No Representation Clause Precludes Reliance On Pre-Contractual Representation

In Houle v. Knelsen Sand and Gravel Ltd., 2016 CarswellAlta 1582, 2016 ABCA 247, the Alberta Court of Appeal has recently held that a “no representation” clause precluded a party from relying on a pre-contractual representation to rescind the contract.


Houle owned a parcel of land in which Houle believed there were substantial gravel deposits. Houle contacted Knelsen about the potential sale of the land and provided Knelsen with a report of Silvatech Resource Solutions which had assessed the deposits and estimated there might be 444,850 tons of gravel in the land. Based on the Silvatech data, Knelsen’s manager concluded that the lands would yield 457,000 tonnes of gravel. After a series of negotiations, a price of $800,000 was agreed upon for the gravel rights, calculated at $1.60 per tonne for 500,000 tonnes, plus $1 per tonne for tonnage over 500,000.

The formal contract between the parties included the following clause:

“The Purchaser acknowledges that he has inspected the property and that he is purchasing the property as is and that there is no representation, warranty, collateral agreement or condition affecting the property or this offer other than as expressed herein in writing.”

In fact, there was much less gravel in the lands than expected. Knelsen extracted 74,000 tonnes of gravel, and estimated there was 25,000 to 30,000 additional tonnes on site, but that extraction of this amount would not be economical. Knelsen failed to make the final payment under the contract, and Houle sued. Knelsen counterclaimed, alleging breach of contract, negligent and innocent misrepresentation respecting the amount of gravel available in the land, and seeking rescission of the contract.

The trial judge granted rescission of the contract based upon an innocent misrepresentation.

Decision of the Alberta Court of Appeal

The Alberta Court of Appeal allowed the appeal and dismissed the action. Its reasoning was as follows:

  1. The estimate in the Silvatech report was not a representation of “fact”, but an opinion. The Court said:

  “As the trial reasons recognized, no one knew, or purported to know, how much gravel was actually in the land ….Neither the appellants, the respondent, Wapiti or Silvatech ever claimed or represented that there were in fact at least 500,000 tonnes of gravel, and it would have been reckless for any of them to do so. The cases relied on by the respondent are distinguishable. It is one thing to represent that an orchard for sale has 600 trees… and quite another thing to represent the quantity of a mineral buried underground. The Silvatech report can only reasonably be read as stating that, in the opinion of Silvatech and based on its professional analysis, it was more likely than not that there would be about 444,850 tons of gravel in the land. This was clearly an opinion, not a “fact”. Neither Silvatech (nor the appellants, vicariously) ever represented as a fact that there was any particular quantity of gravel present.

  1. The court said that “there is nothing objectionable about the whole agreement clause. It was a legitimate provision (found in most commercial contracts) confirming the scope of the agreement, and allocating the risks between the parties….The risk surrounding the actual quantity of gravel was well known to the parties….The respondent agreed to buy the appellants’ interest in the land “as is”. The appellants insisted on the whole agreement clause, at least in part to confirm that the risk arising from these unknown factors fell on the respondent purchaser.”
  1. The “no representation” clause disclaimed any “representation … affecting the property”. Those words:

“must be a reference to pre-contractual representations; post-contractual representations cannot affect the formation or terms of the contract. The trial reasons appear to assume that the whole agreement clause excludes negligent misrepresentations, but not innocent misrepresentations. There is no basis in law for that interpretation. It deprives the parties of the certainty the whole agreement clause was intended to deliver.”

  1. The “no representation” clause was wide enough to catch the representation about the quantity of gravel present in the lands: “There would be no point in excluding liability for non-actionable representations, and no reason to distinguish between innocent and negligent actionable representations, or between relief in contract or equity. The point of the whole agreement clause is that the obligations of the parties will be determined in accordance with the written terms of the contract, not extraneous negotiations and discussions that have not been reduced to writing, and thus formally acknowledged by the contracting parties.”
  1. There was no substantial failure of consideration: “there was gravel and a right to extract it.”


