Maintenance Work, Repair Work, Capital Repair Work, and Lien Rights in Canada

Introduction

I often explain the difference between non-lienable maintenance and repair work on the one hand, and lienable construction work on the other, using the analogy of a landscaper called to a worksite. In one scenario he’s asked to mow the grass and trim the hedges. In another, he’s asked to terraform the entire property, complete with a new deck, sheds, a koi pond, and a stone pathway. The first scenario is non-lienable maintenance, while the second is lienable construction.

Not every worksite, however, involves a koi pond. When dealing with (for example) heavy industrial projects or the energy sector, repair and maintenance work might involve the comprehensive replacement of very large and very expensive machinery and equipment, or massive investment in capital repairs. The difference between maintenance, repair, and construction is often less clear, and courts frequently struggle with where to draw the line. To assist you, dear reader, in making this determination, we have reviewed and summarized the current state of the law in British Columbia,[1]Builders’ Lien Act, SBC 1997, c 45 (the “B.C. Act”). Alberta,[2]Builders’ Lien Act, RSA 2000, c B-7; as of July 1, 2021, Alberta’s Builders’ Lien Act has been replaced by the Prompt Payment and Construction Lien Act, Chapter P-26.4 (the … Continue reading Saskatchewan[3]Builders’ Lien Act, SS 1984-85-86, c B-7.1 (the “Saskatchewan Act”). and Ontario.[4]Construction Act, RSO 1990, c C 30 (the “Ontario Act”).

Executive Summary

The lines of authority respecting the division between maintenance work, repair work, and construction work in Canada have generally divided into two camps: (i) emphasis on the characterization, effect or intended effect of the work in Ontario case law, or (ii) emphasis on the characterization, effect or intended effect of the overall project in B.C., Alberta, and Saskatchewan.

In Ontario, the emphasis is on the nature of the work: maintenance or repair work intended to improve the value of the land is likely lienable (as such work is considered an “improvement” under the statute), whereas work that is intended merely to maintain the status quo is likely not lienable.

In B.C., Alberta, and Saskatchewan, the emphasis is on whether the work or service is necessary or supportive for the completion of the overall project, wherein the overall project is the improvement (and the overall project includes the physical construction of a thing). To put this in perspective, if the overall project is the construction of a shopping centre, then all work and services associated with that construction are lienable, including maintenance, cleaning, inspection, security, temporary water services, the delivery of porta-potties to the site, heating and hoarding, etc.

Legislative Comparison

In each of these jurisdictions, analysis begins with the definition of an “improvement”, because for work or services to be lienable, that work or service must be provided to an improvement. In B.C, Saskatchewan, and Ontario, an improvement includes “repair” or “capital repair” to land in question; Alberta hasn’t included the same terms within its definition of same.

(a)          British Columbia

While there’s limited case law in B.C. on the lienability of maintenance work, it’s clear – given the inclusion of “repair” work in the B.C. Builders Lien Act’s definition of improvement – that repair projects (likely capital repair projects) can constitute an “improvement” and therefore sustain lien rights. Given the currently available case law in B.C., it also appears that B.C.’s courts are mostly in harmony with the developing lines of authority in Alberta and Saskatchewan.

In the 2011 case of Alexander Construction Ltd. v Al-ZaibakEyeglasses,[5]Alexander Construction Ltd. v Al-ZaibakEyeglasses, 2011 BCSC 590, 2011 CarswellBC 2349 (“Alexander Construction). the British Columbia Supreme Court needed to decide whether the lien claimant’s provision of basic inspection and maintenance work could be considered “work” within the meaning of section 1(5) of the B.C. Act, and therefore sustain lien rights that would have otherwise expired. The Court determined that while this work was “minimal”,[6]Alexander Construction at para. 66. given a liberal reading, it was still sufficient to constitute work on the larger improvement (the construction of a home). The Court noted that while the subject efforts “did not move the project any closer to conclusion, they prevented deterioration to the project that would further delay its completion.”[7]Alexander Construction at para. 66. In other words, the Court placed emphasis not on the nature or characterization of the work itself, but rather on the work’s connection to the larger overall improvement project.

In a similar line, in Shelly Morris Business Services Ltd. v Syncor Solutions Limited[8]Shelly Morris Business Services Ltd. v Syncor Solutions Limited, 2020 BCSC 2038 (“Shelly Morris”). the Supreme Court of British Columbia:

  1. noted that the definition of “improvement” is inclusive and can bear meanings other than those included in section 1 of the B.C. Act, as long as they do not subtract from the prescribed definition;[9]Shelly Morris at para. 24; quoting Boomars Plumbing & Heating Ltd. v Marogna Brothers Enterprises Ltd., 1998 CanLII 2970 (BCCA).
  2. emphasized that “improvement” means an improvement to the property itself; and
  3. held that the lien claimant must have contributed physically to the improvement of the site in question.[10]Shelly Morris at para. 30.

Both Alexander Construction and Shelly Morris are consistent with case law and statutory interpretation in Alberta and Saskatchewan, so the guidance from the jurisprudence in those provinces may be instructive for similar B.C. determinations.

(b)          Alberta

Alberta generally draws a much clearer line between physical construction of an improvement (which is lienable) and maintenance work (which is not) than jurisdictions such as Ontario. Given the absence of the terms “repair” and “capital repair” in the Alberta Act, Alberta courts have put more emphasis on the nature or characterization of the overall project rather than the effect or intended effect of the work in question.

Identification of the “improvement” in Alberta is determined by reference to the “overall project” and not the specific work being undertaken, so if nothing new is actually being physically constructed, there is likely not an improvement and thus likely no lien rights. On the other hand, if the overall project meets the definition of an improvement, then nearly any type of work or service provided to that larger project – and that is a necessary or supporting part of physical construction – will likely be lienable.

Fortunately, the Alberta Court of Queen’s Bench provided clear guidance on the specific circumstances in which maintenance will and will not be lienable in the 2021 case of Young EnergyServe Inc v LR Ltd,[11]LR Processing Partnership,Young EnergyServe Inc v LR Ltd, LR Processing Partnership, 2021 ABQB 101 (“Young EnergyServe”). where it dealt with the question of repair and maintenance work during a turnaround project at a gas processing plant.

In finding that a filed lien was not valid, the Court held that “the cleaning, repairing, and relining the interior of tanks and pressure vessels and replacing old or faulty piping and pressure valves are not directly related to the process of construction” and that “[t]hose activities are more appropriately characterized as being in the nature of maintenance.”[12]Young EnergyServe at para. 67.

First, the Court acknowledged that the recent approach taken in Alberta is to consider an “improvement” from the perspective of the “overall project”:

There is no evidence to suggest that the Turnaround Project was a component of a larger construction project on the Mazeppa Lands. In particular, there is no evidence: (i) that the overall project in this case was any broader than the Turnaround Project; or (ii) that the Turnaround Project was a component of the construction of the Mazeppa Power Plant.

I mention this point for context because the Alberta Courts considers “improvement” from the perspective of the “overall project” involved: Re Davidson Well Drilling Limited, 2016 ABQB 416 at para 79 [Davidson Well Drilling]. Based on the facts underlying this case, the Work under the Turnaround Project was not part of an overall project to build a structure on the Mazeppa Lands: see Trotter and Morton Building Technologies Inc v Stealth Acoustical & Emission Control Inc, 2017 ABQB 262 (Master Prowse) at paras 54, 55, and 58. […][13]Young EnergyServe at paras. 30, 31.

The Court noted that both the Supreme Court of Canada and the Alberta Court of Appeal have held that, in order to establish lien rights, a claimant must first strictly comply with the relevant statutory pre-requisites to the creation of the right. However, courts are then entitled to liberally interpret other matters dealt with in that statute. In this case, there was no evidence that the project in question was a component of the overall project to build a new structure on the lands.

Second, the Court reiterated and summarized the Alberta case law, which draws a clear distinction between work involved in the construction of an improvement versus subsequent maintenance, stating:

Alberta courts have determined that services must be directly related to the creation or construction of an improvement to entitle the provider to a lien under the Alberta BLA. As a result, the Courts in this province have, as a rule, rejected claims related to the maintenance and the remediation of lands.

The Alberta Court of Appeal has reinforced this interpretative approach by commenting that when assessing whether an applicant and the work it performs fall within the terms of the Alberta BLA, the proper approach is to give a strict interpretation to the relevant provisions: see Calgary Landscape at paras 13-19. That appellate Court was cited, and it stated that “[a]lthough it is clear that services need not be physically performed upon the improvement to fall with the meaning of the [Alberta BLA] they must […] be directly related to the process of construction”: Hett v Samoth Realty Projects Limited, 1977 ALTASCAD 120 (CanLII), 3 Alta LR (2d) 97 at para 25 (CA); see also Leduc Estates Ltd v IBI Group, 1992 CanLII 6104 (AB QB) at para 34.

