And if a party has a right to terminate “in its sole discretion”, then surely the real issue is whether that right is exercised for bona fide reasons consistent with the purpose of the contract.

In all these circumstances, good faith appears to be applicable to most of the obligations on a construction project.

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

Building Contracts   –   Good Faith   –   Fiduciary Duties   –   Repudiation  –  Cure Notice

WCI v. ADI, 2011 PECA 14 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                          January 10, 2012                                                                              

Does The Removal Of Equipment Amount To An Improvement For Lien Purposes?

Update:  The decision of the BC Supreme Court in West Fraser Mills Ltd. v. BKB Construction Inc., referred to in this article has since been reversed by the BC Court of Appeal.  Please see my blog of April 7, 2012.  The decision of the BC Supreme Court may still be relevant if and when that court finally considers whether demolition amounts to an “improvement” under the BC Builders Lien Act.

An important issue for construction and builders liens is whether destroying or removing land, structure and equipment qualifies as an “improvement.”  Why shouldn’t it, if it benefits the owner?  After all, the land itself couldn’t care less.  It is the benefit to the owner of the land that an “improvement” is all about.

In West Fraser Mills Ltd. v. BKB Construction Inc., the British Columbia Supreme Court recently applied the traditional approach to this issue and held that the removal of equipment was not an improvement and did not give rise to a builders lien.  This decision is noteworthy in itself, but it also raises the question of whether the result would be different under a recent amendment to Ontario Construction Lien Act which specifically deals with the installation of equipment.

The Background

West Fraser shut down its paper mill in Kitimat, B.C.   It then sold the paper machinery separately from the land.  It did so, as the court found, in order to enhance the total proceeds that it received from the land and machinery although the removal of machinery lowered the value of the land.

Under the agreement by which West Fraser sold the machinery, the buyer was obliged to remove the equipment.  The buyer hired BKB to remove the machinery and BKB hired a subcontractor to assist it in the removal.  BKB and its subcontractor were not paid in full by the buyer and filed a builders’ lien against West Fraser’s property.

The B.C. Supreme Court found that West Fraser was an “owner” under the B.C. Builders Lien Act since West Fraser held an estate or interest in the land and, through its sales contract with the buyer, had knowledge of and had given its consent to the work of removing the machinery.  In addition, the removal of the machinery directly benefitted West Fraser by enabling the sale of the machinery to occur on terms advantageous to it.

The Court also held that BKB and its subcontractor were both “subcontractors” under the Act. It said that:

“The Act does not require a direct contractual relationship between the respondents and West Fraser for liens to arise.  Additionally, it does not require contractual relationships between BKB or [its subcontractor] and any person engaged directly by West Fraser.”

However, the Court held that the removal of the machinery was not an improvement of the land.  Demolition work may be an improvement, it said, if undertaken as part of a project to create an altered structure, but work to preserve the value of removed or salvaged material which does not benefit the landowner qua landowner is not an improvement within the Act.

The Court held that the removal of the machinery fell into the latter category.  The land or buildings were not improved by the removal of the machinery nor was the removal incidental to a project to improve the land.

This decision is noteworthy on two accounts.

First, it is surprising that the court found that the value of the land was not improved by the removal of the machinery.  Surely the abandoned paper mill machinery detracted from the value of the land.  Otherwise, why did West Fraser require the buyer to remove it, and to do so at the buyer’s cost?  If the lien claimant proved that the market value of the land was increased by the removal of the machinery, would the result have been the same?

Second, would the result have been different under other provincial lien Acts?  Thus, the Ontario Construction Lien Act was amended in 2010 to broaden the definition of “improvement” to include “the installation of industrial, mechanical, electrical or other equipment on the land.”  Under the Ontario Act, the definition of “improvement” already included  the demolition or removal of any building, structure or works on the land.  The 2010 amendment was apparently intended to reverse the 2007 decision in Kennedy Electric Ltd. v. Rumble Automation Inc. (which, interestingly was not cited in the West Fraser decision).  In Kennedy Electric, the Ontario Court of Appeal held that the installation of large assembly-line equipment for the manufacture of truck frames was not an “improvement.”

By logic, the amendment to the Ontario Act should apply to the removal as much as the installation of equipment, but does it?  Is the equipment “building, structure and works on the land”?  It could be argued that it is not, because if it is, then there was no need to amend the Act in 2010, since the words “building, structure and works on the land” were already in the Act, and it was amended for the very reason that those words did not include “equipment.”  The part of the definition of “improvement” which refers to demotion or removal was not also amended to refer to “equipment”.

If the argument (that the installation of the equipment is within the Act but the removal is not) was successful, it would be unfortunate because the legislative purpose behind including the equipment seems so obviously applicable to the removal.  But making legislative intent clear is a challenge.

