Evaluation Breached Tender Conditions: Alberta Queen’s Bench Court

You would think that the owner would get one thing right before issuing an invitation for tenders: its standard for evaluating the tenders.

Yet, in Elan Construction Limited v South Fish Creek Recreational Association, the Alberta Court of Queen’s Bench recently found that the owner’s tender evaluation criteria were unfair and did not reflect the terms of the tender, and awarded nominal damages to the unsuccessful bidder. The decision is a good checklist for owners in establishing tender evaluation standards.


In July 2010, the South Fish Creek Recreational Association (“SFCRA”), issued an invitation for tenders for the construction, as additions to its existing recreational facilities, of two ice surfaces and multi-purpose rooms and other spaces. Elan was a pre-qualified bidder and filed a bid.

The published evaluation matrix provided for a maximum of 100 points and contained the following elements: Price, 35 points; Date of completion, 35 points; Previous community and arena experience, 20 points; References, 10 points.

Elan was not awarded the contract and sued for damages. The trial judge found the following with respect to the bid criteria:

Price: Elan’s bid was the lowest by $400,000.

Completion Date:  The Invitation to Bid stated that SFCRA wanted the Project to be substantially completed by August 1, 2011, with that date highlighted in bold. The Instructions to Bidders contained a liquidated damages clause providing for liquidated damages in the event of late completion in the amount of $15,000 per day, later reduced to $3,000 per day.

Elan’s bid provided for substantial completion by August 1, 2011 and completion of deficiencies by August 15, 2011. The successful bidder’s completion date was August 31, 2011.

The adjudicator did not use August 1, 2011 as the relevant date. Instead, he took the average of the completion dates of certain, but not all, of the bidding contractors considered most relevant, arriving at a completion date of September 5, 2011; and then awarded bidders points out of 30 based on their proximity to that notional date. As a result, Elan received 25 points for its on–time date of August 1, 2011 for substantial completion, while the successful bidder received 34 points for its later substantial completion date of August 31, 2011.

The evaluator used the same approach to deal with the estimated time to complete deficiencies, arriving at an average figure of 45 days after his notional completion date of September 5, 2011. As a result, Elan received zero points for its 14 day estimate while the successful bidder received four points for its longer 30 day projection.

LEED: Leadership in Energy and Environmental Design (“LEED”) experience was used as a factor in the evaluation criteria factor, but there was no indication in the Bid Documents to this effect.

Court’s Decision

The Court of Queen’s Bench found that on various accounts the evaluation factors used by the owner had not been disclosed in the bid documentation, and therefore the owner breached the implied duty of fairness inherent in the tender process. Here are the reasons of the court on some of the factors:

Substantial Completion Date

“Mr. Quinn’s methodology, as described above, created an arbitrary standard that could not have been within the contemplation of the bidders. His testimony as to his method and rationale served only to underscore the arbitrary nature of his evaluation. Moreover, his approach created, in my view, the kind of undisclosed evaluation criterion that the Supreme Court of Canada has said constitutes a breach of Contract A.”


“….SFCRA’s approach to evaluating the relative experience of the bidders cumulatively amounted to breach of the Bid Contract….While I agree that it would not be unreasonable for SFCRA to put greater emphasis on arena experience given the nature of the Project, in my view, that emphasis should have been disclosed in the Bid Documents…..an explicit preference for such experience could and should have been indicated in the Bid Documents….”

Other undisclosed criteria

“I find that other undisclosed criteria influenced SFCRA’s assessment of the bidders’ experience. ….any consideration of LEED in the assessment of experience…..should have been brought to the attention of bidders….Similarly, while interviewing candidates may be useful and may fall within SFCRA’s right to seek further information, bidders should have been made aware that interviews were a possibility. Further, Elan should not have been forced into the position of attending an important interview without key employees who were designated to work on the Project. In my view, both the use of interviews and the process by which they are conducted must be fair to all bidders.

In its analysis the court referred to the recent decision of the Supreme Court of Canada in Bhasin v Hrynew. In that decision, the Supreme Court held that there is a duty to perform contracts honestly. Applying that principle, the Court of Queen’s Bench said:

“I hasten to add that there is no suggestion that SFCRA acted dishonestly or with malice. Nevertheless, as the Supreme Court of Canada held in Bhasin, a duty of good faith may require more than honesty. Where a bid evaluation has been conducted in an arbitrary manner or on the basis of undisclosed criteria, that is sufficient to constitute breach.

The court concluded that, absent the owner’s breaches of contract, Elan would have been the successful bidder.

In assessing damages, the court held that either the cost of preparing the bid, or the lost profit on the construction contract that would have been awarded to Elan, is the proper measure of damages, but not both. In assessing damages under the second approach the court reduced Elan’s claim:

  1. because Elan had, in the court’s view and based on the next lowest tender, underestimated the subcontracts. On this account Elan’s claim should be reduced by $185,000, from $704,908 to $519,908
  2. because the contractor who was actually awarded the contract was anticipating a $300,000 profit and made a loss of $600,000, and Elan would likely have encountered a similar experience. Accordingly, Elan’s claim should be reduced from $519,908 to nominal damages of $1,000.

Having awarded damages based upon loss of profit, the court said that no damages could be awarded for the cost of preparing the bid, and in any event no proof of that cost had been provided.


This decision is a good illustration of two perils relating to claims for breach of an invitation to tender, and the “smell tests” which the court will likely apply in the course of litigation over a tender.

First, a court will be very unsympathetic to an owner that has not prepared and applied tender evaluation criteria that fairly reflects the bid conditions. There is really no excuse for an owner applying criteria that do not accurately reflect the bid conditions which it has itself prepared and published. Interestingly, the court used the concept of “honest performance” of a contract, enunciated in the Bhasin case, to judge the owner’s performance of its obligations under the invitation to tender.

Second, the court will carefully scrutinize the bidder’s claim for damages. The court may well think: “Well, this contractor was fortunate not to have won that contract!”

Elan Construction Limited v South Fish Creek Recreational Association, 2015 ABQB 330

Construction law – tenders- Contract A/Contract B – honest performance – damages

Thomas G. Heintzman O.C., Q.C.,  FCIArb                                                      December 20, 2015



Quebec Court of Appeal Awards Impact Damages

When a breach of a building contract occurs, the damages can be extensive because the breach can have an impact on the performance of other parts of the contract. For this reason, a unique aspect of construction disputes is the potential award of what are called “impact” costs or damages.

In the recent decision of the Quebec Court of Appeal in Dawcolectric inc. c. Hydro-Québec, the court awarded impact damages against the owner, even though those damages had been suffered by the subcontractor. In the course of its judgment the Court of Appeal also addressed a number of other construction law issues.


Hydro-Quebec contracted with a general contractor Dawco which granted a subcontract to a subcontractor Solimec which did most of the work on the project. Over 400 change orders were issued by the owner and substantial delays were encountered on the project. The general contractor brought a claim for damages against Hydro-Quebec. The trial judge found that the delays were caused 60 percent by Hydro-Quebec and 40 percent by the contractor. The trial judge found that the collective corporate conduct of Hydro-Quebec amounted to a breach of contract. The trial judge dismissed Dawco’s claim for the impact damages suffered by the subcontractor, Solimec.