In adopting this interpretation, the Alberta Court of Appeal confirmed that while services need not be physically performed for the improvement to fall within the meaning of the [Alberta Act], they must be directly related to the process of construction. As a result, the Alberta Courts have drawn a clear distinction between the work involved in the construction of an improvement as part of the construction process on a building site and the subsequent maintenance. As held in Calgary Landscape the former is “obviously related to ‘making or constructing’ while the latter, falling in the category of maintenance, clearly is not”: at para 12.[14]Young EnergyServe at paras. 44-46. [emphasis added]

Finally, the Court addressed jurisprudence under the Ontario and Saskatchewan Acts. With respect to the Ontario version, the Court noted that it would be inappropriate to rely on its definition of “improvement” because of a clear difference in the language between the Alberta and Ontario Acts; specifically, the use of the phrase “alternation, addition or repair” in the definition of “improvement” under the Ontario Act, which is absent in the Alberta Act. With respect to the Saskatchewan version, the Court referred to Re Davidson Well Drilling Limited,[15]Re Davidson Well Drilling Limited, 2016 ABQB 416. wherein Madam Justice J.M. Ross had previously acknowledged that the definition of “improvement” under the Saskatchewan Act is virtually identical to the Alberta Act. The Court ultimately used these factors to further distinguish the definition of “improvement” under the Ontario and Alberta Acts.

(c)          Ontario

In summary of what follows below, a party in Ontario may be entitled to lien rights where the work is intended to improve the value of the land (as in the case of “capital repair” work), but not in situations where the work is intended to maintain the status quo (i.e. non-lienable maintenance work). As such, the emphasis in Ontario case law appears to be on the effect or even the ‘intended effect’ of the work, rather than characterization of the larger “overall project” as there is, for example, in Alberta and Saskatchewan.

In 310 Waste Ltd. v Casboro Industries Ltd.,[16]310 Waste Ltd. v Casboro Industries Ltd., 2005 Carswell Ont 6441 (“310 Waste”). the Ontario Superior Court of Justice (Divisional Court) dealt with an appeal by a landowner from a judgement dismissing an application to discharge a lien associated with 310 Waste Ltd.’s removal of hundreds of thousands of tires from a dumpsite owned by Casboro Industries Ltd. Casboro, as landowner, retained 310, as contractor, when it was ordered by the Ministry of Environment to remove the tires from their dumpsite. When Casboro failed to pay amounts owing for the removal of the tires, 310 registered a lien against the associated lands.

On appeal, the Court agreed with the application judge’s rationale that maintenance (such as the removal of snow) did not give rise to a construction lien.[17]310 Waste at paras. 5, 6. However, the Court also agreed with the application judge’s conclusion that the removal of the tires, which were declared “waste” and a “contaminant” within the meaning of the Environmental Protection Act,[18]Environmental Protection Act, RSO 1990, c E. 19. “clearly enhanced the value of the land” and was therefore considered an “improvement” of the land as defined by the old Ontario Act, and held the lien filed by 310 to be valid.[19]310 Waste at paras. 7, 8. The rationale used in this decision is somewhat suspect given that merely “enhanc[ing] the value of land” without more (i.e. physical construction) has been rejected in many other contexts as an adequate justification to establish lien rights. Albeit, removing “contamination” through the use of physical labour likely does meet the established definition of construction.

Later, in U.S. Steel Canada Inc., Re,[20]U.S. Steel Canada Inc., Re, 2016 CarswellOnt 12275. (“U.S. Steel”) the Ontario Superior Court of Justice found that the following supply of goods and services could give rise to lien rights: (i) the adding of soil and the supply of flower plants; and (ii) spraying for weeds where the contractor provided its own material; and removing weeds, spreading dirt and gravel, and installing cloth. Further, the Court went so far as to suggest that “grounds keeping” would give rise to a lien right, although this conflicts with more strict interpretations from other jurisdictions.[21]Calgary Landscape Maintenance Ltd. v Khoury Real Estate Services Ltd., 1993 CarswellAlta 75, at paras. 11 and 12.

U.S. Steel created some uncertainty for owners and contractors alike, as landscape maintenance contractors in Ontario now had a valid claim that their services could be lienable. As a means to provide clarity, the Ontario legislature passed the Construction Lien Act Amendment Act,[22]Construction Lien Act Amendment Act, SO 2017, c 24 – Bill 142. on December 12, 2017. Subsequently, on July 1, 2018, changes to the definition of “improvement” came into effect under the new, renamed Ontario Act, which succeeded the old Ontario Act.

Where the old Ontario Act defined improvement to include “any alteration, addition or repair to the land”, the new Ontario Act specifies “capital repair” instead of “repair” to the land. These amendments were based on recommendations from an extensive report prepared by the Ontario government in 2016[23]Striking the Balance: Expert Review of Ontario’s Construction Lien Act: see https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/. which addressed the distinction between repairs and maintenance by making reference to the Income Tax Act.[24]Income Tax Act, RSC 1985, c.1 (5th Supp.). Specifically, the report indicated that while capital repairs are intended to improve the land, “maintenance” is intended to maintain the original condition of the land and is not intended to form part of an “improvement”, and therefore does not result in a lien right.[25]Sections 2.1.1 and 2.3 of Striking the Balance: Expert Review of Ontario’s Construction Lien Act. This distinction puts the emphasis in Ontario on the effect or intent of the work (i.e. improvement, addition, “value-add” etc.), whereas Alberta and Saskatchewan courts are more interested in the nature of the labour, and whether it’s best characterized as actual physical construction or mere maintenance.

(d)          Saskatchewan

The question of lienability of maintenance work has not been dealt with as directly in Saskatchewan as it has in Alberta and Ontario. As always, whether maintenance work is lienable will depend on whether such work contributes to the “improvement” of the lands in question.

In Crescent Point Energy Corp. v DFA Transport Ltd.,[26]Crescent Point Energy Corp. v DFA Transport Ltd., 2019 SKQB 189 (“Crescent Point v DFA”). the Saskatchewan Court of Queen’s Bench considered, among other things, whether service hauling of various fluids to or from well sites constituted an “improvement” under the Saskatchewan Act and could therefore result in valid lien rights. Crescent Point was an Alberta partnership carrying on business in Saskatchewan in the exploration, production, sales and marketing of petroleum, natural gas and related hydrocarbons. DFA Transport was a Saskatchewan transport company that supplied Crescent Point with various fluid hauling services.

When Crescent Point ceased payments, claiming overbilling, DFA Transport filed an action and application to compel Crescent Point to pay all outstanding amounts and notified Crescent Point of a Claim of Lien registered against their interests in Saskatchewan.

The parties agreed that DFA Transport’s work included:

  • Production hauling: transporting water or oil from well sites to processing facilities or disposal sites;
  • Service hauling: transporting water, kill fluid, and other liquids to or from well sites or battery sites in connection with maintenance and repairs to wells or batteries performed by third parties; and
  • Completion hauling: transporting water to well sites to fill frac storage tanks and transporting flowback liquid away from well sites.[27]Crescent Point v DFA at para. 11.

In determining the validity of any lien rights as a result of DFA Transport’s work for Crescent Point, the Court considered whether the work constituted an “improvement” within the meaning of the Saskatchewan Act. Specifically, the Court relied on its previous decision in Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of),[28]Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of), [1992] 3 WWR 152 (Sask QB). which held that if a person provides a service which has a direct and real contribution to the construction of an improvement, that person will be entitled to make a lien claim.[29]Crescent Point v DFA at para. 19.

The Court also referred to Boomer Transport Ltd. v Prevail Energy Canada Ltd.,[30]Boomer Transport Ltd. v Prevail Energy Canada Ltd., 2014 SKQB 368. where it had previously held that services that included, inter alia, the pumping out and hauling of water on a continuous basis, where that water was required to be extracted from an oil-water mixture being pumped from the ground through an oil well head, were an integral part of the production of oil for market and thus met the definition of a lienable claim.

Given the foregoing, the Court ultimately held that DFA Transport’s Claim of Lien was valid because, by servicing Crescent Point’s well sites and transporting fluids to and from the well sites, such services were an “improvement” under the Saskatchewan Act.[31]Crescent Point v DFA at para. 26.

Post Script

Posts on this website take many forms, from brief blog posts to deep-dive features which eventually form the foundation for updates to one or more of my books. This post is, obviously, of the latter variety. If you want (even more) up-to-date analysis on this topic and others, I suggest subscribing to (or purchasing a physical copy of) Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition.

