What are “Making Good”, “Faulty Workmanship” and “Resulting Damage” under a Builders’ Risk Policy?

The decision in Ledcor Construction Ltd. v. Nortbridge Indemnity Insurance Company is another attempt by a Canadian court to deal with the ambiguity in the Builders’ risk insurance policy. The wonder is that insurers and builders do not eliminate the exclusion for faulty workmanship, or clarify what the words “making good”, faulty workmanship” and “resulting damage” mean in this policy.  Instead they leave it up to courts to settle the issue on an ad hoc basis. And it’s no wonder that, in that situation, the courts must find that these ambiguous words provide, and do not exclude, coverage.

Coverage In A Builders’ Risk Policy

There are three elements in the coverage clause of a standard Builders’ Risk policy.

The first element is the “coverage wording”. This element defines, at its broadest, what the policy covers. The policy in the Ledcor case provided very broad coverage for property involved in construction. The policy said that there was coverage for property “undergoing site preparation, demolition, construction, reconstruction, fabrication, insulation, erection, repair or testing…”.  The case law makes it clear that this sort of coverage wording includes coverage for property damage arising from the negligence of the insured unless the policy says otherwise.

The second element of the coverage clause in a Builders’ Risk policy is the “exclusion wording”. In the Ledcor case, the wording took coverage away for “making good faulty workmanship, construction or design.” So the “exclusion wording” is apparently intended to exclude the repair of negligent workmanship. The insurers justify the inclusion of this exclusion on the basis that a property damage policy is not a professional liability policy, and that if coverage for negligence is to be obtained, it should be obtained in a separate policy, or by a further premium and amended wording in the Builders’ Risk policy.

The third element in the coverage clause in a Builders’ Risk policy is the “exemption wording.”  This wording in the policy in the Ledcor case exempted the exclusion if “physical damage not otherwise excluded by this this policy results.”  In this event, the exemption wording said that “this policy shall cover such resulting damage.”

What is one to make of this “wheels within wheels”? It’s like peeling an onion, or taking a Russian doll apart, layer by layer. Except that these layers are words, not physical layers. How does one know where one layer ends and the next begins?  The answer to that question is very important because the insured could make a decision to buy other coverage if it knew where the gap is in the Builders’ Risk policy. Since the insurer doesn’t tell the insured, the insured has to figure it out by reading the cases. And since the insurers don’t tell the insured, the courts inevitably decide the cases in favour of the insureds in case of doubt, of which there is almost always a lot.

Background To The Ledcor Case

Ledcor was the general contractor on a construction project. In the concluding portion of the project, Ledcor retained Bristol to clean the outside of the building. During the cleaning, Bristol scratched and damaged the windows of the building. The windows had to be replaced at considerable cost.  Ledcor and the owner made a claim under the policy.

There did not seem to be any dispute that the damage fell within the coverage element of the policy. There were two issues:

Did the exclusion wording apply? The insurer said Yes, because the scratching of the windows was due to faulty work. The insured said No because the exclusion clause is intended to apply to the costs of having the faulty work re-done, but not to the resultant damage of the faulty workmanship.

Second, did the exemption wording apply? Yes said the insured because the claim was based on resulting physical damage. No said the insurer because the damage in this case was not resulting physical damage, but damage caused directly by the window cleaner.

Decision of the Court

The Alberta Court of Queen’s Bench concluded that the work done by the window cleaning company, Bristol, fell within the words “faulty workmanship” in the exclusion wording. The court compared the present situation to the facts in another case in which the acid cleaning of a boiler was held to fall within the words “faulty workmanship” and the court in the Ledcor case agreed that both cleaning exercises amounted to “faulty workmanship”.

The court held, however, that the words “making good” are ambiguous. They could refer only to re-doing the work that was faulty, which is what the insured asserted. Or they could refer to the damage done by the faulty workmanship, which is what the insurer asserted. In the boiler case, the cleaning was part of the very installation of the boiler, and therefore arguably part of “making good” the work if that meant re-doing the work, including installing a new boiler.  But “re-doing the work” in the present case did not include installing new windows.

The court also considered the words “resultant damage” in the exemption wording and reasoned that these words must have been intended to complement the words “making good” in the exemption wording, so that the exclusion referred to “direct damage of the faulty workmanship as opposed to the indirect consequences.”