Hydro-Quebec appealed on the grounds that it could only be liable for acts of its employees, and there was no such thing as a breach of contract by the corporation without a specific act of an employee amounting to a breach. The contractor appealed from the trial judge’s failure to award impact damages.

Decision of the Quebec Court of Appeal

The Court of Appeal upheld the trial judge’s finding that Hydro-Quebec had, by the collective conduct of its employees, breached the contract. It was not necessary to identify a specific breach of contract arising from an individual employee’s conduct for the court to conclude that, in totality, the owner had breached the contract.

The Court of Appeal held that the trial judge erred in failing to award Dawco the amount of impact damages that had been suffered by Solimec and included in Dawco’s claim.

First, while the contract between Dawco and Solimec was styled as an “Entente de rémunération du risqué” (or “risk reward contract”), nevertheless Solimec was a subcontractor of Dawco. Therefore, the general principle applied that the work done by Solimec was work done by Dawco for Hydro-Quebec and recoverable by Dawco under the main contract with Hydro-Quebec.

Second, the fact that the limitation period had expired for Solimec to claim those costs from Dawco was irrelevant and was not a defence for Hydro-Quebec to Dawco’s claim. The limitation period for Dawco’s claim against Hydro-Quebec had not expired when Dawco commenced its action. Therefore, Dawco could assert its claim to those costs against Hydro-Quebec, including any claim arising from the work done by Solimec.

Third, the costs in question were in fact and law “impact costs” and not “indirect costs” as contemplated by the change orders. Indirect costs are costs for items like site administration, bonding costs, water and electricity servicing costs, demobilization, etc. They are sometimes called general or project costs.

The costs in question here were the costs of: extra technical and supervisory personnel and additional equipment, over and above those that had been forecast for the work, which became necessary due to the delays and changes demanded by Hydro-Quebec. According to definitions accepted by the Court of Appeal, these costs fall within the concept of “impact costs,” being additional costs resulting from the impact of change order upon the performance of the contract. The Court of Appeal accepted that impact costs are normally the responsibility of the contractor, but they can become the responsibility of the owner when the owner by its conduct becomes liable for damages in a contractual or non-contractual claim.

When negotiating the change orders, Hydro-Quebec had insisted that the only amounts that could be included were costs directly arising from the modification of the work, and specifically excluded from the negotiations of the change orders any consideration of impact and the retarding of the project. In those circumstances, the Court of Appeal held that those costs were not included within the change orders and the change orders could not bar a claim for impact costs associated with those changes.

Accordingly, the Court of Appeal allowed Dawco’s claim for impact costs and awarded 60% of those costs to Dawco.

The Court of Appeal confirmed the trial judge’s award of 13.76% for overhead and profit. Dawco and Solimec led evidence to establish that their historic overhead and profit during the period 1999 to 2005 amounted to 13.76% of their costs. In addition, the contract itself referred to overhead and profit of 15% in another clause in the contract, which was not applicable to the present case. Hydro-Quebec pointed out that Solimec had only anticipated overhead and profit of 4.95%. Nevertheless, the court held that 13.76% was reasonable in the circumstances.

The Court of Appeal allowed in part the appeal by Hydro-Quebec. It set aside the award of additional financial costs allegedly incurred by Dawco. It held that Dawco was, after all, 40% responsible for the delays, and furthermore Dawco was by its decision receiving substantial compensation for its actual losses. After a lengthy review of the facts, the court held that Hydro-Quebec was not at fault such that Dawco’s additional financial costs should be the responsibility of Hydro-Quebec.

The Court of Appeal also allowed Hydro-Quebec’s appeal with respect to Dawco’s claim for damage to reputation, loss of the opportunity to obtain other business and other inconveniences. It pointed out that the trial judge had dismissed Dawco’s claim for punitive damages on the ground that Hydro-Quebec had not purposefully engaged in wrongful conduct. The court concluded that there was no proof of causation between these alleged losses and any wrongful conduct of Hydro-Quebec that had not already been properly compensated, and that these losses were uncertain and unforeseeable.


This decision contains a potpourri of issues which are important for construction law. One of the most interesting is that of impact damages: what are impact damages; what sort of clause can eliminate a claim for impact damages; what sort of conduct and documentation during the issuance of change orders can eliminate a claim for impact damages, or allow it to survive?

In this case, the Court of Appeal of Quebec held that the contractor’s claim for impact damages was not excluded by the contract. Nor was that claim excluded by the change order process because the owner had specifically directed that impact costs were not to be included in the change order process. Accordingly, the claim for impact damage was allowable under the contract because they fell within a recognized category of recoverable damage, and the claim had not been nullified by the change order process.

The parties could have agreed to include impact costs in each change order, although the total impact costs arising from all change orders would have been difficult to assess when negotiating each change order. Hydro-Quebec could have taken the position that no impact costs arose from the change orders. In either case, Hydro-Quebec could have then required Dawco to sign a release for any further impact costs arising from the change order process. In those circumstances, Dawco’s claim for impact damages would not have survived. However, Dawco would presumably not have accepted that arrangement if it wished to preserve a claim for those costs, particularly one arising from the cumulative effect of change orders.

This decision shows the importance of the negotiation process and the wording of change orders to the viability of a later claim by the contractor for impact costs. Since those costs may arise from many change orders and usually cannot be determined from any single change order, the owner and contractor must be alive to the potential existence of those costs and how they are to be determined.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter, part 6(f)

Dawcolectric inc. c. Hydro-Québec (2014), 32 C.L.R. (4th) 183, 2014 CarswellQue 4600

Building contracts  – Damages  –  Impact Costs – Delays – Change Order Process

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



Owner Awarded Nominal Damages For Deficient Construction Not Affecting Market Value

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

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


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

Decision of the New Brunswick Court of Appeal

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

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

the diminution in the value of the property:

the savings by the contractor by the breach; or

the loss of amenities to the owner.

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

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

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

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

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

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

Justice Robertson then went on to make the following points:

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

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

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

  1. Justice Robertson was strongly influenced by the absence of evidence about the impact of the deviation on the value of the property. Since the building was for rental purposes, in his view it would have been a “relatively simple matter to assess damages based on the lower of the cost of reinstatement or diminution in value of the work done. Had the appraisal revealed the fair market value of the property to be lower, because of the contract deviation, and by an amount less than the cost of the reinstatement, the court would be compelled to award damages based on the property’s diminished value. On the other hand, had the cost of reinstatement been lower than the diminished value of the property, the court would normally be compelled to award damages equal to the former….In the absence of expert evidence regarding the impact of the contract deviation on the property’s value, it cannot be assumed that an award of damages equal to the cost of reinstatement is reasonable.”
  1. However, Justice Robertson was satisfied that Consolidated was entitled to an award of nominal damages, either for lost expectations or a presumed diminishment in value. He pointed out that, to date, Consolidated has experienced no loss as a result of this missing square footage since the tenant had accepted the building as provided, and paid the rent as negotiated. Consolidated’s view that a future tenant might not be so accommodating was speculative, and Consolidated had not allowed Diotte to rectify the problem. In these circumstances, the trial judge’s award of $2,000 nominal damages was reasonable.


