Alberta Court Applies Principles Of Contract Interpretation And Limitations To A Client-Consultant Contract

In the recently released decision in Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11, the Alberta Court of Queen’s Bench applied three potential aids to the interpretation to a client-consultant contract: contra proferentem; post-contract conduct; and estoppel. The court also applied the limitation period to a claim for a percentage-based fee.

The Interpretation and Limitations Issues

After the project was finished, the architects asserted that, on a proper interpretation of the client-consultant agreement, the fee should have been paid on a percentage basis, not a fixed fee basis. The architect relied upon the principle of contractual interpretation known as contra proferentem since the client (the University) had prepared the six drafts of the agreement. The owner asserted that the fee was a fixed fee, and also said that the contract should be interpreted in light of the parties’ actual performance of the contract and that the consultant was estopped from asserting that the fee was based on a percentage of the cost of construction.

The owner also asserted that the consultant’s claim was barred by the limitation period since more than two years had expired from the time when, if the consultant was correct, the fee would have amounted to more than the consultant was paid under the contract and the consultant knew or should have known that the owner was in breach of the contract.

Contra Proferentem

The Alberta court held that there was very little, if any, place for the application of the contra proferentem rule in the present circumstances:

“Where an ambiguity arises in respect of a matter that has been specifically flagged for future negotiation between two sophisticated parties, it should be resolved through the usual principles of contractual interpretation. This includes have regard to the factual matrix and, in some limited circumstances, post-contract conduct that might assist in determining the objective of the parties. The doctrine of contra proferentem has very limited utility or application in that analysis.”

Post-contractual conduct

During the performance of the contract, the parties proceeded on the basis that the fee was a fixed fee, not a percentage fee, but that the consultant was entitled to extra payment for work done in relation to change orders. The Alberta Court held that, in interpreting the contract, it was proper to look at this post-contractual in arriving at the proper interpretation of the contract, particularly when the conduct was consistently and unambiguously in favour of one interpretation:

“…..Such post-contract conduct is not properly considered as part of the factual matrix bearing on the intention of the parties at the time the contract was entered into. It may be considered, however, in the resolution of ambiguity in the contractual language used: Shewchuk v Blackmount Capital Inc., 2016 ONCA 9123 at 41….A cautionary approach is required where evidence of such subsequent conduct is used for the purpose of divining intention. It must generally be given limited weight, but “will have greater weight if it is unequivocal in the sense of being consistent with only one of the two alternative interpretations that generated the ambiguity triggering its admissibility”: Shewchuk at para 54. In this case, the language used in each of the six Change Orders signed by the parties during the project is both consistent and unequivocal in treating the work done by RKA as being part of the basic services. The language is also consistent with being compensated through adjustments to the “Fee for Service” under Section 1 of Schedule C to the Service Agreement.” (underlining added)


For the same reason, the Alberta court held that, by conducting itself throughout the project on the basis that the fee was payable on a fixed basis, the consultant was now estopped from asserting the contrary:

“… is reasonable to infer from the evidence that, had RKA refused to approve and sign-off on the Change Orders as worded, there would have been, at minimum, a discussion and negotiation of how RKA should be compensated, having regard for the wording of Article 4.3.2 and the fee negotiation contemplated in respect of fees for “Additional Services.” By RKA acquiescing in the Change Order process as implemented, only to assert its entitlement to additional fees well after conclusion of the project, the University was deprived of that negotiation (or termination) opportunity to its detriment…… Accordingly, had I accepted the position of RKA regarding the proper interpretation of the Service Agreement, I would have nonetheless found them to be estopped from claiming damages for breach of the Service Agreement.”

The Limitation Period

The Alberta Court held that the consultant’s claim was barred by the Alberta two year limitation period. If the consultant was correct that the contract provided for a fee based on a percentage of the cost of construction, then during the course of the project it would have been apparent to the consultant that the cost of construction had much exceeded the projected cost and that the consultant was owed a much higher fee than was being paid to it. More than two years passed from that point in time before the consultant made its claim.