References

References
1 Builders’ Lien Act, SBC 1997, c 45 (the “B.C. Act”).
2 Builders’ Lien Act, RSA 2000, c B-7; as of July 1, 2021, Alberta’s Builders’ Lien Act has been replaced by the Prompt Payment and Construction Lien Act, Chapter P-26.4 (the “Alberta Act”).
3 Builders’ Lien Act, SS 1984-85-86, c B-7.1 (the “Saskatchewan Act”).
4 Construction Act, RSO 1990, c C 30 (the “Ontario Act”).
5 Alexander Construction Ltd. v Al-ZaibakEyeglasses, 2011 BCSC 590, 2011 CarswellBC 2349 (“Alexander Construction).
6 Alexander Construction at para. 66.
7 Alexander Construction at para. 66.
8 Shelly Morris Business Services Ltd. v Syncor Solutions Limited, 2020 BCSC 2038 (“Shelly Morris”).
9 Shelly Morris at para. 24; quoting Boomars Plumbing & Heating Ltd. v Marogna Brothers Enterprises Ltd., 1998 CanLII 2970 (BCCA).
10 Shelly Morris at para. 30.
11 LR Processing Partnership,Young EnergyServe Inc v LR Ltd, LR Processing Partnership, 2021 ABQB 101 (“Young EnergyServe”).
12 Young EnergyServe at para. 67.
13 Young EnergyServe at paras. 30, 31.
14 Young EnergyServe at paras. 44-46.
15 Re Davidson Well Drilling Limited, 2016 ABQB 416.
16 310 Waste Ltd. v Casboro Industries Ltd., 2005 Carswell Ont 6441 (“310 Waste”).
17 310 Waste at paras. 5, 6.
18 Environmental Protection Act, RSO 1990, c E. 19.
19 310 Waste at paras. 7, 8.
20 U.S. Steel Canada Inc., Re, 2016 CarswellOnt 12275. (“U.S. Steel”)
21 Calgary Landscape Maintenance Ltd. v Khoury Real Estate Services Ltd., 1993 CarswellAlta 75, at paras. 11 and 12.
22 Construction Lien Act Amendment Act, SO 2017, c 24 – Bill 142.
23 Striking the Balance: Expert Review of Ontario’s Construction Lien Act: see https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/.
24 Income Tax Act, RSC 1985, c.1 (5th Supp.).
25 Sections 2.1.1 and 2.3 of Striking the Balance: Expert Review of Ontario’s Construction Lien Act.
26 Crescent Point Energy Corp. v DFA Transport Ltd., 2019 SKQB 189 (“Crescent Point v DFA”).
27 Crescent Point v DFA at para. 11.
28 Points North Freight Forwarding Inc. v Coates Drilling Ltd. (Trustee of), [1992] 3 WWR 152 (Sask QB).
29 Crescent Point v DFA at para. 19.
30 Boomer Transport Ltd. v Prevail Energy Canada Ltd., 2014 SKQB 368.
31 Crescent Point v DFA at para. 26.

Saving Paper Could Cost You – Potential Perils of Incorporating Terms by Reference: Razar Contracting Services Ltd v. Evoqua Water

Why this decision matters

Commercial agreements frequently incorporate or make reference to separate documents that form part of the larger bargain. This practice is known as “incorporation by reference”, and in the construction industry often involves the incorporation of language from prime or “head” contracts into subcontracts. In Razar Contracting Services Ltd. v Evoqua Water (“Razar Contracting”),[1] Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69.  the Manitoba Court of Queen’s Bench dealt with such language and refused to give effect to an arbitration clause located on the Defendant’s website, which the Defendant referenced in the purchase order it issued. Razar Contracting tells a cautionary tale about attempting to incorporate standard terms and conditions into a transaction merely by referencing where those terms can be found.

While the Court in Razar Contracting was more detailed in its dealing with the specific issues of jurisdiction to determine the existence of the alleged arbitration clause and the interpretation of same, the focus of this article is on the larger application of the Court’s findings regarding incorporation by reference.

In a world where contracts are increasingly negotiated, transmitted and executed electronically, businesses who rely on incorporating terms and conditions to their transactions without specifically including the terms themselves in the exchanges with the counterparty will want to consider what steps they can take to ensure that they can demonstrate their terms and conditions (i) have been brought to the other party’s attention; and (ii) were knowingly accepted.

Key Facts

Razar Contracting involved a dispute between a contractor, Evoqua Water Technologies Canada Ltd. (“Evoqua”), and a mechanical subcontractor, Razar Contracting Services Ltd. (“Razar”). The contractual relationship between the parties was formed after Razar responded to a bid package issued by Evoqua which included a form of subcontract with certain conditions. When Razar was awarded the contract, Evoqua simply issued a purchase order that stated that the terms and conditions of purchase that was located on its website applied to the purchase order unless otherwise agreed to in writing; Evoqua also provided a link to the website.[2]Ibid, at para. 6.

Razar’s president attested that he attempted, without success, to access the website. He made no further attempts, believing the form of subcontract in the bid documents would be executed.  However, that did not come to pass.[3]Ibid, at para 7.

Razar commenced an Action at the Manitoba Court of Queen’s Bench regarding unpaid invoices and claims for delay and impact costs. Evoqua brought an application to stay Razar’s Action, arguing that the terms and conditions on its website contained an arbitration clause which required all disputes between the parties to be resolved by an arbitral tribunal seated in Pittsburgh, PA, administered by JAMS.

The Court’s Analysis

The Application was formally brought pursuant to Article 8 of the Model Law On International Commercial Arbitration (“Model Law”),[4]The Model Law is in force in Manitoba pursuant to the International Commercial Arbitration Act, C.C.S.M. c. C151 (“ICAA“). Interestingly, the Court noted that both parties’ written … Continue reading which provides that on an application by a party, the court “shall” refer the parties to arbitration “unless it finds that the agreement is null and void, inoperative or incapable of being performed”.

The Court was asked to consider two main issues, which for the purpose of this article are addressed in reverse: (1) whether there was a valid and binding arbitration agreement, and (2) whether the Court had jurisdiction to rule on the validity or effectiveness of the arbitration agreement.[5]Ibid, at para. 13.

Issue 1 – Is There a Valid and Binding Arbitration Agreement?

Having taken jurisdiction of the matter for the reasons detailed further below, Kroft J. applied a balance of probabilities standard and found that no arbitration agreement was formed in the circumstances either for the purposes of the Model Law (which requires arbitration agreements to be in writing)[6]Model Law Article 7(2). or at common law.

In assessing whether an arbitration agreement was formed for the purposes of the Model Law, Kroft J. noted that under Article 7(2) of the Model Law, an agreement in writing could be found, among other ways, in acknowledgements in pleadings, or in “an exchange” of telecommunications that provide a record of the agreement.[7]Model Law Article 7(2). Kroft J. dismissed the argument that defining the purchase orders as the “Agreement” in the Statement of Claim signified Razar’s agreement to the terms and conditions on Evoqua’s website.

Examining the evidence concerning the formation of the agreement between the parties, Kroft J. noted that there was no “exchange” of communication between the parties where they both acknowledged and agreed to the arbitration clause, and held that such an exchange was required by the plain language of Article 7(2) of the Model Law to form an arbitration agreement.

Additionally, Kroft J. applied common law contractual formation principles and held that there was no meeting of the minds regarding the agreement to arbitrate. In so doing, Kroft J. took a high level view of the facts and circumstances surrounding the formation of the contractual relationship. Kroft J. noted that Evoqua was seeking to impose the terms outlined on its website, despite the fact that the bid documents had in fact contemplated an attached subcontract agreement with its own special conditions.[8]Ibid. Further, Kroft J. was persuaded that at the time of bidding, the president of Razar had not seen the terms and conditions that Evoqua sought to enforce, nor did the Court find evidence that Evoqua had taken adequate steps to draw those terms and conditions to Razar’s specific attention.[9]Ibid.

Having found no binding arbitration agreement, Evoqua’s application for a stay of the action in favour of arbitration was denied.

Issue 2 – Does the Court Have Jurisdiction in the First Instance?

Citing the seminal Supreme Court of Canada decision of Dell Computer Corp. v. Union des consommateurs[10]Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34. [“Dell”], Evoqua had argued that the Manitoba Court did not have the jurisdiction to rule on the existence or validity of the arbitration agreement, as that jurisdiction lay with the arbitral tribunal in the first instance. Dell confirmed the applicability of the competence-competence principle in Canada (the arbitrator has the competence to rule on its own competence)[11]Stated differently, the jurisdiction to determine the scope of its own jurisdiction. and further established the “general rule” that challenges to an arbitrator’s jurisdiction “must be resolved first by the arbitrator”, subject to questions of law or questions of mixed fact and law that require only superficial consideration of the evidence.[12]Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at paras 84-86.

Razar sought to distinguish Dell, relying on a 2009 British Columbia Supreme Court case, H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc.[13]H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc., 2009 BCSC 1389. [“H & H Marine”], which suggested that Dell was limited in application to arbitration issues arising under the Civil Code of Québec, and that the applicant needs to tender an evidentiary or statutory basis for the application of the competence-competence principle.