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

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

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

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

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

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

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





The Supreme Court Of Canada Avoids The Open Windows Issue

In my last article, I dealt with the recent decision of the Supreme Court of Canada in Bhasin v. Hrynew. In that decision, the Supreme Court of Canada established two fundamental principles for the Canadian common law of contract:

First, that the parties are under a general obligation to perform contracts in good faith; and

Second, that the parties have a duty to act honestly in the performance of contracts.

There was a third issue before the court, and that was whether the plaintiff had suffered any recoverable damage. The Alberta Court of Appeal had held that, whether or not the defendants had acted honestly or in bad faith, the defendant Can-Am had the right to not extend the contract and had chosen not to. Therefore, Bhasin had no right to recover any damages. The Alberta Court of Appeal said:

[Can-Am] had a right to end the contract at the end of three years. The law of damages presumes that a party will use the least expensive method to perform. So (for example) employment contracts do not yield damages beyond the date at which the defendant could have ended the contract. See Hamilton v. Open Window Bakery Ltd. (2003), 2004 SCC 9, [2004] 1 S.C.R. 303, 316 N.R. 265(S.C.C.) (paras 11-20). Therefore, since the contract was performed up to its expiry date, in law there was no loss, and no damages are payable. That is an additional reason to dismiss the suit.”

In its decision in Bhasin v. Hrynew, the Supreme Court did not mention its decision in Open Windows Bakery and the principle stated in that case. Accordingly, it is necessary to determine if any hints can be derived from the Bhasin case about how to deal with the principle in Open Windows Bakery.


The following facts were found by the trial judge in Bhasin v. Hrynew. Bhasin and Hrynew were both retail dealers who marketed education savings plans developed by Canadian American Financial Corp. (“Can-Am”).   Bhasin’s agreement with Can-Am was for a term of three years and automatically renewed unless one of the parties gave six months’ notice of termination.

Hrynew was in effect a competitor of Bhasin and wanted to take over Bhasin’s agency and he campaigned with Can-Am to direct such a merger of the agencies. Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. When Bhasin continued to refuse to allow Hrynew to review his records, Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew.  Bhasin sued Can-Am and Hrynew.  The trial judge held that Can-Am breached the implied term in its contract with Bhasin that the contract would be performed in good faith. He found that Can-Am had dealt dishonestly with Bhasin.

The Supreme Court of Canada restored the trial judge’s finding that Can-Am had breached its contract with Bhasin by dealing with him dishonestly. It was then a question of determining the damages to which Bhasin was entitled.

Supreme Court’s Decision re Damages

The Supreme Court referred to the trial judge’s finding that, even though Can-Am had a right to not extend the term of the agency, the agency still had value and Bhasin could have sold it. The Supreme Court said:

“The trial judge specifically held that but for Can-Am’s dishonesty, Mr. Bhasin could have acted so as to “retain the value in his agency”: paras. 258-59. In reaching this conclusion, the trial judge was well aware of the difficulties that Mr. Bhasin would have in selling his business given the “almost absolute controls” that Can-Am had on enrollment directors and that it owned the “book of business”: para. 402.  She also heard evidence and made findings about what the value of the business was, taking these limitations into account.  These findings, in my view, permit us to assess damages on the basis that if Can-Am had performed the contract honestly, Mr. Bhasin would have been able to retain the value of his business rather than see it, in effect, expropriated and turned over to Mr. Hrynew.”

The Supreme Court then referred to the evidence of Can-Am’s expert who said that the value of Bhasin’s agency around the time of non-renewal was $87,000. The court was satisfied that the trial judge had found that Bhazin’s business was worth $87,000 at the time that his agreement with Can-Am expired. In the appeal to the Supreme Court, Can-Am argued that the evidence of their expert established that the value of Bhazin’s agency was $87,000. Accordingly the Supreme Court concluded that Bhazin’s damages were $87,000.


It is, perhaps, not very useful to discuss what the Supreme Court of Canada did not decide, but any chance to discuss the Open Windows Bakery decision must be taken. That case presents a challenge to those trying to understand and fairly apply the Canadian law of contract damages.

The Alberta Court of Appeal correctly stated that, in Open Windows Bakery, the Supreme Court held that contract damages are to be calculated on the basis that the defendant was entitled to use the least expensive method to perform. If the defendant could have terminated the contract in another way which would have entitled the plaintiff to no damages, then that is the amount to which the plaintiff is entitled. Apparently, that formula is to be applied no matter how unlikely it would have been for the defendant to have so acted. To what extent the defendant is entitled to unscramble events which have actually occurred, and which involved third parties, tax implications and other facts totally outside the contractual performance itself, is as yet unclear.

In Bhazin v. Hrynew, the Supreme Court held that because the Bhazin agency was worth a certain amount at the time of the breach of contract, therefore Bhazin was entitled to that amount of damages. However, the connection between the two – the value of the agency and the entitlement of the plaintiff to damages in that amount – is not clear. If Can-Am was entitled to allow the agency to terminate, what difference does it make how much it was worth?

The Supreme Court did not mention Open Windows Bakery in its decision, so we are left to draw the conclusions ourselves. It is clear that the Supreme Court held that the dishonesty of Can-Am was a separate breach of contract, quite apart from the termination of the contract by expiry of its term. Based upon that holding, it may be that the Supreme Court has held that damages for dishonesty may be assessed without regard to the principle in Open Windows Bakery. Or that a breach of contract arising from dishonesty gives rise to separate causation, and therefore the entitlement of the defendant to terminate the contract is not relevant. Or it may be that Open Windows Bakery does not apply to contracts which expire but only to contracts which are terminated in a less onerous way by the defendant.

Other possible explanations about why Open Windows Bakery did not apply will certainly be drawn from the decision in Bhazin v. Hrynew. There seems little doubt that the latter decision will be relied upon in the future to narrow what some argue is the unfair rule in the former.

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Damages – Least Onerous Performance  – Honest Performance

T.G. Heintzman O.C., Q.C., FCIArb                                             December 7, 2014



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



The Mother Of All Tender Cases – The Fifth Issue: Determining Damages In An Unfair Tender Case

The last two articles have dealt with the recent decision of the Ontario Superior Court of Justice in Envoy Relocation Services Inc. v. Canada (Attorney General). That decision concerned a tender by the federal government.  The trial judge awarded $29 million to an unsuccessful bidder due to the court’s findings that the tender had been conducted unfairly.  The prior two articles dealt with four questions:

  • When must a sponsor’s conduct occur for it to be considered unfair?
  • What is the standard of review to be applied to a sponsor’s decision to select one bid over the others?
  • Can the court’s authority to try an action arising from a government tender be ousted by the authority of an administrative tribunal?
  • And when do earlier decisions about a tender amount to res judicata and bar the court from considering the claim?

This article concerns a fifth question arising from the Envoy Relocation Services decision.