The consultant asserted that the fee was not truly payable until its legal entitlement to percentage-based compensation was known, which it asserted was not known until the building was complete and the construction costs were known with certainty.

The Alberta court accepted the owner’s submissions:

“The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed. It is also clear that RKA was being paid for ongoing work, excluding the separately negotiated FFE Agreement, pursuant to a series of Change Orders purporting to contain add-ons to the basic services fee described in Section 1 of Schedule C…..Accordingly, the essential facts supporting a breach of contract under RKA’s interpretation of the Service Agreement were probably known as early as March 23, 2009. These facts were certainly known when the post-project reconciliation of amounts paid to RKA, as against amounts owing under the contract, was done in March 2010. Accordingly, if RKA is correct in its interpretation of the Service Agreement, and is not estopped from claiming a breach, it would nonetheless have been out of time pursuant to the Limitations Act.”

The Merits Of The Claim

The court reviewed what it described as the “poorly drafted” and “confusing and ambiguous language” of the contract. Thus, the RFP for the contract stated that the “fees will be based as a percentage (%) of the total construction budget” and the heading to Article 4.3 of the contract stated that the fee was a “Percentage-Based Fee”. However, article 4.3.2 stated: “For greater certainty, the Fee for Services as set out in Schedule C is a fixed fee, and there will be no adjustments to the fee in the event of changes in Construction Cost due to inflation. The fee will only be adjusted in the event and in accordance with an approved Change Order which changes the Scope of Work and results in an upward adjustment in the Construction Cost or Contract Time.” Schedule C to the contract stated: “(a) Fixed Base Fee…”

After sifting through all this inconsistent language, the Alberta court held that the contract provided for a fixed fee, not a percentage fee based upon the cost of construction. The court also held that the consultant was entitled to extra fees in relation to work done on the change orders:

“Article 4.3.2 shows that the parties intended that the fee for services be a fixed fee….. Although poorly drafted, Article 4.3.2 also shows that, on an objective basis, the parties intended that compensation for basic services in respect of changes to the scope of work being done, as opposed to “Additional Services,” are to be governed by Article 4.3 and the corresponding provisions of Schedule C…..The language used by the parties in Article 4.3.2 allows the University to exercise a measure of cost control by reviewing and approving Change Orders, and to adjust the base fee for services through the Change Order process. Section 1.3(a) of Schedule D of the Service Agreement includes, as “Additional Services,” revising or providing additional drawings, specifications, or other documents “caused by instructions inconsistent with instructions or written approvals previously given by the owners, including revisions made necessary by adjustments in the Owner’s program or Project Budget….The better view, however, is that the inclusion of services associated with a scope of work change in Article 4.3.2 was intended to bring them within the ambit of services compensable through adjustment to the fixed base fee as set out in Section 1 of Schedule C.”

Accordingly, the court dismissed the consultant’s claim for further fees based on a percentage of the cost of construction.


It is not often that one construction law case deals with a number of contract interpretation principles and the limitation period. This decision will be a useful guide to those principles for application in similar circumstances.

The court was strongly influenced by the fact that, throughout the project, the consultant participated in the calculation and payment of the fee on a fixed fee basis, and did not suggest, until the project was well over, that the fee should have been paid on a percentage basis. Clearly there is a lesson for consultants here: be up front about the basis for the fee, and don’t try to assert a different basis after the fact.

The court’s conclusion on the limitations issue might be contentious. Under section 3(1) of the Alberta Limitation Acts, the limitation period starts to run when the claimant knew or ought to have known that: (i) injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to conduct of the defendant, and that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding.

Accordingly, the limitation period only commences when the cause of action arises and (not or) the claimant knows or ought to know that it has a claim. In other words, the fact that the claimant knows or ought to know that the defendant’s conduct amounts to a breach of contract, and that the claimant will have a claim, does not start the limitation period unless the time for the obligation to be performed has arrived and an accrued cause of action exists (unless the claimant treats the defendant’s conduct as an anticipatory breach of contract and terminates the contract forthwith).