Justice Kroft relied on H & H Marine, and found that Evoqua had failed to tender evidence pertaining to the JAMS arbitration rules to establish the competence-competence principle would apply to the arbitral tribunal in Pittsburgh, PA. Justice Kroft also noted that in the event Dell applied, this case fell within the exceptions articulated in Dell, as the facts were not in dispute and the question before the Court required a legal conclusion, not material findings of fact. As such, Kroft J. found that the Court had the jurisdiction to consider whether there was an arbitration agreement and that the Court ought to exercise that jurisdiction.

Commentary

Regarding the interpretation of the contract generally, the Court’s consideration of whether the terms incorporated by reference actually formed part of the agreement stands as an interesting 21st century twist on the so-called “battle of the forms”.[14]See Butler Machine Tool Co Ltd. v Ex-Cell-O Corp (England) Ltd. [1977] EWCA Civ 9. What is consistent with this long line of authority is the underlying question of whether the terms and conditions have been specifically drawn to the attention of the seller.

Razar Contracting stands as an example of the difficulty a party may have establishing that such attention has been ensured when the terms and conditions are located outside of the main agreement and indeed may not have even been reduced to paper. While not explicitly referenced in Kroft J.’s decision, Razar Contracting is in keeping with the general trend that an arbitration clause in one contract is only incorporated into another contract if that clause is clearly and specifically referenced. In this way, some courts appear to have applied a more stringent level of scrutiny where the proposed term is an arbitration clause in particular. For example, in Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc.,[15]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) Chapnik J. held that “[i]ncorporation of an arbitration clause can only be accomplished by distinct and specific words …”,[16]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 11 [emphasis added].ultimately finding that “the manifest intention of the parties, as reflected on the face of the subcontract document, was not to include the arbitration clause therein; in the alternative, the matter was overlooked and cannot now be imposed upon the parties in the absence of agreement between them.”[17]Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 15. Similarly, in Sunny Corner Enterprises Inc. v. Dustex Corp.,[18]Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172. Kennedy C.J.S.C. held that a “general incorporation of the prime contract into the subcontract will not normally include the arbitration clause.”[19]Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172 at para. 39 [emphasis added]. See also Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition at § 4:23. Incorporation … Continue reading While Kroft J. perhaps does not go as far, he nonetheless held “that the reference in Evoqua’s purchase order to a website showing multiple categories of terms and conditions with no real guidance does not amount to a written arbitration agreement […]”.[20]Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69 at para. 33.

More broadly, the British Columbia Supreme Court provided a valuable summary of the notice and accessibility considerations regarding the incorporation of terms and conditions through an external website in its decision in Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd.:[21]Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224.

In an appropriate case it might be that parties, especially sophisticated commercial actors, would be taken to know that terms and conditions are found on a website. It is now commonplace for companies to have internet websites which allow for electronic transactions. However, in order for terms and conditions on an internet website to be within the common understanding of the parties and part of their contract, there should be some evidence that those parties had interacted through the use of their websites, not just by email, or at least had notice of the terms and conditions on the other’s website at the time of entry into contract. There must also be evidence that those terms and conditions were posted on the website at the requisite time. It would be inappropriate to simply imply notice of terms absent any evidence that the website had been used before or that reasonable steps were taken to bring the existence of that website, and specifically the terms and conditions contained therein, to the attention of the other party prior to the contract.[22]Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224 at para. 124. See also Centre intégré universitaire de santé et de services sociaux du … Continue reading

Finally, with respect to the alleged arbitration process, the Court’s conclusion that the general rule of systemic referral to arbitration articulated in Dell need not apply in the circumstances is surprising, both legally and on the facts of the case. Dell has been followed by courts across common law Canada numerous times, including in Manitoba.[23]See for instance, Uber Technologies Inc. v Heller, 2020 SCC 16 where the Supreme Court of Canada confirmed that the framework from Dell Computer Corp. applies in Ontario based on the “similarities … Continue reading Also surprising is the Court’s decision not to address Article 16 of the Model law in the decision, as this provides for the application of the competence-competence principle for a tribunal subject to the Model Law.[24]On account of conflicts of laws principles, foreign law is to be assumed to be the same as the law of the forum unless specifically pled and proven otherwise: Old North State Brewing Co v Newlands … Continue reading Instead, the Court opted to recognize its discretionary jurisdiction afforded by Dell.

References

References
1 Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69.
2 Ibid, at para. 6.
3 Ibid, at para 7.
4 The Model Law is in force in Manitoba pursuant to the International Commercial Arbitration Act, C.C.S.M. c. C151 (“ICAA“). Interestingly, the Court noted that both parties’ written submissions were premised on the domestic Arbitration Act, CCSM c A120, applying. The application of the ICAA was only addressed in oral argument where both parties acknowledged that the ICAA applied.
5 Ibid, at para. 13.
6 Model Law Article 7(2).
7 Model Law Article 7(2).
8 Ibid.
9 Ibid.
10 Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34.
11 Stated differently, the jurisdiction to determine the scope of its own jurisdiction.
12 Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34 at paras 84-86.
13 H & H Marine Engine Service Ltd. v. Volvo Penta of the Americas, Inc., 2009 BCSC 1389.
14 See Butler Machine Tool Co Ltd. v Ex-Cell-O Corp (England) Ltd. [1977] EWCA Civ 9.
15 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.)
16 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 11 [emphasis added].
17 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 CarswellOnt 16 (Ont. Gen. Div.) at para. 15.
18 Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172.
19 Sunny Corner Enterprises Inc. v. Dustex Corp., 2011 NSSC 172 at para. 39 [emphasis added]. See also Heintzman, West and Goldsmith on Canadian Building Contracts, 5th Edition at § 4:23. Incorporation by Reference, which notes that in the United Kingdom, this rule is sometimes referred to as the “rule in Aughton” after the decision in Aughton Ltd. (formerly Aughton Group Ltd.) v. M.F. Kent Services Ltd. (1991), 57 B.L.R. 1, 31 Con. L.R. 60 (Eng. C.A.).
20 Razar Contracting Services Ltd. v Evoqua Water, 2021 MBQB 69 at para. 33.
21 Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224.
22 Kobelt Manufacturing Co. v. Pacific Rim Engineered Products (1987) Ltd., 2011 BCSC 224 at para. 124. See also Centre intégré universitaire de santé et de services sociaux du Centre-Sud-de-l’Île-de-Montréal c. Oracle Canada, 2017 QCCS 6377 at para. 75, where Peacock J.S.C. commented on specific notice and accessibility issues and held: “Here, the Plaintiff could not find the external document by simply visiting www.oracle.com/contracts. The title of the document on the website was not the same as the one provided in the purchase order, a series of steps were required to reach the document, and the French version was only accessible if the English title happened to be found.”
23 See for instance, Uber Technologies Inc. v Heller, 2020 SCC 16 where the Supreme Court of Canada confirmed that the framework from Dell Computer Corp. applies in Ontario based on the “similarities between the arbitration regimes in Ontario, British Columbia and Quebec.” (at para 35). See also Wardrop v Ericsson Canada Inc., 2021 MBQB 183, and Buffalo Point Development Corp. Ltd. v. Alexander et al, 2012 MBQB 341.
24 On account of conflicts of laws principles, foreign law is to be assumed to be the same as the law of the forum unless specifically pled and proven otherwise: Old North State Brewing Co v Newlands Services Inc. (1998) 58 BCLR (3d) 144 at 154.

Arbitral Rules Held To Exclude Right To Appeal Arbitration Award

Parties who select arbitral rules, or the administration facilities of an arbitral institution, may do so because they believe that the rules or institution will provide a fair and efficient administration of the arbitral process. They may not suspect that the rules will affect their right to appeal the award.

However, in Highbury Estates Inc. v. Bre-Ex Ltd., the Ontario Superior Court recently held that by adopting arbitral rules which preclude an appeal, the parties thereby opt out of statutory appeal rights.

The Arbitration Act, 1991 and the National Arbitration Rules

Sub-sections 45(2) and (3) of the Ontario Arbitration Act, 1991 provide for a right of appeal on law, fact and mixed fact and law if the parties agreement so provides. Sub-section 45(1) states that, if the arbitration agreement does not deal with appeals on questions of law, then an appeal on a matter of law may be allowed with leave of the court. Section 3 of the Act permits the parties to contract out of Section 45. By making Ontario the place of the arbitration or by otherwise making the arbitration subject to the Act, the parties agree to these statutory rights of appeal unless they contract out of them.

In the present case, the arbitral agreement stated that National Arbitration Rules applied to the arbitration. Rule 47 of those rules provided that ‘[u]nless otherwise agreed, the award of the Tribunal shall be final and binding and there shall be no appeal’.

In effect, both the Act and the Rules allowed the parties to “otherwise agree.” The Act does so in Section 3. The Rules do in the provision referred to above. In this circumstance, how does one tell if the parties “agreed otherwise” to the Act or to the Rules?