This decision reflects the trend of Canadian courts to hold parties to their contractual deal about limitation and exclusion clauses, absent egregious facts or dealings. In this case, the “no representation” clause directly addressed the commercial risk relating to the amount of gravel in the land, a risk that both parties were aware of. There was nothing unfair in holding that the clause addressed the very risk to which it obviously applied.

It seems doubtful that the “whole agreement” part of the clause (“there is no….collateral agreement or condition …..”) would have been effective in the present circumstances. It was the “no representation” part of the clause (“there is no ….representation, warranty…) that was really applicable. But the present decision shows how powerful a combined “whole agreement/no representation” clause can be: the first part ensures that, so far as contractual claims and remedies are concerned, the parties cannot go beyond the written contract; and the second part ensures that the parties cannot assert tort or other non-contractual rights and remedies that are inconsistent with the contract.

The court’s discussion about whether the pre-contract statements were factual or opinions seems somewhat odd. If the statements were opinions, then they did not amount to representations unless Houle did not believe in their accuracy (and there was no suggestion of that in the reasons of the court). So if the statements were opinions, then the discussion of the “no representation” clause was unnecessary. If the statements were facts, then the discussion about opinions was unnecessary. In either event, part of this decision appears to be obiter dicta.

It is well to remember that a “no representation” clause is not effective against fraud. If pre-contractual statements are made which are fraudulent then the remedies of rescission and deceit will still be available, no matter what the contract says.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 4, part 3(f)(iii) and chapter 8, part 7.

Houle v. Knelsen Sand and Gravel Ltd., 2016 CarswellAlta 1582, 2016 ABCA 247

Contract – whole agreement and no representation clauses – pre-contractual representations – statements of fact or opinion

Thomas G. Heintzman O.C., Q.C., FCIArb                               October 30, 2016

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



When Does The Negotiation End And The Limitation Period Begin For An Arbitration Claim?

Construction Law – Arbitration – Negotiations – Limitation Periods – Contract

An arbitration clause in a construction contract may be written in a way that encourages the parties to settle their differences by negotiation and agreement. But if the parties attempt to do so and fail, can one of the parties then say to the other: “Gotcha! The limitation period for your claim has now passed!” That is the issue which the Ontario Court of Appeal recently addressed in L-3 Communication Spar Aerospace Limited v. CAE Inc.

SPAR was awarded a contract to develop a hardware and software system. SPAR subcontracted some of the deliverables to CAE. SPAR was required to deliver data about those deliverables to CAE within a certain timetable. The subcontract said that if the data was not delivered within 90 days of that timetable “and the parties cannot agree to a price adjustment due to the delay….beyond the 90 days”, then CAE was relieved of its obligations under the subcontract “only to the extent that performance is not possible as a direct result of Spar to provide that information”. The subcontract then stated: “The price and other adjustments that are not agreed between the parties may be referred to arbitration” under the arbitration clause in the contract.

SPAR provided certain data to CAE, but CAE took the position that it was inadequate, and that SPAR should obtain further data from the vendors of the relevant software to SPAR. Spar refused to do so, and its refusal to do so was clear by November 2005. CAE proceeded to obtain the data from SPAR’s vendors. CAE’s evidence was that it had discussions with SPAR about settling the question of who would pay for the cost of obtaining that data.

When the cost and price issue was not settled by December 2008, CAE demanded payment for the cost of obtaining the data from SPAR’s suppliers. SPAR responded by stating that CAE’s demand was premature and that CAE was required to proceed by way of the arbitration. When CAE then delivered a Request to Arbitrate in January 2009, SPAR took the position that CAE’s arbitration claim was barred by the two year limitation period in Ontario. SPAR said that the limitation period commenced in November 2005 when SPAR unequivocally said that it would not obtain the data. SPAR commenced a court application for a declaration to that effect.

The Ontario Superior Court dismissed SPAR’s application and its decision was upheld by the Ontario Court of Appeal.