If the fee in this case was payable by installments, and each instalment was itself legally due and payable during the project at the stipulated time or event, then the limitation period for each payment then arose. But if, on the proper construction of the contract, the fee was one fee only earned on the completion of the project, although payable during the project by way of part-payments, then the limitation period would only arise when the fee was fully earned. And even in the first case, the limitation period would only expire payment by payment, and would not expire for those payments payable less than two years before the action was commenced.

The Alberta court did not discuss when the cause of action for the fee payments arose. In its view, the essential question was: “when the facts giving rise to the claimed breach were known or discoverable.” It further stated: “The $21,000,000.00 in “Construction Cost” (including contingency) set out in Schedule C of the Service Agreement was exceeded at an early stage. By this time, which was approximately January 2009, 75% of “Total Service Fee” had already been billed.” It appears to have assumed that the obligation to pay had by then arisen. If that assumption is correct, then the court’s conclusion is correct. If the obligation to pay had not yet arisen, even though the clamant had submitted interim bills, then the court’s conclusion may not be correct. In addition, if any of the client’s payment obligations fell within two years of the commencement of the action, then the action may have been timely with respect to those payment obligations.

All of which is to say that the parties to a building contract that take a long time to perform should be careful about limitation periods that may arise during the contract. A building contracts is usually considered to be “entire”, “dependent” or “whole” contract, under which the obligations are not independent but dependent on one another, and not fulfilled until entirely fulfilled. However, the part payment obligations under a building contract are usually considered to be severable and presently enforceable as to each payment. This is how the Alberta court considered the payments under this consultant’s agreement. The issue may be disputable under another building or consultant’s contract.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, part 3(f), chapter 2, parts 2(3)(f), 2(4)(iii) and chapter 9, part 3(a).

Riddell Kurczaba Architecture Engineering Interior Design Ltd v. Governors of the University of Calgary, 2018 CarswellAlta 10, 2018 ABQB 11

Building Contracts – Interpretation – Estoppel – Contra proferentem – Post-contract conduct – Limitation periods

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                     January 29, 2018




Standard Form Contract To Be Given Plain Meaning, Not The Industry Meaning: Supreme Court Of Canada

In its recent decision in Sabean v. Portage La Prairie Mutual Insurance Co., the Supreme Court of Canada has held that words in a standard form contract used by the public should be given their plain and ordinary meaning, and not a different meaning that those words might be given by the industry or trade which drafted the contract.

While this decision related to an insurance contract, it may well apply to standard form building contracts. The question may then arise as to whether building contracts – such as the CCDC contracts – are standard form contracts. If they are, can the words in those contracts have a trade or industry meaning when they are used between participants in the building industry who understand that meaning, and another meaning when they are entered into by a member of the public, such as a homeowner?


The plaintiff recovered a judgment arising from a motor vehicle accident. The judgment exceeded the limits of the tortfeasor’s insurance policy. The plaintiff claimed the shortfall under the policy with his own insurer. Under the standard form excess insurance provision of that policy, there were deductions from the amount payable by the insurer. One of those deductions was for future benefits arising from a “policy of insurance providing disability benefits.” The plaintiff was entitled to receive future Canada Pension Plan (CPP) disability benefits. The insurer asserted that the CPP was a “policy of insurance”. The trial judge held that the CPP benefits were not deductible from the amount payable by the insurer. The Nova Scotia Court of Appeal held that they were. The Supreme Court of Canada re-instated the trial judge’s decision, holding that the CPP benefits were not payable under a “policy of insurance”.