The Decision

The decision of the court was based on the following:

  1. The court referred to a number of prior decisions which dealt with contracting out of section 45 of the Act: Orgaworld Canada Ltd. v. Ottawa (City), 2015 ONSC 318 (Ont. S.C.J.), paras. 48-72, Inforica Inc. v. CGI Information Systems & Management Consultants Inc. (2009), 97 O.R. (3d) 161 (Ont. C.A.), Ontario Hydro v. Dennison Mines Ltd., [1992] O.J. No.2948 (Ont. Gen. Div.), Piazza Family Trust v. Veillette, 2011 ONSC 2820 (Ont. Div. Ct.). The court then concluded that “Where parties have turned their minds to the question and have decided that a decision of the arbitrator will be final and binding, and not subject to appeal on a question of law, s. 45 of the Act operates to exclude recourse to an appeal.”
  1. The court concluded that the language in the arbitration agreement was sufficient to incorporate the arbitral rule excluding appeal, in this case Rule 47 of the National Arbitration Rules. The court held that the decision in Orgaworld, was “unequivocal that language such as was used in Rule 47 and incorporated into the Arbitration Agreement expresses the necessary intention by the parties to forgo a right to appeal, or to seek leave to appeal, on questions of law.”

However, these cases did not deal with arbitration rules which barred an appeal.

In the Orgaworld Canada case, article 25.1(d) of the arbitration agreement itself said that the decision of the arbitrator “shall be final and binding on the parties and there shall be no appeal therefrom.” Based upon this wording, the court held that there was no right of appeal.

In the Inforica case, the question was whether the arbitrator had jurisdiction to order security for costs. The arbitrator held that the ADR Chambers rules had been incorporated into the arbitration agreement and that, therefore the arbitrator had authority to order security for costs as provided in section 8(1)(h) of those rules. The arbitrator also held that he had the authority to order security for costs pursuant to s. 20 of the Act, which provides that an arbitrator “may determine the procedure to be followed in the arbitration”.

The decision of the arbitrator in the Inforica case was upheld by the Ontario Court of Appeal.  The Court of Appeal held that “it was clearly open to the arbitrator to conclude on this record that the arbitration was tak[ing] place with ADR Chambers” and it was, therefore, subject to the ADR Chambers Rules. Accordingly , the Court of Appeal held that the arbitrator’s conclusion that he had jurisdiction to grant security for costs under the ADR Chambers’ rules “was either a finding of fact or a finding close to the fact end of the mixed fact and law spectrum with which a court should be reluctant to interfere.” The decision did not deal with appeals.

The Denison Mines case involved a motion to stay the action to rectify a commercial agreement between Denison Mines and Ontario Hydro. The stay motion was based on the existence of the arbitration agreement in the commercial agreement. The decision did not deal with appeals or arbitration rules. Interestingly, in a later decision in Denison Mines Ltd. v. Ontario Hydro, (2002), 58 O.R. (3d) 26, 2002 CarswellOnt 88 the Ontario Court of Appeal dealt directly with the issue of whether an arbitration agreement barred an application for leave to appeal, and held that it did not when there was nothing expressly in the agreement to that effect.

The Piazza Family Trust case involved a co-tenancy agreement which contained an arbitration clause which stated that “the decision arrived at by the arbitrator shall be final and binding upon the parties and shall not be appealed.” The parties entered into a mediation/arbitration agreement and that agreement provided that “the decision of the Arbitrator is final and binding, with no right of appeal.” The court concluded that “there is no right of appeal of the arbitrator’s decision under section 45 of the Arbitration Act where the arbitration agreement states that the arbitrator’s decision is final and binding with no right of appeal.”

Accordingly, the prior decisions cited in the Highbury Estates decision were not based upon arbitral rules, and did not decide that arbitral rules could bar an appeal. However, the Highbury Estate decision now holds that arbitral rules may have that effect.

Discussion

It is important for parties to realize that by choosing a seat or place for a domestic arbitration, they are making a decision about whether an appeal from the arbitral award is permitted. This issue will only be a consideration in the case of domestic arbitrations since the laws relating to international commercial arbitration (the UNCITRAL Model Law as incorporated into provincial international commercial arbitration statutes in Canada) do not provide for appeals from arbitral awards.

In Canada, the law of the place of a domestic arbitration may or may not allow an appeal on grounds of fact, law or mixed fact and law. For instance, the law of Ontario and some other provinces, which have adopted the Uniform Arbitration Act of the Uniform Law Conference of Canada, allows the parties to agree to an appeal on matters of fact, law and mixed fact and law. The laws of Newfoundland and Quebec do not provide for the parties to so agree.

Based upon the Highbury Estates decision, the parties should realize that by choosing arbitral rules, they may be barring an appeal from the arbitral decision even if the law of the place of the arbitration permits an appeal.

This latter point may not be intuitively obvious to all parties. The rules of the well-known international arbitration institutions do not appear to have any provisions relating to or restricting appeals, presumably because, as already noted, under international commercial arbitration (and the UNCITRAL regime) there are no appeals. So a party involved in a domestic arbitration may not expect the arbitration rules to deal with appeals. If those rules do contain provisions dealing with appeals and the parties do not wish to adopt those provisions, then they should exclude those appeal provisions in their arbitration agreement.

One could argue that arbitral rules should not deal with appeals, since the parties may not expect that the rules will do so. One could also argue that, at the very least, the rules should alert the reader, in bold upfront print, that the rules do limit or prohibit appeals, and not in a clause near the end of the rules without any separate heading or highlighting.

An appellate court may re-examine the Highbury Estates decision in the future. If that occurs, two issues may arise.

One is a factual issue. What if one of the parties testifies that he or she did not read the part of the arbitral rules banning appeals, did not expect the rules to deal with appeals and did not realize the rules did so. Will the court still hold that this part of the rules is incorporated into the arbitration agreement?

The second issue is a legal one: the law relating to incorporation by reference. That subject has been dealt with extensively in construction law. There, a bond or subcontract may incorporate the main contract between the owner and the contractor. The majority of cases hold that the dispute resolution clause in the main contract is not thereby incorporated into the bond or subcontract. The reasoning of those cases is that the parties to the bond or subcontract intend the “working” or project parts of the main contract to be part of the bond or subcontract, but not the dispute resolution part unless it is expressly adopted.

Similar logic might arguably apply to the present issue. When parties to an arbitration agreement adopt arbitration rules, they intend to have those rules apply to the procedures of the arbitration itself, but do they intend to alter the existing statutory regime applicable to the court dispute resolution system, namely appeals, absent clear agreement to do so?

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), Chapters 4§3(d), 11§11(a), 12§6(b).

Highbury Estates Inc. v. Bre-Ex Ltd., 2015 CarswellOnt 12073, 2015 ONSC 4966, 257 A.C.W.S. (3d) 22

Arbitration – appeal from arbitral award – arbitral rules – incorporation by reference

Thomas G. Heintzman O.C., Q.C., FCIArb                                                 February 14, 2016

www.heintzmanadr.com

www.constructionlawcanada.com

 

Can An Entire Agreements Clause Make A Party To An Agreement Also A Party To Another Agreement?

In construction projects, there will often be several agreements between the various participants. Those agreements may contain “entire agreement” clauses to ensure that the parties are bound only by the terms of the agreement they sign. But could the entire agreement clause have the opposite effect if it refers to one of the other agreements?

In One West Holdings Ltd. v. Greata Ranch Holdings Corp. the British Columbia Court of Appeal recently answered Yes to this question. As a result, the entire agreement clause became an incorporation by reference clause, incorporating an arbitration clause from one agreement into another.

Background

Several parties joined together to buy the Greata Ranch in British Columbia and to subdivide and develop the land for resale. There were three agreements:

the limited partnership agreement between the participants (LPA);

the project management agreement between the limited partnership and the management company One West (PMA); and

the agreement to purchase the ranch (PA).  One West was not a party to the LPA or PA although it was affiliated to a company that was.

The PMA and PA each had an entire agreements clause that said that the PMA, LPA and the PA “and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties and/or affiliates and supersede all previous communications, representations and agreements, whether oral or written, between the parties with respect to the subject matter hereof.…”.

The LPA had an entire agreements clause that said that “This Agreement constitutes the entire agreement between the parties hereto with respect to all of the matters herein and its execution has not been induced by, nor do any of the parties hereto rely upon or regard as material, any representations or writings whatsoever not incorporated herein and made a part hereof.”

The LPA had an arbitration clause requiring the arbitration of “all disputes arising out of or in connection with this Agreement, or in respect of any legal relationship associated therewith or derived therefrom….”  The PMA and PA had no arbitration clauses.

When disputes arose, arbitration proceedings were commenced, and One West was joined as a respondent. One West said that it could not be joined as a party to the arbitration as it was not a party to the LPA and therefore was not a party to the arbitration agreement.