The Superior Court held that, under the wording of the subcontract, the right to arbitrate arose and the limitation period for CAE’s claim commenced, not from the date that SPAR said that it would not obtain the data, but from the date that the parties had failed to agree on a proper price adjustment. The Court held that that date was not until at least the fall of 2007, and accordingly the arbitration claim was commenced in time. The Court did not agree with CAE that the limitation period did not commence until CAE had full knowledge of the full costs of obtaining the data. But it did agree that the entitlement to arbitrate and the limitation period did not commence until “SPAR indicated its intentions to avoid any and all financial responsibility for the increased costs associated with procuring the data”.

The Court of Appeal agreed. It held that the commercially reasonable interpretation of the subcontract was that “a dispute over failure by SPAR to deliver information as required together with the cost consequences caused thereby is one that the parties were obliged to attempt to resolve between themselves. Failing agreement either party is entitled to take the dispute to arbitration.” Only then did the right to arbitrate arise and the limitation period commence running.

The Superior Court also found that, by its conduct, SPAR was estopped from asserting that the limitation period was running from November 2005. In light of its decision on the primary matter, the Ontario Court of Appeal did not deal with this issue.

Two comments can be made about this decision:

First, it is a welcome recognition of the duty to negotiate where such a duty is contained in the contract. Had the courts held that the limitation period started running from the time SPAR refused to obtain the data, the obligation to negotiate the price and costs dispute would have been effectively removed from the contract. When parties include an obligation to seek an agreement over those sorts of matters, then full recognition and effect should be given to that obligation. The only way to do so is to hold that the limitation period does not commence until that process is complete. That causes no hardship on either party, since either party can at any time state that negotiations are over and refuse to negotiate further.

Second, this decision is a reminder that it is the exception. It is the exception because most construction contracts do not contain an express duty to negotiate and attempt to agree on costs or other matters in dispute under the contract. Accordingly, in most instances it is dangerous for a party to continue to negotiate when, based upon the date of the other party’s alleged wrongful conduct or its discovery, a limitation period is looming. In most cases, the limitation period will have started to run and the party with the claim must protect its litigation rights, and then negotiate.

So there are two lessons to be learned:

First, when you are negotiating the contract and want to provide for an obligation to negotiate, expressly state that obligation in the contract and expressly state that any limitation period will only commence once the negotiations are complete.

Second, if you are in the midst of a contractual dispute and a limitation period is looming based on the date of the wrongful conduct or its discovery, then initiate the arbitration claim and negotiate later, unless you are very certain that the contract provides that the limitation period is not running in the meantime.

Construction Law  – Arbitration – Negotiations – Limitation Periods:

L-3 Communication Spar Aerospace Limited v. CAE Inc., 2010 ONSC 7133; 2011 ONCA 435 (CanLII)

Thomas G. Heintzman, O.C.,  Q.C.                                                                                           July 17, 2011

Does An Insurance Clause Preclude The Contractor From Being Sued?

An insurance clause in a building contract usually provides that one of the parties will obtain insurance for the project, and that some or all of the other parties engaged on the project will be covered under that insurance. The issue raised by such a clause is whether the party that agreed to take out that insurance, or that party’s insurer, may sue another party which was to be covered by that insurance.

In Greater Toronto Airport Authority Association v. Foster Wheeler, the Ontario Superior Court recently held that the insurance clause did preclude such an action against the contractor. In the course of its decision the Ontario court set out some useful principles.

There is always a tension between the liability or indemnity clauses, and the insurance clause, in a building contract. If the contract states that the contractor shall be liable for faulty workmanship, or warrants that the project will be free of defects for a certain period of time, or agrees to indemnify and hold the owner harmless from certain liabilities, how can the insurance clause over-ride those provisions? Yet, if the owner agrees to take out builders’ or other broad insurance policy that would normally cover the contractor in those circumstances, how can the owner’s insurer maintain a subrogated action in the owner’s name against the contractor?

Foster Wheeler entered into a contract with the GTAA to supply four boilers to the GTAA. One of the boilers exploded during installation, damaging the boiler and other property. The GTAA was compensated by its insurer which brought a subrogated claim against Foster Wheeler.