How should the bidder’s damages be calculated when the sponsor of a tender wrongly fails to award the contract to the bidder?  And in particular, how does the decision of the Supreme Court of Canada in Hamilton v. Open Window Bakery Ltd., [2004] 1 SCR 303 apply to tenders and procurements?

The Background

Let’s review the facts in this case. They were set out in the last two articles and will be repeated here.

The dispute arose from a 2004 RFP by the Canadian government.  The RFP was for a relocation service for personnel employed in the Canadian armed services, government services and RCMP.  An earlier RFP had been undertaken in 2002.

One element in both RFPs was a service called Property Management Services, or PMS.  Under PMS, the winning bidder was required to arrange and pay for various services to the individuals being moved, such as realty services, legal services and similar services. The incumbent provider which had won the 2002 RFP knew that the RFP services were hardly used at all by any of the transferred individuals. It had bid on the 2002 RFP showing zero as the ceiling cost for PMS, thereby contracting to provide the service free of charge. In fact, it actually charged the few individuals who used the service under the 2002 contract.

Then, in the 2004 RFP, the incumbent provider again knew that few individuals used PMS.  So it again included zero cost for this service in its bid.  The other bidders were told by the sponsor to include a specified level of projected users of PMS, and did so.  By reason of doing so, their bids were about $45 million more than they would otherwise have been if they had bid zero as a ceiling for PMS, as the incumbent had done.

These facts about the 2002 and 2004 procurements were subsequently discovered by the Office of the Auditor General.  One of the other bidders, Envoy Relocation Services Inc., sued the Canadian government and this trial ensued.

The trial judge found that, because of the unfairness with which the Crown had conducted the RFP, the Crown had breached the contract that applied to the bidding process (Contract A in the Ron Engineering analysis) and Envoy Relocation Services was entitled to about $29 million in damages.

Calculation of the Plaintiff’s damages

In arriving at his assessment of Envoy’s damages, the trial judge considered conflicting submissions made by the Crown and Envoy.  Envoy said that, once the trial judge found that if the bid had been properly conducted Envoy would have been awarded the contract for the relocation services, then Envoy’s loss of profit on that contract was the proper measure of damages. Furthermore, Envoy said that, in order for the Crown to carry out the contract most favourably to itself, the Crown would have granted Envoy a two year extension of the contract and therefore, under the Open Window Bakery case, Envoy was entitled to its loss of profit based on those two extra years.

The Crown said that Envoy did not win the tender, that another bidder did, and therefore Envoy was only entitled to nominal damages. In the alternative the Crown said that it was not clear what would have happened if the other bidder had not won the contract.  Accordingly, Envoy had at most a 50 percent chance of winning, so its damages should be calculated at 50 percent of its loss of profits.

The trial judge rejected the Crown’s approach.  He held that “in the tendering context, the measure of damages is loss of profits” of the plaintiff whose bid ought to have been accepted.  He cited the Supreme Court of Canada’s decision in Naylor Group Inc. v. Ellis-Don Construction and M.J.B. Enterprises v. Defence Construction in which loss of profit damages were indeed awarded to the plaintiffs in “unfair tender” cases.  However, those cases were decided before the Open Window Bakery decision of the Supreme Court in 2004.  The Supreme Court has not yet decided how that case might impact the award of damages in an “unfair tender” case.

The trial judge certainly seems to be correct in rejecting the application of the “chance of success” theory of damages.  After all, he had found that the winning bidder was wrongly selected by the Crown, and he had found that Envoy’s bid ought to have been accepted.  With those findings, there was no question of probabilities or chances. On the trial judge’s findings, if a contract was to be awarded, it could only have been awarded to Envoy. And the prior decisions in Naylor and MJB certainly seem to rule out any application of the “chance of success” theory of damages in “unfair tender” cases.

However, the trial judge’s application of the Open Window Bakery decision appears problematic. He held that the most beneficial way for the Crown to perform the relocation contract, assuming it was awarded to Envoy, was for the Crown to extend that contract for two years.  He therefore awarded damages to Envoy for the period of extension but discounted them by 50 percent to take contingencies into account.

It is arguable that this use of Open Window Bakery is contrary to what the Supreme Court actually decided. In that decision, the Supreme Court said that “the non‑breaching party is entitled to be restored to the position they would have been in had the contract been performed….The assessment of damages required only a determination of the minimum performance the plaintiff was entitled to under the contract, i.e., the performance which was least burdensome for the defendant.”

In Open Windows Bakery, the Supreme Court did go on to say (and these words were quoted by the trial judge in Envoy Relocation Services decision)

“This is not to say that the general principle will never require a factual inquiry.  The method of performance that is most advantageous or least costly for the defendant may not always be clear at the outset from the contract’s terms.  A court may have to consider evidence to determine an estimated cost of the various means of performance.  In some cases it will only be after this factual investigation that a court can confidently conclude that a certain mode of performance would have been the least burdensome for the defendant.  That this factual investigation might need to be conducted in some instances does not undermine the general principle.”

But the Supreme Court said these words after holding that a tort-like determination of what the defendant would probably have done was not relevant to contract damages. In making the assessment of damages for breach of contract, the Supreme Court has effectively said that it is not a question of considering how the defendant would have actually conducted its business, and determining what method of actually carrying on its business would have been most profitable.  Rather, it is a question of awarding the plaintiff the least amount that it could expect to receive from the defendant if the defendant had performed the contract, and performed the contract in the manner least onerous to it.  It would seem that not extending the contract was a less onerous way of the Crown performing the contract so far as the calculation of damages was concerned.

The bigger question, which was not addressed in the Envoy Relocation Services decision, is whether the Open Window Bakery decision disentitles the plaintiff to any damages in an “unfair tender” case, if the invitation to tender contains a “privilege clause”. That clause usually says that the sponsor is not obliged to accept the lowest or any tender.  In light of that clause, is the plaintiff entitled to any damages, since the sponsor was entitled to award no contract?

This possibility arises from the peculiar nature of the contract in issue in an “unfair tender” case.  That contract arises from the invitation to tender and the bidder’s tender, and it governs the tender process itself.  The contract is called Contract A in the analysis conducted under the Ron Engineering decision of the Supreme Court of Canada and the decisions which have applied that analysis including MJB, Naylor, Martel, Double N  Earthmovers and Tercon.  Those cases establish that Contract A governing the bidding process contains a duty of good faith.

But if there is a privilege clause in the tender documents, Contract A doesn’t necessarily result in a final contract for services or a building contract, called Contract B in the Ron Engineering analysis. It results in the sponsor deciding whether to award Contract B, or to cancel the tender.  Can the sponsor say to the plaintiff in an “unfair tender” case that one optional method of performing Contract A was to not award Contract B, and therefore the plaintiff has no claim to damages?

Compare Open Window BakeryThat case concerned an employment contract.  The employer wrongfully terminated the employee but had the right to terminate the employee on giving a certain period of notice. The Supreme Court held that the employer had the option of performing the contract by giving a proper notice of termination.  Therefore the employee was entitled to no more damages than arose under that period of notice.  Could the sponsor under an invitation to tender say that it had the option of performing Contract A by not awarding Contract B?