The Decisions

The arbitrator held that, because of the entire agreements clause in the PMA, One West was a party to another agreement, the LPA, and therefore a party to the arbitration agreement in the LPA. On appeal, a judge of the B.C. Supreme Court disagreed, holding that the entire agreements clause in the PMA did not make One West a party to another agreement, the LPA, and to the arbitration agreement in the LPA. The B.C. Court of Appeal disagreed with that decision and agreed with the arbitrator.

The Court of Appeal’s conclusion about the entire agreement clause in the PMA was as follows:

“Article 17.1 does two things: it defines the agreement of the parties and it limits the scope of inquiry. The judge’s approach appears to eliminate the first part of the provision merely because it is called an “entire agreement” clause. It is necessary, as was done by the arbitrator, to look at the opening words of the provision: “This Agreement, the Partnership Agreement and the Purchase Agreement and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties”.
There is nothing ambiguous or unclear about this language. It defines the agreement of the parties. The balance of the provision limits the sources on which the parties can rely and to which the court can look. It reflects the traditional purpose of an “entire agreement” provision, but it does not supplant the agreement of One West that the LPA is part of the agreement between the parties. That agreement contains an arbitration commitment that is binding on One West.”

In effect, the court held that, by reason of the wording of the entire agreements clause in the PMA, One West had agreed that it was a party to the LPA and the arbitration clause in that agreement.

The Court of Appeal gave a second reason for its decision:

“The scope of the arbitration commitment extends to legal relationships associated with or derived from the LPA. The “entire agreement” clause in the PMA extends to the parties and their affiliates.”

In this passage, the Court of Appeal is saying that the arbitration clause itself was sufficient to sweep One West into the arbitration as an affiliate of the party which signed the LPA, quite apart from the argument that the LPA and its arbitration clause were incorporated into the PMA through the entire agreements clause.

Comments

This decision arrives at startling conclusions about both the entire agreement and the arbitration clause. As to the former, entire agreement clauses are not usually thought of as creating new rights but as ensuring that there are no rights other than those contained in the written contract. If this is the purpose of the clause, then when the clause appears in one contract of a number of related contracts to which a number of entities are parties, the clause can be taken to mean that there are no rights in the contract other than those in the respective contract or contracts, not that new rights are created in one contract that are not otherwise there.  But that is the very argument that the court appears to have rejected.

As to the affiliate issue, the PMA and PA said that they constituted the entire agreement between the parties and/or affiliates of the parties.  So far as the reasons of the court disclose, the PMA or PA did not apparently state that they were being executed by one party on behalf of its affiliates who were thereby made a party to and bound by it.  So, again, it seems arguable that the statement about affiliates was that there were no other agreements between all these parties, not that the affiliates were parties to every agreement. But again, that seems to be the argument rejected by the court.

So far as the arbitration clause is concerned, the court’s decision is that an entire agreements clause in one agreement (the PMA in this case) effectively operates as an “incorporation by reference” clause and brings the arbitration agreement from another agreement (the LPA in this case) into the first agreement.  This is a very significant issue for construction law.

There are many cases holding that an arbitration clause is not incorporated from one agreement into another without there being a specific incorporation of that clause. Thus, it has been held in many cases that an arbitration clause in the main contract between an owner and contractor will not be incorporated into the subcontract between the contractor and subcontractor merely because the subcontract states that the terms of the main contract are incorporated into the subcontract: it takes something much more specific to incorporate the arbitration clause from one agreement into the other.

Yet in this case, the court has held that an entire agreements clause –which on its face doesn’t appear to be an incorporation by reference clause at all– is not only an incorporation by reference clause, but it incorporates an arbitration clause from one agreement into another.

With this decision in mind, those involved in preparing building contracts will have to carefully scrutinize their entire agreement and arbitration clauses to ensure that they have the intended ambit and effect.

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

One West Holdings Ltd. v. Greata Ranch Holdings Corp., 2014 Carswell BC 414, 2014 BCCA 67

Building contracts – incorporation by reference – arbitration clauses-third parties –

T.G. Heintzman O.C., Q.C., FCIArb                                           April 6, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Incorporation By Reference In Building Contracts

Incorporation by reference in building contracts

By Thomas G. Heintzman and Julie Parla1

A common clause in a building contract is one which incorporates the terms of another contract or document into the building contract in issue. The effect of such a clause is referred to as “Incorporation by Reference”. These clauses are common in building contracts because the various contracts necessary for a building project are often cross-referenced and their performance are inter-related.

Thus, the main contract between the owner and the general contractor is inter-related with the subcontract between the contractor and the sub-contractor. The tender or other pre-contractual documents are inter-related to the contracts later entered into. The payment or performance bonds are related to the contracts for which they provide financial guarantees. The contracts between the consultants are related to the building contracts themselves. To a great extent, all of these contracts are part of the same package. Whether the object is to save drafting time or to ensure absolute consistency, or laziness, one of these contracts may state that the terms of another document or contract are incorporated into it.

While an Incorporation by Reference clause may provide a useful correlation of one contract to a second contract, they also open up dangers when the clauses are arguably unsuitable for inclusion in the second contract. This paper will examine the circumstances in which Incorporation by Reference clauses have been used and the potential problems they raise.

Uses of Incorporation by Reference Clauses

Incorporation by Reference clauses have been used in a wide variety of circumstances in building contracts. Here are some of the circumstances in which they have been used and applied:

  • (a)  Specifications:  A specification list prepared by the owner was incorporated by reference into the contract ultimately entered into with the contractor, rather than attaching a specification list physically to the actual contract.2
  •  
  • (b)  Specific work and Best Practices:  A term in the main contract specifying the work to be carried out and stating the obligation to use “best trace practices” was incorporated by reference into the subcontract.3 In another case, the measurement and price to be paid for concrete work in the main contract was incorporated into the subcontract.4
  •  
  • (c)  Force Majeure and Claim period:  A force majeure clause and a clause stating the period in which a claim must be made, contained in the main contract, was incorporated by reference into the sub-contract.5
  •  
  • (d)  Profit Sharing:  A contractor’s obligation in the main contract to pay the owner 75% of savings from the contract price was enforceable against the bonding company. While there was no Incorporation by Reference clause in the bond, the Ontario Court of Appeal applied principles that related both to Incorporation by Reference and to contractual interpretation.6
  •  
  • (e)  Tender Conditions – GST:  The term of a tender, requiring the tender price to include GST, was incorporated into the contract ultimately entered into.7
  •  
  • (f)  Performance Bond:  A provision in the main contract requiring the contractor to post a performance and materials bond for 50% of the contract price was incorporated into the subcontract and precluded the contractor from requiring the subcontractor to post a 100% bond.8
  •  
  • (g)  Letter of Intent:  A letter of intent was incorporated by reference into the subsequent contract, thereby creating contractual representations.9

On the other hand, Incorporation by Reference clauses have not been applied in many cases to incorporate the provisions of another contract or document. Thus,

  • (a)  Liquidated Damages: A liquidated damages clause in the main contract was not incorporated by reference into the sub-contract.10 A bond which contained a clause incorporating the building contract between the owner and the contractor was held not to impose on the surety the obligation to pay the liquidated damages referred to in the building contract between the owner and the contractor.11
  •  
  • (b)  Lien Security:  The obligation to post security for lien claims contained in the main contract was held not to be incorporated into the subcontract.12
  •  
  • (c)  Guarantee Period:  A two-year guarantee given by the contractor to the owner in the main contract was not incorporated by reference into the subcontract.13
  •  
  • (d)  Insurance:  An obligation to obtain insurance was not incorporated into the subcontract because, although there was an Incorporation by Reference clause in that subcontract, there had been no main contract in fact entered into.14
  •  
  • (e)  Inconsistency:  A Term in a building contract was not incorporated into a bond because it was inconsistent with the limited liability of the surety stated in the Bond.15
  •  
  • (f)  Additional Terms:  The subcontractor understood that the main contract between the owner and contractor was the standard CCDC 2 contract. In fact the owner and contractor negotiated additional terms which were unknown to the subcontractor. It was held that those additional terms were not incorporated by reference into the subcontract.16
  •  
  • (g)  Dispute Resolution:  In Canada, courts have generally held that an arbitration clause in the main contract is not incorporated by reference into the subcontract without specific incorporation.17

The courts in other common law jurisdictions have also considered the incorporation of arbitration clauses from one contract to another. Their decisions illustrate the nuances of this practice, especially when those clauses affect rights and obligations outside of the project work per se. The incorporation by reference of arbitration clauses from one contract to another has been the subject of a number of cases in the United Kingdom and Australia.18 The general trend is that an arbitration clause in one contract is only incorporated into the other contract if the arbitration clause in the first contract is specifically referred to in the second agreement. This rule is sometimes referred to as the “rule in Aughton” after the decision in Aughton Ltd. v. M.F. Kent Services Ltd.19 The rule was effectively applied 100 years ago by the House of Lords in TW Thomas & Co. Ltd v. Portsea Steamship Co Ltd (The Portsmouth).20 While the rule is more or less settled in the UK, there are cases in which the rule was not applied on the particular facts.21