The contract between GTAA and Foster Wheeler contained a variety of apparently conflicting provisions:

1.      GTAA agreed to take out an All Risk Course of Construction insurance policy, and to include Foster Wheeler as an additional insured (“the insurance clause”);

2.      Foster Wheeler warranted the boilers to be free of defects for 12 months;

3.      Foster Wheeler was responsible for damage to GTAA’s property that occurred as a result of Foster Wheeler’s operations under the contract, except to the extent that the GTAA received proceeds of insurance under the All Risk Course of Construction insurance policy;

4.      Foster Wheeler agreed to place all risk insurance on its machinery and equipment and that such insurance was to contain a waiver of subrogation against the GTAA.

5.      GTAA agreed to waive any claim for damages against Foster Wheeler in contract or tort “except to the extent that such damage might be recovered under insurance”.

During the negotiation of the contract, Foster Wheeler asked that the contact include a waiver of subrogation under the All Risk Course of Construction insurance policy taken out by the owner, but the GTAA refused to agree to such a waiver.

The Court reviewed a number of Canadian cases dealing with the effect of an insurance clause in contracts of this nature and arrived at what it called the “beneficial aspects” of typical course of construction insurance contracts:

(a)      on a construction site the possibility of damage by one contractor to the property of another and the construction as a whole is ever present:

(b)      there is a common interest in avoiding the necessity to debate issues of negligence and responsibility in court;

(c)      parties can focus on the common goal of completing construction instead of fighting amongst themselves;

(d)      given the obligation of the owner or general contractor to obtain comprehensive insurance it makes “no business sense for sub-contractors to pay premiums to duplicate that coverage”;

(e)      the insurer sets the premium recognizing there is no right of subrogation;

(f)      the owner purchasing comprehensive insurance on behalf of contractors and subcontractors is less expensive than each party obtaining its own insurance.

The Court then considered the contract and concluded as follows:

1.      The All Risk Course of Construction insurance that GTAA had agreed to obtain admittedly provided insurance for Foster Wheeler’s negligence in the present circumstances.  Accordingly, the insurance clause protected Foster Wheeler from GTAA’s claim even in respect of Foster Wheeler’s negligence, up to the limits of that policy.

2.      The provision in the contract that exempted Foster Wheeler’s liability for damages to the GTAA’s property up to the limits of the owner’s All Risk Course of Construction insurance policy confirmed that conclusion.

3.      The insurance that the contract required the owner to obtain was described as “course of construction insurance”, which is exactly the sort of insurance that had been held by the Supreme Court of Canada to describe insurance which barred an owner’s subrogated claims against contractors and subcontractors.

4.      The insurance clause commenced with the words “Without restricting any other responsibility of the Supplier….. However, those words did not over-rule the fundamental impact of the insurance clause.

5.      The insurance clause did over-ride the warranty obligations of Foster Wheeler, to the extent of the insurance coverage and that result was “necessarily incidental” to the customary interpretation and effect of an insurance clause.

6.      The fact that, during the negotiation of the contract, Foster Wheeler had asked for a waiver of subrogation clause and the GTAA had not agreed to such a clause did not change the meaning and effect of the insurance clause. Foster Wheeler was not relying on an implied waiver of subrogation but rather an express insurance clause and its accepted effect.

7.      There was an exception to the release of Foster Wheeler’s liability. That exception applied to the extent of damages recoverable under insurance. However, that exception did not over-ride the insurance clause to the extent that the GTAA’s claim was covered by and paid out of the All Risk Course of Construction insurance. Rather, it provided for the liability of Foster Wheeler over and above the insurance obtained by the owner.

The fact that these liability/insurance issues are still being debated is remarkable. In 1976, the Supreme Court of Canada established the general principle relating to the issue, and there have been many decisions applying the principle since then. Yet parties to building contracts continue to insert into those contracts provisions which are contradictory and do not clearly apply the principles set out in the decided cases.

In these circumstances this judgment, which has not been appealed, is a helpful guide to resolving the various clauses relating to liability, indemnity and insurance in a building contract.