That result seems unfair to the bidder and would effectively let the sponsor off the hook for unfair tendering practices.  It also is contrary to the actual results in MJB, Naylor , Tercon and many lower court decisions in which substantial damages have been awarded in “unfair tender” cases. The unwillingness of the Supreme Court of Canada to allow such a result is evidenced in its decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), [2010] 1 SCR 69In that case, the majority held that the sponsor, the Department of Transportation and Highways of British Columbia, could not rely on an exclusion clause to avoid liability for an unfair tender, and substantial damages were awarded against that Department.

This article concludes the analysis of the decision in Envoy Relocation Services, truly the Mother of All Tender cases.  The decision can be filed away for future reference on a wide variety of issues relating to tenders and procurements. And it can be pulled out to be read any time we need to be reminded about the importance of the courts to the impartial resolution of disputes between the government and the private sector.

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

Envoy Relocation Services Inc. v. Canada (Attorney General), 2013 ONSC 2034

 Construction Law  –  Tenders and Procurements  –  Damages

 T.G.Heintzman O.C., Q.C., FCIArb                                                                                                                               May 23, 2013



If You Want Specific Performance, Do You Still Have To Mitigate Your Damages?

Is a party to a contract obligated to mitigate its damages at the same time that it is asking the court to order specific performance? Since the party wants the contract performed, not damages for non-performance, the obligation to mitigate seems to be totally inapplicable.

Yet, in Southcott Estates Inc. v. Toronto Catholic District School Board the Supreme Court of Canada has just held that a plaintiff seeking specific performance may have an obligation to mitigate.  If it doesn’t do so, and the court holds that specific performance should not be granted, then the plaintiff may be awarded very little if any damages.

Building contracts do not often give rise to claims for specific performance. That is because a court cannot readily supervise the conduct of a construction project.  But specific performance is a remedy which is often sought by developers who assemble land for the purpose of construction projects.  So the decision in Southcott has direct implications for companies involved in the assembly of land for building projects.

Factual Background

Southcott was a single purpose company which was part of the Ballantry Group of Companies.  The Toronto Catholic District School Board agreed to sell to Southcott a property which was surplus to its needs. Southcott intended to develop the property for residential purposes.  It was a condition of the agreement that the School Board obtain a severance from the Committee of Adjustment on or before the closing date. The School Board failed to have a development plan prepared and failed to obtain the severance. When the closing date arrived, the School Board refused Southcott’s request to extend the closing date.  The School Board declared the transaction to be at an end, and returned Southcott’s deposit.

Southcott commenced an action for specific performance or, in the alternative, for damages. Southcott succeeded on the merits of the action, and the real question was whether it was entitled to specific performance or damages.

Southcott admitted that it didn’t intend and never tried to mitigate its damages.  It said that it was incorporated solely for the purposes of this project and had no assets other than the money provided by Ballantry. Southcott said that it neither intended to nor tried to purchase other land, especially having regard to its involvement in this action. At trial, the School Board led evidence that 81 parcels of vacant development land in the Greater Toronto Area (GTA) were sold between the date of breach and the date of trial. That land was suitable for residential development. In fact during that period other companies in the Ballantry Group purchased lands which were similar to the subject property.

The Decision

The Supreme Court noted that, in Asamera Oil Corp. v. Seal Oil& General Corp, [1979] 1 S.C.R. 633, it had dealt with the obligation to mitigate in relation to a claim for specific performance.  The Asamera case dealt with an investment contract, not real estate.  In Asamera, the court had said that the plaintiff needed to show “some fair, real, and substantial justification” before a claim for specific performance could be insulated from the obligation to mitigate. If the plaintiff could show some “substantial and legitimate interest” in seeking specific performance as opposed to damages, then the plaintiff might justify its inaction in failing to mitigate.

The Supreme Court also noted that, since its decision in Semelhago v. Paramadevan, [1996] 2 S.C.R. 415, a plaintiff could not assert that every piece of land was “unique” and insist on specific performance of a contract to purchase that piece of land.

The Court then proceeded to deal with three issues:

First, the fact that Southcott was a single purpose company did not exempt it from the general principles applicable to specific performance and mitigation of damages. If it were otherwise, everyone would establish single purpose companies to exempt themselves from these general principles.

Second, Southcott did not have a sufficient justification for its failure to mitigate its damages. The Court said:

“The trial judge made clear findings that the land was nothing more unique to Southcott than a singularly good investment and that this was not a case in which damages were too speculative or uncertain to be an adequate remedy. The unique qualities related solely to the profitability of the development for which damages were an adequate remedy … A plaintiff deprived of an investment property does not have a “fair, real, and substantial justification” or a “substantial and legitimate” interest in specific performance… unless he can show that money is not a complete remedy because the land has “a peculiar and special value” to him…. Southcott could not make such a claim. It was engaged in a commercial transaction for the purpose of making a profit. The property’s particular qualities were only of value due to their ability to further profitability. Southcott cannot therefore justify its inaction.”

Third, the Supreme Court held that there was evidence to support the Court of Appeal’s conclusion that Southcott had suffered no damages.  It agreed with Southcott that the mere fact that Southcott had admitted it did not mitigate its damages did not throw the burden of proof on the damages issue onto Southcott.  Since mitigation of damages was at issue, the normal burden of proof remained on the defendant, the School Board.  However, taken as a whole and in the light of purchases by other Ballantry companies of similar land during the same period, there was evidence to demonstrate that Southcott had suffered no damages.


The Southcott decision shows that the plaintiff – and the defendant – rolls the dice on the same “uniqueness of the property” issue, both for the specific performance claim and the damage claim. If the property isn’t really unique, then the plaintiff won’t be awarded specific performance.  If the property isn’t really unique, then the plaintiff will be denied damages if it doesn’t mitigate. So the parties had better get that issue right, or someone is either going to win or lose both issues. In effect, the plaintiff is either going to obtain specific performance, or (if the damages could have been mitigated) little or no damages.

The second lesson to learn from Southcott is that the uniqueness cannot be solely based on value.  Value can be as much translated into a damage award as into an award for specific performance.  If the property is really valuable, or more convenient, or more developable, in relation to other available properties, then those advantages can be awarded by way of damages.  They may not be an excuse for the plaintiff not searching for reasonable alternative properties.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed.

Chapters 5 and 6, part 1.

Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51

building contracts – remedies – claims – specific performance – damages

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



Andrews v ANZ: What Are The Consequences For Building Contracts?

The recent decision of the Australia High Court in Andrews v. Australia and New Zealand Banking Group Ltd. is important for the building industry.  While it dealt with a banking contract, the principles it applied are directly relevant to building contracts.

The central decision in Andrews v. ANZ is that the doctrine prohibiting contractual penalties applies both to conduct which is a breach of contract and conduct which is permitted under the contract.  But in its review of the whole history of the law of penalties, the court draws conclusions which are of much wider consequence.  The court explains that non-monetary consequences of a contract are included in the doctrine against penalties.  That conclusion could have a dramatic impact on building contracts.  The court also clarifies the difference between a “condition” in a contract and a “condition” in a bond, and decides that these words do not have the same meaning in both settings.  Since bonds are an essential element in building projects, this decision should be well understood by those engaged in those projects.