Two commentators have recently reviewed the law in the UK and Australia. Their view is that, in Australia, the pendulum is swinging from requiring express reference to an arbitration clause in order to validly uphold an incorporation by reference, to more flexibility allowing arbitration clauses to be incorporated by general reference to a contract which contains an arbitration clause, provided doing so can be supported on a proper construction of the contract. This shift is generally credited to a more pro-arbitration policy of the courts, and may provide insight as to the direction other common law jurisdictions will ultimately take.22

Incorporation by reference of arbitration clauses may also be subject to the governing arbitration statute. Thus, the UNCITRAL Model Law, which is incorporated into the various provincial and federal statutes applicable to international commercial arbitrations23, states as follows:

“The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.” (underlining added)

It is arguable that the proviso to this provision was intended to require specific reference to the arbitration clause in the other contract before incorporation of it into the second contract occurs. But the opinions of commentators and the decided cases do not necessarily demonstrate this point of view.24

In light of these apparently inconsistent decisions, one might wonder why any subcontractor would agree to an Incorporation by Reference clause in the subcontract. Since the provisions of the main contract are drafted to suit the circumstances of the owner and the contractor, there is every reason for the subcontractor not to agree, holus bolus, to the terms of the main contract being incorporated into the subcontract. This is especially so where the main contract may contain provisions such as liquidated damages, an arbitration clause and other specific provisions with respect to security, insurance and removal of liens which may be wholly suitable to the owner and contractor, but totally unsuitable to the subcontractor.

Some examples from the cases referred to above make this point clear. For example, in Q.Q.R. Mechanical Contracting Ltd. v. Panther Controls Ltd., the contractor had given the owner a specific two-year guarantee. There does not seem to be much reason why the subcontractor should be bound by that guarantee. In Litchfield Bulldozing Ltd. v. PCL Construction Ltd., the owner was a municipality. While a municipality may need a specific force majeure clause, it is not evident that the same force majeure clause is suitable to the subcontract.

Similarly, in Niagara Structural Steel v. LaFlamme, the liquidated damages clause stated a specific per diem amount which was based upon the owner’s particular circumstances and was set to cover the owner’s supervisory cost. Those costs would have no bearing upon the costs incurred by the contractor or subcontractor. In the result, that liquidated damages clause had no relationship to the subcontract. Similarly, in Lac La Ronge Indian Band v. Dallas Contracting Ltd., a bond was interpreted as not including on obligation upon the surety to pay the liquidated damages due by the contractor under its contract with the owner, because that obligation was contrary to the specific terms of the bond.

There may be a total disconnect between the necessity and rationale for terms in the main contract as opposed to the necessity or rationale for the same terms in the subcontract.

Nevertheless, standard form contracts in the Canadian building industry continue to contain Incorporation by Reference clauses. General condition 3.7.1 of the CCDC 2 Stipulated Price Contract between the owner and the contractor requires the contractor to “incorporate the terms and conditions of the Contract Documents into all contracts or written agreements with subcontractors and suppliers.” The wisdom of this requirement is questionable particularly when, as noted above, courts have found that the Incorporation by Reference will not necessarily occur even in the presence of such a clause.25

In these circumstances, it seems more advisable for the Incorporation by Reference clause to state that “the following provisions of the Contract Documents are to be incorporated into the subcontracts”, and then list them specifically, rather than incorporating each and every portion of the Contract Documents into the subcontract. This is particularly so in circumstances where the owner and the contractor have negotiated provisions which are peculiar to their relationship and which may have no place in the subcontract document.

Application of Contract Interpretation Principles

It should be kept in mind that the determination by the Courts of when a term will be found to have been incorporated by reference, will be subject to the general principles of contract interpretation as applicable to any contract.

First and foremost the court will look to the words of the contract, understood with reference to the “factual matrix”, that is, the circumstances and context surrounding contract formation.26 The factual matrix will include the purpose of the second contract to the overall project, in informing how to interpret the agreement.

Second, determining the intention of the parties is an objective exercise; the court does not look to the subjective intent of the parties, but rather presumes that the parties intended the legal consequences of their words.27

Third, the contract must be interpreted as a whole, such that meaning is given to all of the terms agreed to between the parties, without conflict.28

Finally, the contract is to be interpreted consistent with “sound commercial principles and good business sense” and in a way that is commercially reasonable.29

These principles guide how a court may treat terms incorporated into a contract by reference. So, for example, the court will look first to the words that the parties have used, and the subjective intent of one party to incorporate all terms of the incorporated contract (or to not do so) will not be determinative in interpreting what was intended to be incorporated. As discussed below, if a term makes little sense in governing the relationship between the parties who incorporate another contract, it may be inapplicable for failing to result in being commercially reasonable – for example an onerous liquidated damages term as applied to a relatively discrete subcontract, the value of which is far less than the purported liability, may be found to be inapplicable. Where the express terms of the contract appear to be in conflict with the terms of the contract purported to be incorporated, the incorporated terms may also fail to apply.

An Attempt to Draw General Principles

So long as Incorporation by Reference clauses are included in building contracts, can we derive any principles from the case law? To the extent that it is possible to do so, the following are general principles which, in our view, should be applied by the courts, based upon the decided cases, and the principles of contract interpretation:

1.   Incorporation by Reference will only occur if the objective intention of the parties was to incorporate one document into another. While this principle is sometimes stated to be based on the subjective intention of the parties, that approach is contrary to the fundamental principle of contract law that intention is to be objectively determined.30 The mere existence of Incorporation by Reference clause in a subcontract will not demonstrate such an objective intention in relation to matters which do not concern the coordination and undertaking of the physical work.

2.   Some of objective circumstances which may arguably demonstrate an objective intention not to include terms of one contract into another were discussed in the Dynatec Mining deicison, being: lengthy negotiation of the latter contract during which the terms proposed to be incorporated were never discussed; an entire agreement clause in the latter contract; and a comprehensive scheme (such as a dispute resolution procedure) in the latter contract which does not mention or is inconsistent with the term in the other contract (such as an agreement to arbitrate).

3.   Conflict between the provisions in the latter contract and the term sought to be imported from the other contract will in all likelihood preclude incorporation. In fact, the latter contract may directly address this conflict issue. Thus, the subcontract may well state, and should state, that if there is any conflict between the subcontract and the main contract, then the provisions of the subcontract apply.

4.   A conflict does not require an absolute conflict in wording. Indeed, the failure to provide for the matter in, say, the subcontract may itself preclude the importation of a term from the main contract, because to do so would be in conflict with the subcontract.

5.   If the parties are in a direct relationship with each other, then Incorporation by Reference will be more sustainable. Hence, if it is a question of incorporating a letter of intent or the terms of a tender into the contract which is ultimately made by the same parties who exchanged the letter of intent or participated in the tender, or incorporating the terms of a contract into a performance or payment bond relating to that contract, then a court will be much more likely to hold that the Incorporation by Reference clause is effective to bring all of the material portion of the other document into the contract.31

6.  The obligation in the main contract in respect of the actual physical work to be undertaken will likely be incorporated into the subcontract by virtue of the Incorporation by Reference clause.32 The courts view the purpose of an Incorporation by Reference clause in a subcontract to be for co-ordinating the prosecution of the actual physical project, and not for the purposes of subjecting the subcontractor to the same insurance, dispute resolution and similar regimes adopted by the owner and the contractor, absent the clear intention by the contractor and subcontractor to import into their contract the terms of the main contract.

For this reason, terms relating to liquidated damages, the obligation to obtain insurance, the provision for security for lien in the main contract will not likely be incorporated into the subcontract in the absence of a specifically articulated intention to do so.

7.   Similarly, arbitration clauses and other clauses relating to dispute resolution will not usually be imported from the main contract into the subcontract by virtue of a general Incorporation by Reference clause in the latter contract. However, the general principles of interpretation and the facts of the particular case may result in a general incorporation clause having that effect. Consideration must also be given to the specific arbitral statute governing the contract because it may favour or contradict such incorporation. In addition, the trend toward a more arbitration-friendly approach by courts may increase the likelihood of such general incorporation in the future.

Conclusion

Even though standard form building contracts contain Incorporation by Reference clauses, courts may not find that such incorporation has actually occurred. Incorporation by Reference will more likely be found to occur if the parties are in a direct relationship with each other or engaged in the preparation of, or exchanged, both documents, or if the document sought to be incorporated relates to the physical construction of the project. Otherwise, terms such as arbitration clauses, lien security, insurance and liquidated damages clauses will not likely be imported from one contractual regime into another. The interpretation of the contract as a whole, being the contract and the terms Incorporated by Reference, will be subject to the established principles of contract interpretation.

In these circumstances, the drafters of standard building contract might well revisit the Incorporation by Reference clauses contained in those contracts, and particularly in main contracts and subcontracts, and encourage the parties to direct their minds to which specific provisions of one contract they wish to be incorporated into the other contract.