Construction Law  –  Construction Liens  –   Removal of Equipment:

West Fraser Mills Ltd. v. BKB Construction Inc. 2011 BCSC 1460

Thomas G. Heintzman O.C., Q.C.                                                                      December 4, 2011

Remember Rainy Sky: The Commercially Sensible Interpretation Prevails

Every once in a while, an important decision comes along which should be put in your hip pocket so that it can be pulled out when needed.  Rainy Sky S.A. v. Kookmin Bank is such a decision.  In this decision, the U.K. Supreme Court (formerly the House of Lords) recently held that if there is a choice between interpretations of an agreement, the commercially sensible one should be adopted.

That principle may not be rocket science, but it is crucially important for two reasons.

First, the Supreme Court held this principle applies even if another interpretation is arguable.  The more commercially sensible interpretation will be selected whenever there is a contest over the meaning of a contract.

Second, this approach may make it more important to lay the groundwork for a sensible interpretation in the evidence.

Rainy Sky is an easy case to remember:  whenever the sky looks gloomy in a dispute, think of Rainy Sky!  It concerned a bond given by the Koomin Bank in relation to a shipbuilding construction contract.  The bond was given to protect the buyer in the event of the builder’s/seller’s default under the contract and obliged Koomin to pay “all such sums due to you under the Contract, between the buyer and the seller.”

The question was:   what “such sums” did the bond cover?  Did it cover only events such as the rejection by the buyer of the vessel, the cancellation or rescission of the contract by the buyer or the total loss of the vessel, all of which were specifically mentioned in the bond as events obliging the seller to repay the buyer?  Or did the bond also cover the insolvency of the seller?

In fact, the seller went bankrupt and failed to refund the advances paid by the buyer to the seller, and that event triggered Rainy Sky’s claim on the bond.  Rainy Sky asserted that the return of the advances was included as an obligation of Koomin under the bond.  Koomin asserted that the bond did not cover the seller’s insolvency, and that it covered only the specifically mentioned obligations of repayment contained in the construction contract.

The trial judge held that the bond covered the insolvency of the seller.  The Court of Appeal held that it did not, and that only the events of repayment specifically mentioned in the bond were covered by it. The UK Supreme Court restored the trial judgment.

The Supreme Court’s decision is a ringing endorsement of the reliability of commercial common sense as a touchstone to contract interpretation.  The Court adopted the following statement by the dissenting judge in the Court of Appeal:

“As the [trial] judge said, insolvency of the Builder was the situation for which the security of an advance payment bond was most likely to be needed….It defies commercial common sense to think that this, among all other such obligations, was the only one which the parties intended should not be secured.  Had the parties intended this surprising result I would have expected the contracts and the bonds to have spelt this out clearly but they do not do so.”

The Supreme Court re-iterated the principle stated by Lord Justice Hoffman in another case to the effect that “if the language is capable of more than one construction, it is not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement.”

The Court also referred to a previous decision of Lord Justice Longmore to the effect that “if a clause is capable of two meanings, it is quite possible that neither meaning will flout common sense, but that, in such a case, it is much more appropriate to adopt the more, rather than the less, commercial construction.”

The Supreme Court ended its judgment with the following statement:

“..the omission of the obligation to make such re-payment from the Bonds would flout common sense but it is not necessary to go so far…..of the two arguable constructions of paragraph (3) of the Bonds, the Buyers’ construction is to be preferred because it is consistent with the commercial purpose of the Bonds in a way in which the Bank’s construction is not.”

The court did not limit this principle to contracts in the nature of bonds and indemnities.  Rather, its pronouncement was clearly intended to relate to the general interpretation of contracts.  As such, it is of the highest persuasive authority in all common law countries.

The face of the judgment does not indicate that there was any expert or other evidence demonstrating the commercial common sense that the Supreme Court adopted.  So that sense of commercial reasonableness had to be derived from other sources.

In the Rainy Sky case, a primary source was the commercial skill and experience of the U.K. Supreme Court.  A court with that experience can make that judgment which other courts, even of high authority, may not be able to make if composed of judges who have not had extensive commercial experience.

If a judge or court does not have commercial experience, then that experience may have to be provided by expert or other testimony.  That circumstance may result in an unfortunate dispute between expert witnesses about what is “commercially sensible”.  That is a dispute which the Court of Appeal may have felt was undesirable.  The Court of Appeal also seemed unwilling to be the judge of what result amounted to commercial common sense when sophisticated parties had not themselves expressly stated that result in their contract.

In any event, we now have a judgment that we can rely upon for a crucial principle:  the commercially sensible interpretation of a contract prevails, even if another interpretation is arguable.

Construction Law  –  Interpretation of Building Contracts  –  Bonds:

Rainy Sky S.A. v. Kookmin Bank, [2011] UKSC 50

Thomas G. Heintzman O.C., Q.C.                                                                                                            December 3, 2011