The conclusion to be drawn is that, if there is an insurance clause in the contract by which one of the parties obligates itself to obtain builders’ risk or course of construction insurance for the project and another party is to be an insured under that insurance policy, that clause will likely preclude a claim by the owner (or by its insurer in a subrogated claim) against the contractor unless the contract clearly and expressly states that the contractor’s liability to the owner remains outstanding notwithstanding the insurance clause.

If a provision is included in the contract which expressly states that the contractor is liable to the owner notwithstanding the insurance clause, then the contractor will likely have to obtain its own insurance, particularly against claims by the owner.

Limited insurance of that nature may not be available and the net effect may be that the contractor may have to duplicate the owner’s entire insurance program for the project.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed.) at Chapter 1, part 3(d); Chapter 5, part 3 and Chapter 6, parts 2(b)(i)(D) and 2(b)(ii)(D).

Construction Law – Insurance – Contractors:
Greater Toronto Airport Authority Association v. Foster Wheeler, 2011 ONSC 1442 (CanLII)

Thomas G. Heintzman O.C.,Q.C                                                                        July 10, 2011

Pay-When-Paid: When Is The Contractor Not Obliged To Pay The Subcontractor?

Construction Law  –  Building Contract  –  “Pay When Paid”

The Ontario Superior court recently wrestled with the issue of how to interpret and apply a “Pay When Paid” clause in a subcontract.

In 1473662 Ontario Limited v. Avgroup Consulting Services Limited, the Court appears to apply the traditional approach to this clause, but opened a door for subcontractors to avoid its severity.

Avgroup was the general contractor for a hotel construction project. The numbered company (which carried on business as “Dyson Electric”) was the electrical subcontractor.  Avgroup alleged that the parties had contracted pursuant to the CCDC subcontract, and that the contract contained a “Pay When Pay” clause which read:

“The Contractor shall pay the Subcontractor no later than thirty (30) days after the Submission Date or three (3) working days after the Contractor receives payment from the Owner, whichever is the later.”

However, that contract was never signed.  Dyson alleged that the contract was found in the invoices which it had submitted to Avgroup and which Avgroup had accepted as the basis for payment.  Those invoices did not contain a Pay When Paid clause.

The Court appeared to accept that the Pay When Paid clause in the form of CCDC contract relied upon by Avgroup was substantially similar to the clause in the contract which had been considered by the Ontario Court of Appeal in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc (1988) 32 C.L.R. 32 (Ont. C.A.).  The clause in that case stated:  “Payments will be made not more than thirty (30) days after the submission date or ten (10) days after the certification or when we have been paid by the owner, whichever is the later.”

The Court of Appeal in Timbro held that such a clause was not just a payment-timing clause operating during the project, but entirely precluded the sub-contactor from recovering from the contractor in the event that the contractor was not paid by the owner.

The court in the present case evidently felt itself to be bound by the Timbro decision.  But the court held that there was a triable issue relating to whether the contract was in the form of the CCDC subcontract or in the form of the subcontractor’s invoices.  Accordingly, the court dismissed Dyson’s motion for summary judgment.

This decision highlights the need for the Supreme Court of Canada to review the Pay When Paid issue.  There is conflicting authority in Nova Scotia (Arnoldin Construction & Forms Ltd. v. Aslta Surety Co (1995), 19 C.L.R. (2d) 1 (N.S. C.A.)) and leave to appeal that decision was dismissed by the Supreme Court of Ontario.  Moreover, members of the construction industry, and the drafters of the CCDC subcontract, should clarify their intention about the meaning of a Pay When Paid clause.

The fundamental questions are these:  Who should bear the risk of the owner’s insolvency, the contractor or the subcontractor?

Why should the subcontractor, who has no dealings with the owner and no means of managing the risk of the owner’s insolvency, bear that risk rather than the contractor?  A subcontractor may reasonably be expected to bear the risk of the timing of the payments by the contractor during the project, but it is more difficult to understand why the subcontractor should bear the risk of the owner’s insolvency.