Decision of the Supreme Court of Canada

In arriving at its conclusion, the Supreme Court held that benefits payable by the Canada Pension Plan did not fall within the plain meaning of the words “policy of insurance”. The insurer then submitted that in Gill v. Canadian Pacific Railway, [1973] S.C.R. 654, the Supreme Court of Canada had decided that CPP payments were deductible in calculating monies due under the Families’ Compensation Act of British Columbia. The insurer submitted that the court in the present case should apply the reasoning in the Gill decision. More particularly, however, the insurer submitted that the Supreme Court should recognize that, by reason of the Gill decision, the deductibility of CPP benefits from damage claims had been recognized or assumed in the insurance industry and that therefore the words “policy of insurance” in private insurance policies, like the one in issue in the Sabean case, were meant to include CPP benefits. Accordingly, the insurer submitted that this meaning which had developed in the insurance industry, not the ordinary meaning of the words “policy of insurance, should be applied to those words.

The Supreme Court disagreed. Having found that the ordinary and natural meaning of the words “policy of insurance” did not include CPP benefits, the Supreme Court rejected the submission that an insurance industry or trade meaning could displace the ordinary meaning of those words. It said:

“The insurer submits and the Court of Appeal accepted that the meaning of “policy of insurance” under the Endorsement must be understood in the context of this Court’s decision in Gill. Implicit in the approach urged by the insurer is the suggestion that this Court’s decision in Gill itself supports an alternative reasonable interpretation of the disputed words at the first stage of the Ledcor analysis. As I shall explain, I cannot accept this as a reasonable interpretation of this insurance policy. Gill does not interpret or inform the ordinary words of the Endorsement. Nor would the average person applying for this insurance contemplate the distinct tort and statutory context in Gill in understanding the words of the Endorsement. The insurer relies on its specialized knowledge of the jurisprudence to advance an interpretation that goes beyond the clear words of the policy.” (underlining added)

The Supreme Court arrived at this conclusion for a number of reasons. The purchasers of insurance coverage are not knowledgeable about the insurance case law nor about the drafting of insurance policies:

“It cannot be assumed that the average person who applies to purchase this excess insurance policy would imbue the words in the Endorsement with knowledge of how they were interpreted by the courts for the purposes of provincial insurance legislation and the collateral benefits rule in tort. In this context, the purchaser is not someone with the specialized knowledge of related jurisprudence or of the objectives of the insurance industry. Thus, the history and intention of the insurance industry in drafting the Endorsement following Gill do not assist in the interpretation of this contract.” (underlining added)

In addition, the Gill decision dealt with a statutory, not a contractual, provision. The court in Gill was applying the legislature’s intent, not the intent of parties to a contract as in Sabean. As the Supreme Court said in Sabean:

“…the decision in Gill is confined to a distinct statutory context. When interpreting a statute, the court searches for the intention of the legislature. In interpreting a standard form policy of insurance, the court is concerned with the ordinary meaning of the contract as it would be understood by the average insured.”


This decision follows and has solidly entrenched the recent decision of the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. 2016 SCC 37. Both cases deal with standard form contracts. In Ledcor, the court held that the meaning of the words in a standard form contract cannot be changed by the circumstances surrounding one instance of the use of the contract, because they must be given the same meaning for all users of the contract.   In Sabean, the court has held that the meaning of the words in a standard form contract cannot be changed by industry or trade usage, at least when the contract is entered into by members of the public who are not familiar with the case law and drafting behind that wording. In both decisions, the Supreme Court has strongly endorsed the principle that standard form contracts, and particularly those prepared by a member of an industry for contracting with a member of the public, must be interpreted as written and in according with their ordinary meaning, and must not be altered by extraneous factors, particularly at the instance of and in favour of that industry.

This decision raises important questions for building contracts, such as the CCDC contracts. As I raised in my article of October 10, 2016 about the Ledcor decision, an initial question may be: are the CCDC contracts “standard form contracts”? Since they are not drafted by one particular company and are not issued on a “take it or leave it” basis to customers, but rather developed on a consensual basis by the entire building industry, there is an argument that building contracts like the CCDC contracts are not standard form contracts that fall within the Ledcor and Sabean decisions.