[This article first appeared in Skylines – Newsletter of the CBA National Construction Law Section – July 2012]


  • 1 Thomas G. Heintzman OC, QC, FCIArb is counsel and Julie Parla is a partner in the Toronto office of McCarthy Tétrault LLP.
  • 2 Pozzebon v. Lamantea, 1988 Carswell Ont. 759 at para. 4
  • 3 Kor-Ban Inc. v. Pigott Construction Ltd. (1993), 11 C.L.R. (2d) 160 at para 529(Ont. S.C.J.)
  • 4 Online Constructors Ltd. v. Speers Construction Inc. 2011 CarswellAlta 104 at paras 17-20.
  • 5 Litchfield Bulldozing Ltd. v. PCL Construction Ltd. (1985) 14 C.L.R. 287(B.C. Co. Ct.)
  • 6 Whitby Landmark Developments Inc. v. Mollenhauer Construction Ltd., (2003) 26 C.L.R. (3d) 161 at para. 9-16 (Ont. C.A.)
  • 7 Ecozone Engineering Ltd. v. Grand Falls – Windsor (Town) (1995), 30 C.L.R. (2d) 277, (2000) 5 C.L.R. (3d) 55 (N.L.C.A.)
  • 8 Schaible Electric Ltd. v. Melloul – Blaney Construction Inc. (2005) 45 C.L.R. (3d) 41 (Ont. C.A.)
  • 9 Foundation Co. of Canada Ltd. v. United Green Growers Ltd. (1997), 33 C.L.R. (2d) 159 at para. 27 (B.C.C.A.)
  • 10 Niagara Structural Steel v. LaFlamme (1985), 14 C.L.R. 70 at para 28-32; aff’d (1987) 58 O.R. (2d) 773 (C.A.)
  • 11 Lac La Ronge Indian Band v. Dallas Contracting Ltd. (2004), 35 C.L.R. (3d) 236 at para 70, 82-95 (Sask. C.A.)
  • 12 1510610 Ontario Inc. v. Man-Shield (NOW) Construction Inc., 2010 Carswell Ont. 1395
  • 13 Q.Q.R. Mechanical Contracting Ltd. v. Panther Controls Ltd. (2005), 40 C.L.R. (3d) 154 at para 16-31 (Alta. Q.B.)
  • 14 529198 Alberta Ltd. v. Thibeault Masonry Ltd. (2001), 19 C.L.R. (3d) 63 (Alta. Q.B.)
  • 15 Lac La Rouge Indian Band v. Dallas Construction Ltd., (2004) 35 C.L.R. (3d) 236 (Sask. C.A.)
  • 16 Daiwood Construction Co. v. Wright Schuchart Construction Ltd. (1992), 3 C.L.R. (2d) 144.
  • 17 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1995), 25 C.L.R. (2d) 259 (Ont. Gen. Div.); Sunny Corner Enterprises Inc. v. Dustex Corp., (2011), 1 C.L.R. (4th) 281 (N.S.C.A.)
  • 18 Rebecca James and Michael Schoenberg, “Incorporating an Arbitration Clause “By Reference”: Reconciling Model Law Article VII and Australian Common Law in Light of Recent Developments”, (2011) 77 Arbitration, Issue I, 84. (“James and Schoenberg”)
  • 19 (1991), 57 B.L.R. 1; 31 Con. L.R. 60 CA.
  • 20 [1912] A.C. 1 HL.
  • 21 Modern Buildings (Waltes) Ltd. v. Limmer & Trinidad Co. Ltd. [ 1975], 1 W.L.R. 1281; [1975] 2 All E.R. 549 CA; Owners of the Annefield v. Owners of Cargo Lately Laden on Board the Annefieldl, [1971] P. 168; [1971] 2W.L.R. 320 CA
  • 22 James and Schoenberg, above.
  • 23 See, for instance, the Ontario International Commercial Arbitration Act, R.S.O. 1990, c. I.9, Article 7(2) of the Model Law attached to that Act The domestic Ontario Act, the Arbitration Act, 1991 ,S.O. 1991, c. 17 does not contain a provision that directly deals with incorporation by reference of an arbitration clause from one contract or document into a second contract. Section 5(1) does say that an arbitration agreement “may be an independent agreement or part of another agreement”.
  • 24 See James and Schoenberg, above, at footnotes 15 and 16.
  • 25 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259; Daiwood Construction Co. v. Wright Schuchart Construction Ltd. (1992), 3 C.L.R. (2d) 144.
  • 26 SimEx Inc. v. IMAX Corp., [2005] O.J. No. 5389 (Ont. C.A.) at para. 23
  • 27 Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at para. 56; SimEx, supra at para. 23; Drumbrell v. Regional Group of Cos. 2007 CarswellOn 407 (Ont. C.A.) at paras. 48-51.
  • 28 Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 85 O.R. (3d) 254 at para. 24; 3869130 Canada Inc. v. I.C.B. Distribution Inc. (2008) ONCA 396 (Canlii) at para. 31.
  • 29 Ibid.
  • 30 Heintzman and Goldsmith on Canadian Building Contracts, Chapter 1, Part 1(b)
  • 31 Foundation Co. of Canada v. United Green Growers Ltd. (1997), 33 C.L.R. (2d) 159 (B.C.C.A.); Pozzebon v. Lamantea, 1988 Carswell Ont. 759 at para. 4; Whitby Landmark Developments Inc. v. Mollenhauer Construction Ltd., (2003) 26 C.L.R. (3d) 161 (Ont. C.A.)
  • 32 Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc., (1996), 25 C.L.R. (2d) 259; Kor-ban Inc v. Pigott Construction Ltd, 1993 Carswell Ont. 825 at para 529.

www.constructionlawcanada.com                                                                                                                               July 25, 2012

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When Is The Main Building Contract Incorporated By Reference Into The Subcontract?

Most standard form building contracts provide for the incorporation of the main contract into the subcontract.  For instance, GC 3.7.1 of the CCDC 2 Stipulated Price Contract requires the contractor to incorporate the terms of that contract into all agreements with subcontractors and suppliers.  But what effect does an Incorporation by Reference clause in the subcontract have?  In 1510610 Ontario Inc. v. Man-Shield (NOW) Construction Inc, the Ontario Superior Court recently held that it does not mean that an obligation to post security for lien claims contained in the main contract is incorporated into the subcontract.

The Background

The main contract between the owner and Man-Shield required Man-Shield to post security for and discharge any liens that were registered.  Man-Shield entered into a subcontract with 1510610.  The subcontract referred to the main contract as “forming or by reference made a part of this Subcontract, insofar as applicable, generally or specifically, to the labour and materials to be furnished and work to be performed under this Subcontract.”  The subcontract stated that, in the event of any discrepancy between the subcontract and the main contract, the terms and conditions of the subcontract were to apply.

Man-Shield had asked 1510610 to sign a subcontract which contained an express provision requiring 1510610 to post security if its sub-trades liened the project, and 1510610 had refused to execute that contract.

When liens were filed by, among others, a sub-trade of 1510610, the owner demanded that Man-Shield provide security and discharge those liens, and Man-Shield did so.  Man-Shield then applied to the court for an order requiring 1510610 to take over this responsibility and post security to replace the security provided by Man-Shield with respect to the lien filed by the sub-trade of 1510610.  The Ontario court dismissed that application.

The Ontario court held that “the extent to which the terms of a principal contract are incorporated by reference into a subcontract is a question of construction of the subcontract.  The mere existence of an incorporation by reference clause in the subcontract did not automatically incorporate everything in the main contract.”

The court held that, for such a significant obligation as providing security for liens to be incorporated into the subcontract, more precise language was necessary.  In arriving at this conclusion, the court particularly relied upon the fact that 1510610 had been requested, and had refused, to execute a contract containing just such an obligation; and the fact that the incorporation by reference provision was prefaced with the words “insofar as applicable, generally or specifically to the labour and materials to be furnished and work to be performed under this Subcontract.”  In light of these facts, the court was not satisfied that the parties intended the lien security obligation in the main contract to be incorporated into the subcontract.

This decision highlights the need for parties to building contracts to carefully consider what they intend by an Incorporation by Reference clause.  These clauses are dangerous for subcontractors because they may impose unforeseen obligations arising from the main contract which they had no part in negotiating.  Courts have been sensitive to this issue and have been reluctant to apply these clauses, holus bolus.  This reluctance is clearest when the subject matter is not directly related to the physical prosecution of the work.  In other circumstances, the courts may insist upon objective proof that the parties really intended such incorporation.  The Man-Shield decision is just a recent example of that reluctance.

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

Construction Contracts   –   Subcontracts   –   Interpretation  –   Incorporation by Reference

1510610 Ontario Inc. v. Man-Shield (NOW) Construction Inc, 2012 ONSC 302

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                        April 4, 2012

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