The same issue can, of course, arise in a sub-subcontract or a supply contract if that contract contains a Pay When Paid clause.  Here, the risk is the contractor’s insolvency.  Is it reasonable for the sub-subcontractor or supplier to the sub-contractor to bear the risk of the contractor’s insolvency when they have no dealings with the contractor?

These are questions which the courts and the construction industry need to carefully consider.

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

Construction Law – Building Contract – “Pay-when-Paid”: 

1473662 Ontario Limited v. Avgroup Consulting Services Limited, 2011 ONSC 2900 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                               June 26, 2011

Arbitration Appeal Rights: Think About Them Before Signing A Contract

Owners and contractors will normally insert an arbitration clause into their contract.  When they do so, they rarely consider their rights of appeal from an arbitral award.  The recent decision of the Ontario Court of Appeal in Kingsway Insurance Company v. Gore Mutual Insurance Company provides a good opportunity to develop a strategy towards appeal rights before signing a construction contract containing an arbitration clause.

Under the domestic Ontario Arbitration Act, an appeal of an arbitration award may be taken in two circumstances.  First, if the parties agree, then an appeal may be brought on a matter of law, fact or mixed fact and law.  Otherwise, an appeal may be brought on a matter of law with leave of the Superior Court.  In addition, of course, an application may be brought to set aside the award or for a declaration of the invalidity of the award.

In Kingsway, the Court of Appeal has held that leave to appeal is required before a further appeal may be taken from the Ontario Superior Court to the Court of Appeal for Ontario.  In arriving at this conclusion the Court resolved a statutory conflict.  Section 49 of he Ontario Arbitration Act states that leave to appeal is required from a decision of the Superior Court relating to an appeal to that Court of an arbitral award, or an application to set aside the award or a declaration of invalidity of the award.  However, section 6(1) (b) of the Ontario Courts of Justice Act states that an appeal lies to the Court of Appeal from a final decision of a judge of the Ontario Superior Court.

The Court of Appeal held that these two provisions are in direct conflict and that the conflict must be resolved in favour of the more specific provision in the Arbitration Act, being the Act which specifically governs domestic arbitrations in Ontario.

While Kingsway was not a construction law case, this ruling may be of importance to owners and contractors, particularly if they wish to preserve appeal rights relating to the arbitral decision.  Under Ontario law, the parties may include in their arbitration agreement a full appeal to the Superior Court on matters of law and fact.  If they do so, that is probably because they wish those issues to be dealt with by the Court in the usual way.  They may now be surprised to learn that the normal appeal route is not available to them, and that, despite their agreement and despite the normal situation in civil actions, they are only entitled, as of right, to one level of appeal.

The situation created by section 49 of the Ontario Arbitration Act may be contrasted with the Ontario International Commercial Arbitration Act (“ICAA”).  That Act applies to international arbitrations.  Like the ICAAs of virtually all the other provinces, the Ontario ICAA incorporates the New York UNCITRAL treaty provisions which do not countenance an appeal of the arbitral award.  Likewise, those provisions contain no provisions relating to an appeal from a decision of the Superior Court setting aside, or refusing to set aside, the award.  In these circumstances, the normal provisions of Section 6(1) (b) of the Ontario Courts of Justice Act presumably apply, as presumably would the comparable legislation in the other provinces.  Indeed, there are instances in which appeal courts in Canada have heard appeals from the provincial superior courts dealing with arbitrations under the ICAA statutes, without leave being granted.

Ironically, therefore, the ICAA statutes may allow for appeals as of right from a reviewing judge’s decision in circumstance in which no such appeal as of right exists under the domestic arbitration regime. That would be ironic since ICAA is generally considered to contain an “anti-appeal” regime.

A comparison of domestic arbitration statutes across Canada reveals a somewhat diverse regime with respect to appeals from decisions of reviewing judges.  The statutes in Ontario, Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia generally provide a similar regime. They allow for an appeal from the arbitral award to the Superior Court with leave on a question of law (except in Nova Scotia).  They generally allow the parties to provide in the arbitration agreement for appeals without leave on matters of law, fact and mixed fact and law.  But they also generally provide that any further appeals from the reviewing or appeal decisions of the Superior Court to the Court of Appeal are only with leave.