Factual Background

The decision in Andrews v. ANZ arose from a motion to strike out certain claims in a class action relating to banking contracts.  The contracts permitted, but did not require, the bank to impose certain fees if the customer undertook, or asked the bank to undertake, various transactions. The transactions included:

  • requesting the bank to consider a withdrawal or payment which would result in an overdraft in the account; or
  • requesting the bank to honour a transaction that resulted in an overdraft.

The transactions were not contrary to the banking contract.  The fees might be payable by the customer if the bank considered the requested transaction, even if the request was denied.

In its motion to strike, the bank argued that the rule against penalties did not apply to these amounts on the ground that the rule against penalties did not apply when, as in this case, the triggering conduct was not a breach of contracts.  The Court of Appeal agreed.  The High Court reversed that decision, holding that the fact that these fees “were not charged by the respondent upon breach of contract by its customers and that the customers had no responsibility or obligation to avoid the occurrence of events upon which these fees were charged, do not render the fees incapable of characterisation as penalties.”

The High Court also held that the doctrine against penalties applies to non-monetary conduct.  The contract may state that a party will do something (the primary event) and then stipulate a further event if the primary event does not occur (the secondary obligation).  Neither event need be a monetary one for the doctrine against penalties to apply. Thus if the primary event is the transfer property, the doctrine can apply.  If the secondary event is the transfer of property, likewise the doctrine can apply.  In either situation, if the secondary event is totally disproportionate to the real consequences of the failure to perform the primary event, the secondary event can be examined to determine if it is really a penalty.  If it is, then it is unlawful.

The Consequences of Andrews v. ANZ  for Building Contracts

There are four important consequences of the decision in Andrews v. ANZ.

1.      Doctrine Against Penalties applies to more than Breaches of Contract

The central conclusion in Andrews v. ANZ is, of itself, extremely important for the law relating to building contracts.  All the clauses in a building contract which provide for monetary payments should be closely examined to see if they impose unlawful penalties. Even those clauses which do not give rise to a breach of contract should be examined.  If those payments are out of line with the actual detriment arising from the relevant conduct, potentially they are penalties and unlawful, whether or not they are in relation to a breach of contract.

2.      Doctrine Against Penalties applies to Non-Monetary Conduct

According to Andrews v. ANZ, this principle applies to any provision in a contract, not just those which involve monetary payments.  In the context of building contracts, this approach could have a wide and uncertain application. What sort of non-monetary consequences fall within it?  If a bidder submits an erroneous bid (the primary event), could a court hold that disqualifying the bidder (the secondary event) is unlawful as a penalty if it is shown that the error in the bid caused little harm to the owner and the disqualification of the bidder is a disproportionate “penalty”?  If an owner gives a “cure notice” and then terminates the contract, could the termination amount to a penalty if it was disproportionate to the damage suffered by the owner?  It may seem ridiculous to include those examples within the doctrine against penalties, but it is difficult to draw a clear line between what non-monetary consequences fall within that doctrine in the construction setting.

3.      Doctrine Against Penalties may not apply to Additional Obligations

The High Court expressly recognized that there may be an exception to the penalty doctrine arising from what it called a consensual “additional obligation.”  The High Court said that if the amount which the party must pay (or other secondary event) as a consequence of the conduct in question is really the result of a new contract, then the penalty doctrine may not be engaged.

Thus, the fee for the overdraft to the banking customer might be seen as really arising from a new contract and a new and additional privilege purchased by the customer.  Similarly, a distributor of films to a theatre owner might stipulate that the theatre owner would pay four times the original single-screening fee for extra showings of the film. The High Court said that those extra fees might amount to the purchase of additional privileges which fall outside the doctrine against penalties. It did not decide whether the banking fees in question fell within this exception and left that issue to the trial judge.

How would this exception apply to building contracts? If the building contract said that for every day of delay by a contractor, the contractor shall pay the owner $500,000, is that provision a penalty or an “additional obligation.”  If instead, the contract stated that if the contractor wished to extend the period of completion, then he may apply to the owner for permission to extend, and the parties agree that a new contract containing any such permission shall be made at a cost of $500,000 per day, would that be a penalty or an additional obligation?

4.      “Conditions” in Contracts and Bonds are Different

There is a further aspect of the decision in Andrews v. ANZ which is of interest to the building industry, and that is its discussion of “conditions” in contracts and bonds. The High Court pointed out that the word has an entirely different meaning in a contract than in a bond.

As the court said, in a contract the word “condition” refers to a term of the contract which is “vital, important or material.”  By using this word, the parties have agreed that the breach of this term amounts to a repudiation and permits the other party to accept the repudiation and terminate the contract.  In other words, in a contract conduct which does not comply with a “condition” is necessarily a breach of contract, and indeed a serious one.

In a bond, however, the word “condition” performs another function.  Like a contract, the bond seeks to “secure performance of the condition, but instead of attempting to secure this result by exacting a promise from the obligor to perform the condition, there is an acknowledgment of indebtedness –in effect a promise.” In Roman and early English law, a bond might be payable in full, no matter what damages the obligee might really suffer. That result was later modified by equity, through decisions which evolved into the doctrine against penalties, to ensure that the payment under a bond could be no more than the real loss of the obligee.

In addition, the High Court noted that the “condition in the bond may be any occurrence or event which need not be some act or omission of the obligor, analogous to a contractual promise by the obligor.” Moreover, the condition in the bond need not be the payment of money, and could relate to the transfer or vesting of interests in land. Indeed, “the cases do not establish any general proposition as to the contractual character of the condition in a bond.”

This discussion of bonds supported the High Court’s conclusion that the doctrine against penalties relates to conduct which does not necessarily amount to a breach of contract and to consequences that do not necessarily involve monetary payments.

In the result, the decision in Andrews v. ANZ provides a good review of the law of bonds and the use of the word “condition” in bonds.  That word designates a circumstance which is the basis for the obligation in the bond. That circumstance need not be a breach of a contract.  It can be whatever conduct the bond is intended to secure.


Andrew V. ANZ results in a sweeping application of the equitable doctrine against penalties. The decision holds that the doctrine applies to all contractual conduct, including both breaches and permitted conduct and both monetary and non-monetary consequences. Whether this approach will be followed in Canada is uncertain. As a matter of logic and principle, it makes sense.  But the decision raises challenges when applied to building contracts.  And it raises difficult questions about where the boundary line is between conduct which falls within the doctrine against penalties and conduct which does not.

See Heintzman and Goldsmith on Canadian Building Contracts (4th ed.) at Chapter 6, para 2(b)(i)(B) and Chapter 9

Andrews v. Australia and New Zealand Banking Group Ltd., [2012] HCA 30

Building Contracts  –  Bonds  –  Penalties  –  Damages  –  Remedies for Breach of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                  October 20, 2012




Can A Service Contract Create A Duty To Defend?