If building contracts do fall within the Sabean decision, what is the effect? If one of the parties to the contract is a member of the public – such as a homeowner, or a business seeking a building for its premises – then the decision in Sabean means that words in the contract may not be given a technical or trade meaning understood by the building industry but not by the general public.

But what if the contract is between the contractor and the subcontractor? Could the same contentious words in the contract be given a technical or trade meaning known to the building industry? And then what happens when there is a main contract with a member of the public and a subcontract between two members of the building industry, and the contentious words appear in both contracts? Could the words in the main contract mean one thing – because they cannot be given an industry meaning – but mean another thing in the subcontract – because the words have a well-known meaning in the building industry? And if the subcontract incorporates the main contract by reference, what happens to the conflicting meaning of the words?

Building contracts often contain a Definitions section to ensure that the parties understand what they mean by particular words. In the CCDC contracts, the Definitions are some two pages in length. The Sabean case is a warning to those drafting “standard form” contracts, including those in the building industry, that they should carefully review their contracts. If those contracts contain any wording that relies on an industry or trade meaning, that meaning should be clearly spelt out in the contract.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 2, parts 3(a), 3(e) and 4(v)

Sabean v. Portage La Prairie Mutual Insurance Co., 2017 CarswellNS 38, 2017 CarswellNS 39, 2017 SCC 7

Interpretation of Contracts – Standard Form Contracts – Trade and Industry meaning –

Thomas G. Heintzman O.C., Q.C., L.L.D. (Hon.), FCIArb                         March 5, 2017

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


Interpretation Saves Contract From Penalty Doctrine

Contract law contains a fundamental rule: penalty clauses are prohibited and liquidated damage clauses are permitted. But in its recent decision in Ottawa Community Housing Corp. V. Foustanellas, the Ontario Court of Appeal held that there is another way to look at this rule. The clause is valid if, properly interpreted, the clause delays, but does not permanently affect, the exercise of the contractor’s rights. In this case, the clause is not a penalty or liquidated damages clause at all. Parties about to enter into a building contract should examine this decision to see if there are ways to draft the contract to avoid the penalty doctrine but achieve much of the desired result.


Ottawa Community Housing Corp. (OCHC) entered into a contract with Argos Carpets, of which Foustanellas was the principal. OCHC later determined that Argos was overbilling OCHC. OCHC then notified Argos that it was withdrawing the remaining work under the contract and withholding payment of the past amount due under the contract. At trial, Arogos argued that the contractual provision in question amounted to a liquidated damages clause and limited, to the withheld payment, the amount which OCHC could recover against it.

Clause 1.6.1 of the contract entitled OCH, in certain circumstances, to “take the whole operation, or any part of the operation out of the hands of the Contractor.” The owner relied upon that clause to take the remaining work out of Argos’ hands.

Clause 1.6.3 stated that:

     “…where any or all of the work has been taken out of the hands of the Contractor, the Contractor will not be entitled to any further payment, including payments then due and payable but not yet paid. The obligation of the Owner to make payments will cease, and the Contractor will be liable upon demand to pay the Owner an amount equal to all of the losses and damages incurred by the Owner for the non-completion of the work.”

Decision of the Ontario Court of Appeal

The Court of Appeal held that clause 1.6.1 entitled the Owner to terminate the contract on the happening of events which triggered that clause. If that occurred, the courts said, then the owner was entitled to invoke clause 1.6.3.

The Court of Appeal agreed with the trial judge that clause 1.6.3 was neither a penalty clause nor a liquidated damages clause as recognized in established contract case law. Rather, clause 1.6.3 had two effects:

“ First, it relieves the owner (OCHC) from any obligation to make payments to the contractor, including in respect of unpaid receivables, pending determination of the owner’s losses and damages arising from the contractor’s non-compliance with the carpet contract. Second, it establishes the contractor’s (Argos’) liability to the owner (OCHC) for an amount equal to the owner’s losses and damages occasioned by the contractor’s non-completion of the work provided for under the carpet contract.