British Columbia permits an appeal of the arbitral award to the British Columbia Supreme Court on a question of law either with leave or on consent, but does not deal with further appeals.

Newfoundland and Labrador does not expressly provide for appeals from arbitration awards and establishes no express limit on, and does not address, appeals from orders reviewing and setting aside, or refusing to review and set aside, arbitration awards.

The Prince Edward Island statute contains the novel provision, whereby if the parties provide for an appeal in the arbitration agreement, then the parties have the right to appeal directly from an arbitral award to the Appeal Division.

In these circumstances, owners and contractors who are entering into arbitration agreements should carefully consider their rights of appeal.  Perhaps, rights of appeal are the very last thing they want.  In this case they may wish to specifically state that there are to be no rights of appeal.  In some provinces (like Ontario), the parties can, in the arbitration agreement, entirely contract out of their right to an appeal even with leave, while in other provinces (like Manitoba) they cannot.

But the parties may wish to have full rights of appeal, particularly if there are serious issues of law at stake.  If so, they may want to stipulate that the arbitral law of a specific jurisdiction is to apply to their contract and select one which is the most appeal-friendly.  If this is the case, then Ontario arbitral law may have become less suitable to those parties and more suitable to parties wishing to restrict appeal rights following a hearing before the Superior Court.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed), Chapter 10

Construction Law – Arbitrations – Contract – Appeals – Civil Procedure

Kingsway Insurance Company v. Gore Mutual Insurance Company 2011 ONCA 87

Thomas G. Heintzman                                                                           May 24, 2011

Can A Construction Lien Be Based On A Pre-Incorporation Contract?

Construction Lien Claims  –  Pre-Incorporation Contracts

What happens when a pre-incorporation construction contract is made in the name of a company which does not do the work, and then the construction lien is filed in the name of the company that was later incorporated and did the work?

That was the situation faced by the Alberta Court of Appeal in Canbar West Projects Ltd v. Sure Shot Sandblasting & Painting Ltd.  The Court held that the lien was valid and, furthermore, that the contract had been effectively adopted by the company that did the work.

A company known as Can-West Projects Ltd entered into a contract with Sure Shot  to construct facilities on land owned by a company related to Sure Shot.  The problem was that Can-West was not then incorporated, and when the principals behind it went to incorporate the company, they found that the name was taken. So they incorporated a company by the name of Canbar West Projects Ltd. and that company registered the name “Can-West Projects” as a trade name.  After it was incorporated, the rest of the work was done by Canbar West Projects Ltd and it registered the lien.

The trial judge held that Canbar did not have a valid lien because it had not entered into the contract, and that Canbar had not adopted the contract made in the name of Can-West.  The Court of Appeal of Alberta reversed both of these findings.

First, the Court of Appeal held that, so far as the lien was concerned, it did not matter that the contract was not in the name of Canbar.  The entitlement to a lien arises from three elements:

–         the owner requests the work

–         the claimant does the work

–         and the work improves the value of the land

The lien does not arise from the existence of a contract.  Indeed a contract with the owner will not exist between the owner and a sub-contractor and yet sub-contractors can file liens.  Here, Canbar had done the work, at least from the date of its incorporation; and the land had been improved.  The mere fact that the contract had been made with a contractor under another name did not mean that the owner had not requested the work to be done.  In effect, the trial judge had incorrectly used principles relating to the making of contracts when the issue related to construction liens.

Some of the work had been done before Canbar’s incorporation.  As to that work, the Court of Appeal referred to section 15(3) of the Alberta Business Corporations Act, which deals with pre-incorporation contracts.  The Court held that Canbar had adopted the contract made in the name of Can-West, in two ways.