The court concluded that both of the interpretations advanced by the parties were reasonable. On balance the one suggested by the insured was somewhat more logical for two reasons.

First, since Builders’ Risk policies are intended “provide coverage for virtually any event which might occur by way of negligence, third party action or act of God, one could conclude that an exclusion as suggested by the [insurers] is inconsistent.

Second, “Bristol, as a sub-contractor, is an additional insured under the policy. Subrogation by the insurers against Bristol can be waived at the option of the [insureds]. Again, all of that suggests broad coverage inconsistent with what the [insurers] say is the effect of the exclusion.”

The Alberta Court of Queen’s Bench held that, at best, the clause was ambiguous and should be interpreted contra proferentem against the insurer.  Therefore, there was coverage under the policy.


This decision illustrates the need for insurers and insureds to refine the meaning of the coverage, exclusion and exemption wording of Builders’ Risk policies, or the futility of doing so.  The Ledcor decision means that the policy exclusion does not apply in two situations.

First, if the person who did the faulty work installed something, and whatever was installed caused damage to some other part of the construction, then the damage to that other part is not excluded. That sort of damage is “resultant damage” and not “direct damage” and therefore falls within the exception to the exclusion. One only has to review the decided cases to know how difficult it can be to determine in that sort of situation whether the damage is “direct” or “resultant”.

Second, and this is the nub of the Ledcor decision, if the person who did the faulty work did not construct or install anything, then the claim does not arise from “making good” that work, or is “resultant damage” and not “direct damage.”

However, if the person who did the faulty work also constructed or installed something upon which it did the faulty work (as in the boiler case), then if the “making good” requires the property to be re-installed, then there may be no coverage due to the exclusion.

Two further points can be made about this decision:

First, this decision is a very good example of the rule of interpretation that the words, and all the words, in a contract must be given meaning. Here the key words were “making good”. What do those words mean and why were they used? The insurer really wanted to read the exemption to read as follows: “physical damage arising from faulty workmanship….” instead of “making good faulty workmanship….”  After all, the policy covered “physical damage” and the exemption referred to “physical damage”.   But for some reason, the exemption doesn’t. It refers to “making good”. So the parties must have meant something different by those words than “physical damage.” The court concluded that they can’t and don’t mean “physical damage” because the parties didn’t use those words. Rather, in that context, the words must mean re-doing the work, not repairing the damaged property, at least in the absence of any other or better explanation of what the words mean.  

Second, this decision perhaps demonstrates the futility of the exemption for faulty workmanship. Surely contractors and their advisors do not go through the mental gymnastics to figure out all these permutations and combinations involved in coverage.  And should they have to, especially when all the parties to the construction project are intended to be covered by the policy? Would it not be better simply to eliminate the exemption for faulty workmanship? Since the policy covers all the sub-contractors on the project, would there really be much, if any, additional risk or premium?

Ledcor Construction Ltd. v. Nortbridge Indemnity Insurance Company, 2013 ABQB 585

Builders’Risk Policy – Construction – Sub-Contractors – Contractors – Damages – Insurance – Exclusion Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                        December 27, 2013



Is A Subcontractor Bound By The Arbitration Clause in the Main Contract?

In a judgment delivered on May 6, 2011, Chief Justice Joseph P. Kennedy of the Nova Scotia Supreme Court dealt with a contentious issue relating to arbitration clauses in construction contracts.

Is an arbitration clause in the main contract between the owner and the contractor incorporated into a subcontract between the contractor and subcontractor?  If that incorporation occurs, then the subcontractor’s court claim must be stayed and the subcontractor must assert its claim by way of arbitration.

In Sunny Corner Enterprises Inc v. Dustex Corporation, the main contract contained an arbitration clause requiring that any dispute between the owner and contractor be arbitrated.  The subcontract was contained in a purchase order that stated that the scope of the work was to be as defined in the main contract.  The contractor argued that the purchase order sufficiently incorporated the terms of the main contract, and therefore the arbitration clause, into the subcontract.  The subcontractor acknowledged that the main contract was integral to the purchase order, but asserted that the purchase order did not specifically incorporate the arbitration clause from the main contract into the subcontract.