A clause obliging the insurer to defend an insured, or pay for the insured’s defence, is a well know feature of liability insurance policies. Recently, some Canadian courts have held that the duty of one party to defend or pay for defence of another party to the contract may arise in contracts outside the field of insurance, for instance in building contracts.  This obligation has been found to arise from an indemnity clause or insurance clause in the contract. Such a duty has been held to exist in a service or building contract even though that contract contained no express duty to defend or pay for a defence.

However, a duty to defend or pay for a defence before a finding of liability seems to be an obligation of a different kind than a duty to indemnify or to obtain insurance.  Recently, the Ontario Court of Appeal has clarified this issue in Papapetrou v. 1054422 Ontario Limited. The court held that an insurance clause may create an obligation to pay damages equal to defence costs, but it does not create a duty to defend.


Ms Papapetrou brought a slip and fall claim after she fell on ice on the stairs of The Galleria.  That building was owned by the numbered company and managed by the Cora Group. The Cora Group hired Collingwood to provide winter maintenance and snow removal.

The service contract between Collingwood and the Cora Group contained the following indemnity clause:

The Contractor assumes sole responsibility for all persons engaged or employed in respect of the Work and shall take all reasonable and necessary precautions to protect persons and property from injury or damage. The Owner shall not be responsible in any way … resulting from any act or omission of the Contractor…The Contractor shall indemnify and save harmless the Owner …against all claims, losses, liabilities, demands, suits and expenses from whatever source, nature and kind in any manner based upon, incidental to or arising out of the performance or non-performance of the contract by the Contractor….[Emphasis added.]

The contract also contained an insurance clause. Collingwood agreed to obtain CGL insurance covering the liability of Collingwood and its employees and agents for bodily injury up to a minimum of $2,000,000 and to include the Owners as additional insureds on the policy. Instead, Collingwood obtained an insurance policy covering a maximum of $1,000,000 and the policy did not name The Cora Group as an additional insured.

The Cora Group brought a motion to compel Collingwood to indemnify, and assume the defence of the action on behalf of, The Cora Group. The motion judge granted the motion, finding that “the true nature of [Ms. Papapetrou’s] claim is that [Collingwood and The Cora Group] were negligent in failing to maintain an ice free pedestrian stairway” and that based on the service contract, a duty to defend and indemnify therefore arose. The motion judge stated that Collingwood “should not escape responsibility to defend/indemnify merely because [it] failed to meet [its] contractual responsibility” to name The Cora Group as an additional insured in its CGL policy.  She ordered that Collingwood indemnify The Cora Group and undertake the defence of the action against The Cora Group.

The Court of Appeal’s decision

In the Court of Appeal, The Cora Group acknowledged that an order that Collingwood indemnify it was premature.  No evidence about liability or damages had been led on the motion. The service contract did not require that Collingwood assume sole responsibility for damage to persons and property. Rather, it required Collingwood to assume “sole responsibility for all persons engaged or employed in respect of the Work” and “take all reasonable and necessary precautions to protect persons and property from injury and damage.”  Moreover, Collingwood’s contractual obligation to indemnify The Cora Group was limited to claims “based upon, incidental to or arising out of [Collingwood’s] performance or non-performance of the [service] contract”.

In these circumstances and at this juncture, the Court of Appeal held that there could be no finding that Collingwood’s duty to indemnify had been triggered. Accordingly, the motion judge’s order to indemnify was set aside.

The Court of Appeal also held that the order requiring Collingwood to assume the defence of The Cora Group must be set aside, for two reasons:

First, the service contract contained no duty to defend.

Second, any duty to defend could be no wider than claims arising from Collingwood’s performance or non-performance of its contract.

The Cora Group argued that Collingwood’s obligation to defend arose, not out of the indemnity clause, but rather out of the insurance clause.  It argued that Collingwood’s failure to name The Cora Group as an additional insured in its CGL policy was a breach of contract and that the appropriate remedy was an order requiring Collingwood to defend it. However, the court held that “Collingwood’s breach of this contractual obligation does not create a duty to defend; rather, it gives rise to a remedy in damages.” The court also held that the failure of The Cora Group to object to the form of the insurance was irrelevant.

The court held that the amount of damages suffered by The Cora Group was the amount the CGL insurer would have paid on behalf of The Cora Group.  That amount had to be determined from the service contract, not the CGL insurance policy that Collingwood obtained, since that policy did not contain the additional insured coverage for The Cora Group that it was supposed to contain. The scope of Collingwood’s contractual obligation to indemnify was limited to “claims … based upon, incidental to or arising out of the performance or non-performance of the contract by the Contractor”. Accordingly, the amount of damages was “the amount The Cora Group must pay to defend claims for bodily injury arising out of the manner in which Collingwood performed or failed to perform the service contract.”

The court held that “these costs will include all costs of The Cora Group’s defence of the Papapetrou action, save for any costs incurred exclusively to defend claims that do not arise from Collingwood’s performance or non-performance of the service contract.” The court arrived at this conclusion by analogy to the payment of defence costs under an insurance policy.

First, it applied the principle that an insurer’s obligation to defend is limited to claims that, if proven, would fall within the policy.

Second, it applied the apportionment principle applicable to defence costs under an insurance policy that “where an action includes both covered and uncovered claims, an insurer may nonetheless be obliged by the terms of the policy to pay all costs of defending the action save for those costs incurred exclusively to defend uncovered claims.”

In view of the allegations of Ms. Papapetrou, there was a conflict of interest between Collingwood and The Cora Group, and The Cora Group was entitled to retain separate counsel.

The Court of Appeal set aside the motion judge’s order and substituted an order requiring that Collingwood pay for The Cora Group’s defence of the action, save for any costs incurred exclusively to defend claims that did not arise from Collingwood’s performance or non-performance of the service contract.


There are a number of interesting aspects of this decision from the aspect of construction law and insurance law.

First, this decision has to some extent clarified the law with respect to whether a duty to defend can arise from an indemnity or insurance clause in a non-insurance contract, such as a building contract.  The Court of Appeal has certainly held that such a duty does not arise from the breach of an insurance clause, and that the proper remedy is damages. If this is so, it seems hard to imagine that another court could conclude that an indemnity clause gives rise to a duty to defend and not damages. As well, it appears that a number of recent lower court decisions, holding that a duty to defend may arise from an indemnity clause in a non-insurance contract, are no longer good law.

Second, if a future action arises from the breach of an indemnity clause, we cannot be certain what principles the court will apply to the calculation of damages.  In the present case, since the breach was of the insurance clause, the court had a convenient proxy or reference point in the cases dealing with the determination and apportionment of defence costs under a liability insurance policy.  No policy reasons come to mind for applying different principles to breach of an indemnity clause, but we will have to await such a case for a clear answer.

Third, it may be a little surprising that, on an interlocutory motion, the court made what appears to be a final order determining the principles upon which damages were to be paid. There may be an argument on a duty to defend motion under an insurance policy as to whether, and to what degree, the court should finally determine the principles upon which the defence costs are to be paid, and the degree to which the trial judge should be left with some discretion on that matter.  In the present case, the Court of Appeal appears to have finally decided the matter.