First, the name on the contract was very similar to the name of the company as incorporated.  In this circumstance, the contract can be said to have been made “in its name” within the subsection.  As the court said, “minor variations in name surely must be included with respect to contracts made in the name of a then non-existing corporation.”

Second, the contract was made “on behalf of” the company within the meaning of the subsection. The principals intended to incorporate a company, to use the Can-West name and to have it perform the work, and they only adopted another name because that name was taken.  The company in fact adopted and performed the contract and the owner took no objection to the company doing further work after they knew that the lien was filed in the name of CanBar.

On the latter point, the trial judge had held that the existence of another, totally unrelated, company having the Can-West name disentitled CanBar from adopting the contract.  The Court of Appeal disagreed. The other Can-West company did no work on the project and did not file the lien.  That company was totally irrelevant to the issue.

This decision is a reminder of two important principles.  One relates to construction liens. Construction liens are a creature of statute, not contract law.  They protect those who improve lands, by virtue of that improvement and not by virtue of a contract. The owner must request the work or materials, but the lien arises from the request and the subsequent improvement, not a contract.

The second principle relates to pre-incorporation contracts.  Adoption of such a contract can, under the legislation, occur “by any act or conduct signifying [the corporation’s] intention to be bound”, but only as long as the original contract was made in its name or on its behalf.  Those involved in pre-incorporation contracts should make both elements very clear, both that the contract was made in the future corporation’s name or on its behalf, and also that there is a clear adoption of the pre-incorporation contract, by an express corporate resolution or contract or other express written document to that effect.  Absent that sort of clarity, pre-incorporation contracts can lead to litigation.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed.) at Chapter 1, para 1(a)(ii) and Chapter 11, para 2(a)(iii).

Construction Lien  –    Pre -incorporation Contracts:

Canbar West Projects Ltd v. Sure Shot Sandblasting &Painting Ltd., 2011 ABCA 107

Does A Breach of Fiduciary Duty Fall Within an Arbitration Clause?

In the recent decision, St. Pierre v. Chriscan Enterprises Ltd., the British Columbia Court of Appeal considered whether a claim by an owner against the project manager for breach of fiduciary duty fell within the wording of the arbitration clause in the project management agreement.

The arbitration clause stated that disagreements “as to the interpretation of this contract or the quality of the material or construction arranged by the project manager or any issues relating to project deficiencies” were to be arbitrated under the British Columbia Commercial Arbitration Act. 

The owner’s claim was that the project manager had arranged for some of the work to be contracted to a company in which the principal manager of the project manager, Chriscan, had an interest and that the project manager or its principal had received secret profits in this way.  The owner asserted that its fiduciary duty claim against the project manager relating to those secret profits did not fall within the arbitration clause.

The B.C. Court of Appeal disagreed.  It noted that, if the arbitration clause referred to “all disputes”, then there would be no argument and the dispute would clearly have to be arbitrated.  The Court held that, while the present arbitration clause was narrower, it still captured the dispute which depended on determining whether the relationship between the parties was a fiduciary one or not.  That issue depended upon an “interpretation of the contract” between the parties.  Accordingly, the dispute fell within the arbitration clause.

The Court held that “it is only by interpreting the contract, in its factual context, that the legal nature of their relationship and whether the appellants’ allegations have any merit can be determined”.

This decision reflects the tendency in Canadian law to include any claim within an arbitration clause which arguably falls within it.  In this case, the parties appeared to be at some pains to draft a narrow arbitration clause, yet the Court held that the clause applied to conduct quite outside the actual performance of the construction project – a secret profit allegedly earned by the project manager through a related company.  It is hard to imagine an arbitration clause and a claim which are more disassociated, yet the Court held that the claim fell within the arbitration clause.

The lesson here is that an arbitration clause in a construction project should either be drawn to encompass “all claims” in dispute, or if the parties intend to limit the disputes which may be arbitrated then those limitations should be set out in explicit exclusionary language.

St. Pierre v. Chriscan Enterprises Ltd., 2011 BCCA 97 (CanLII)

Construction Law – Claims – Arbitration                                                                                                                                               March 28, 2011