The Chief Justice held that the later is the proper statement of the law.  Referring to Goldsmith and Heintzman on Canadian Building Contracts (4thed), he held that an arbitration clause in the main contract will only be incorporated in the subcontract if it is specifically incorporated.  It was not sufficient to merely say in the subcontract that the main contract was an “integral” part of the subcontract.  As he pointed out, there may be many terms in the main contact which are irrelevant to the subcontractor.  He referred to an Alberta decision [Q.Q.R. Mechanical Contracting Ltd. v. Panther Controls Ltd., 2005 ABQB 58] in which a two year guarantee provision in the main contract was held not to have been incorporated into the subcontract.  Accordingly, Chief Justice Kennedy dismissed the motion to stay the action and permitted it to proceed.

There is logic and a lesson to be learned from this case. The parties to a subcontract may well intend to be bound by the conditions in the main contract relating to the actual nature and performance of the work.  After all, they need a common road map to get the project built that is consistent with the main contract.  But it is quite another thing for them to agree to be bound by consequential, remedial and procedural matters found in the main contract.  There is no inherent reason why the parties to the subcontract cannot agree to a different regime for those matters.  For a court to find that they made an agreement to be bound by the main contract about those matters, there should be specific provisions in the subcontract to that effect.

See Goldsmith and Heintzman:  Canadian Building Contracts (4thed) at Chapter 7, section 1 and Chapter 10, section 1.

Arbitration  – Construction Agreement –  Subcontract:

Sunny Corner Enterprises Inc v. Dustex Corporation, 2011 NSSC 172   https://bit.ly/kXG9Ck

Thomas G. Heintzman


May 15, 2011

Contractors Beware: Don’t Rely On Quantum Meruit To Fill a Gap in a Contract

The principles of contract interpretation and quantum meruit are obviously quite distinct.  But in its recent decision CH2M Hill Energy Canada, Ltd. v. Consumers’ Co-operative Refineries Ltd., the Saskatchewan Court of Appeal has reminded us that they also give rise to two very different and separate payment obligations.  There cannot be an obligation to make a quantum meruit payment if the contract, properly interpreted, covers the subject matter but contains no contractual obligation to pay.

CH2M Hill Energy Canada Ltd. (“CH2M”) answered a request for proposal issued by Consumers’ Cooperative Refineries Ltd. (“CCRL”). The accepted proposal was for the provision by CH2M of home office services and field management services, and also included the provision of craft labour.  The proposal stated that there would be a specified mark-up on the home office services and field management services, including percentages for burden and overhead.  However, while the request for proposal and the accepted proposal provided for payment of the cost of the craft labour itself, neither provided for a mark-up on craft labour.

The Court rejected the argument that the principle of “contractual quantum meruit” could be used to imply an obligation to pay a mark-up on craft labour when the contract contained no such obligation.  Contractual quantum meruit only applied, the Court said, if the contract contained an obligation to pay for the mark-up, but left the amount of payment unspecified.

Another concept is restitutionary quantum meruit which applies if the parties have not made any agreement about the subject matter at all.  That was not the case here.  The agreement did include the subject matter of craft labour but only provided for payment for the direct cost of that labour.

In the present case, the request for proposal and the proposal contained no obligation to pay for mark-up on craft labour.  The Court said that CM2H was seeking to imply into the contract a “multimillion dollar claim for overhead”.  The Court noted that overhead is “too variable a term” and its calculation “inherently uncertain and controversial”.  In the present case, the amount of the overhead would be about $10 million.  Before an obligation to pay for a mark-up on craft labour could be implied into the contract, cogent evidence of the parties’ intention to that effect would have to exist.  To the contrary, the request for proposal and the proposal itself contained no such evidence, in contrast to the mark-up specified for the other services.  Absent a contractual obligation to at least pay for the mark-up on craft labour, there was no room for the application of quantum meruit.

This decision is a fair warning to contractors:  If you want to be paid for each element of the materials or services that you provide, then ensure that the contract clearly identifies those elements and states an obligation to pay for each of them.  If you don’t at least provide for the obligation to pay, then don’t expect quantum meruit to fill the gap left by an adverse interpretation of the contract.

Building Contracts – Interpretation – Quantum Meruit:   CH2M Hill Energy Canada, Ltd. v. Consumers’ Co-operative Refineries Ltd. 2010 SKCA 75 (CanLII)  https://bit.ly/hvk8us