Fourth, the court appears to have finessed the issue of whether the claim by Ms. Papapetrou was entirely covered under Collingwood’s CGL policy.  There is no mention in the decision of any coverage dispute under that policy, so perhaps coverage was not an issue. In addition, the Court of Appeal may be saying that, because Collingwood did not obtain the coverage for The Cora Group, it could not argue anything about the scope of coverage under the policy. But in another case, if coverage is an issue under the “policy that wasn’t obtained” then this may be raised as an issue by the defaulting party.  That party may argue that there should be an additional exception to its liability, namely, “to the extent that coverage was not available under the policy not obtained.”

Fifth, this decision shows how a breach of an insurance clause can be expensive. By failing to obtain the right insurance, Collingwood turned what would have been a claim for payment of costs against the insurer under the CGL policy into a claim for costs against it personally.

Finally, the insurance law junkies will take note that the Court of Appeal has once again applied the apportionment principle that requires the insurer (and by analogy in this case, the party in breach of contract) to pay defence costs except to the extent that those costs are due exclusively to uncovered claims.  This rule is favourable to the insured and is generally applied by Anglo-Canadian courts to apportionment disputes, but other rules less favourable to the insured may be applied in other jurisdictions and are advocated for by many insurers.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed. Chapter 5, part 3

Papapetrou v. 1054422 Ontario Limited, 2012 ONCA 506

Building Contracts –  Insurance –  Indemnity and Insurance Clauses  –  Duty to Defend    –   Damages

 Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                  September 23, 2012



Ontario’s Highest Court Upholds NAFTA Arbitration Against Mexico

The Ontario Court of Appeal has just released an important decision upholding an arbitration award under NAFTA against Mexico.  This decision shows that Canadian courts will be reluctant to interfere on jurisdictional grounds with the remedial decisions of international commercial arbitrations.

In The United Mexican States v. Cargill, Incorporated, Mexico opposed the recognition in Ontario of an award by an international commercial arbitration tribunal relating to Mexico’s protection of its refined sugar industry.  Cargill had established a business in which its wholly-owned Mexican subsidiary distributed HFCS, a low-cost substitute for caned sugar.  Cargill’s Mexican subsidiary imported HFCS from Cargill’s U.S.’s plants, and sold it to Mexican customers.  Mexico enacted a number of prohibitions which were found by the arbitration tribunal to constitute breaches of NAFTA.  As a result of those prohibitions, Cargill shut down a number of its HFCS plants and distribution centres in the U.S.A.

Cargill claimed damages for both the “downstream losses” that its Mexican subsidiary suffered, and also the “upstream losses” which it suffered by reason of the closing down of its U.S. production and distribution facilities.  The arbitral tribunal awarded damages on both accounts.  In particular, in relation to the damages suffered by reason of the impact on Cargill’s U.S. plants and distribution centres, the arbitral tribunal found that those damages were caused by the prohibitions implemented by Mexico.

Since the seat of the arbitration was in Toronto, Ontario, Mexico challenged the damage award in the Ontario Superior Court.  Its position was that the arbitral tribunal had no jurisdiction to award the “upstream” damages, and its position was supported by the governments of the U.S.A. and Canada as intervenors.

Mexico argued that under Chapter 11 of NAFTA, Cargill could only recover losses as an “investor” in relation to its “investment” in Mexico.  Accordingly, Mexico argued that Cargill had no right to recover, and the arbitral tribunal had no jurisdiction to award, damages to Cargill as a U.S. producer and exporter of its product to Mexico.  The tribunal held that Cargill was an “investor”, that it had made an “investment”, that Mexico had adopted a prohibited measure and that everything else related to the measure of damages.  The tribunal found that there were no express or necessarily implied limitations on the scope and nature of the damages that could be awarded by it.

Mexico’s submissions were rejected by both the Superior Court judge who heard the initial application and the Court of Appeal.  The Court of Appeal went through a lengthy consideration of the standard of review to be applied, and basically held that if the issue was one of jurisdiction, the standard of review was “correctness”.  Having said that, the Court stated that this standard only applied in the rare case of a true jurisdictional dispute, and that a very narrow view should be taken of what amounted to a jurisdictional dispute in the case of international commercial arbitrations.

The Court of Appeal’s conclusion:

The Court of Appeal held that the arbitral tribunal had not exceeded its jurisdiction.  It arrived at that conclusion through a number of concessions by Mexico and other conclusions, such as:   Mexico’s concession that damage suffered by an investor is not limited to damage suffered in the country where the investment is located; and no territorial limitation for damages or the occurrence of damages is contained in NAFTA.

The Court concluded: “It is up to the tribunal to make findings of fact, apply the facts to the definitions, and determine whether, in any particular case, the claimed damages fall within the defined criteria.”

In particular, the Court held as follows;

“The only issue is whether the tribunal was correct in its determination that it had jurisdiction to decide the scope of damages suffered by Cargill by applying the criteria set out in the relevant articles of Chapter 11, and that there is no language in Chapter 11, or as agreed by the NAFTA Parties, that imposes a territorial limitation on those damages.  Once the court concludes that the tribunal made no error in its assumption of jurisdiction, the court does not go on to review the entire analysis to decide if the result was reasonable.”

Clearly, this decision is of great importance to arbitrations under NAFTA.  It is also of general importance under the UNCITRAL Model Law.  The Model Law was incorporated into Ontario law in the International Commercial Arbitration Act .

Everything is, of course, in the eyes of the beholder and depends upon the perspective from which one looks at the matter.  To the governments of Mexico, U.S.A. and Canada, the award of damages for activity in another country could not be the basis of a claim as an “investor” in the offending country.  From their perspective, damage was a jurisdictional issue.

But NAFTA does not quite say that loss in another country is a forbidden element of recovery. And from the perspective of the injured party, damage in the country of origin may well be a source of damage arising from an investment in the offending country.  In the absence of specific language in NAFTA removing such damage from the loss which the complainant may recover, the Court of Appeal was not able to say that the arbitral tribunal had made a jurisdictional error in awarding those damages.

There are at least three lessons to be learned from this decision:

First, Canadian courts will be very reluctant to interfere with the decisions of international commercial arbitrations.  This reluctance is due to the evident respect for those tribunals which legislatures have accorded to them.

Second, absent specific language excluding the jurisdiction of the arbitral tribunal, a Canadian court is unlikely to infer a limitation.

Third, it is very unlikely that a Canadian court will find that arbitral decisions relating to damages or other remedies contain jurisdictional error.  Once the arbitral tribunal has jurisdiction to deal with the merits of the dispute, it will require specific limitations on the tribunal’s jurisdiction for the remedial powers of the tribunal to be circumscribed.

Arbitration  –   International Arbitration  –   Enforcement-Remedies  –  Damages

The United Mexican States v. Cargill, Incorporated 2011 ONCA 622

Thomas G. Heintzman , O.C., Q.C.                                                                                                  October 14, 2011