Thus, properly interpreted, clause 1.6.3 functions as a “stop payment” provision. It is designed to halt the owner’s contractual obligation to make any payments to the contractor pending the determination of the owner’s losses and damages arising from the contractor’s breach of contract.”

The Court of Appeal found that several ingredients of the contract supported its interpretation of clause 1.6.3.

First, the clause did not state a specific amount which was recoverable by the owner, such as one would expect to find in a penalty or liquidated damages clause.

Second, the amount due to the contractor could vary widely from job to job, making the clause a sensible delay of the rights of the contractor on all jobs until the owner’s damages could be assessed.

Third, the fact that the clause gives the owner the right to set off its claims against the contractor’s entitlement to payment for work “does not convert clause 1.6.3 into a penalty or liquidated damages provision.”


Clause 1.6.3 might have been held to be an unenforceable penalty clause if its effect was to forfeit the monies due to the contractor when the balance of the contract work was taken out of its hands. Or, if the amount of the forfeiture was a reasonable estimation of the owner’s damages – an apparently unlikely scenario – the clause might have been held to be effective as a liquidated damages clause which set the amount of the owner’s maximum entitlement as the amount owed to the contractor when the work was taken out of its hands, as the contractor argued. Instead of determining the dispute according to the traditional penalty/liquidated damages debate, the trial and appeal court took the debate to an entirely different debate – one about the proper interpretation of the contract.   And they found that all the clause did was defer the contractor’s right to enforce its claim to monies due until the owner’s claim for damages was determined.

This decision is a good example of the rule of contract interpretation known by its Latin name: ut res magis valeat quam pereat: or, that the thing shall have effect rather than perish. In other words, if there is an interpretation that saves the validity of the contractual provision, it should be preferred over one that would cause it to perish. In this case, interpreting the clause to delay the rights of the contractor gave force and effect to the clause which might otherwise have been an ineffective penalty clause.

A party negotiating a building contract should consider this decision when deciding what remedies it really wants in the event of a breach of the contract by the other party. If the party really wants a definitive fixing of the amount due by the wrongful party, then this decision will not help it. In that situation it will have to face up to the penalty/liquidated damages rule and all the perils that the rule involves. If the amount fixed is later considered by the court to be an unrealistic estimation of the damages flowing from the breach, then the clause may be struck down as a penalty clause.

But if the party really wants a means to forestall the other party from collecting monies due under the contract until its own damages are determined, then this decision offers a way to accomplish that result.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. Chapter 2, part 3(d), Chapter 4, part 3(h) and Chapter 9, part 6(j).

Ottawa Community Housing Corp. V. Foustanellas (2015), 125 O.R. (3d) 539

Building contracts – interpretation – penalty clauses – liquidated damages clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     October 14, 2015



Can A Payment Bond Impose Double Payments On A Contractor?

Payment bonds come in various shapes and sizes and it is important to read them carefully before concluding what they bond. They may not just bond the payment obligation of the party obtaining the bond. They may also bond the payment obligations of all persons on the project.  If they do the latter, then the bond may expose the party which obtained the bond to more than one payment obligation.  That was the conclusion in Nova Scotia Court of Appeal in the recent case of APM Construction Services Inc. v. Caribou Island Electric Ltd.


ACS was an unpaid sub-sub-contractor on a building project of the province of Nova Scotia.  It sought payment under a bond obtained by the general contractor, APM, from Travelers Insurance. The bond stated as follows:

 NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that if the Principal shall at all times promptly make payment to all Claimants for all work, materials or services used or reasonably required for use in performance of the Contract, or as the same be changed, altered or varied, to the satisfaction of the Obligee, then this obligation shall be void.

. . .

IN THIS BOND where there is a reference to Claimant it shall mean any person, firm or corporation doing or performing any work or service or placing or furnishing any materials, or both, for any purpose related to the performance of the Contract:  work, service and materials being constructed to include all water, gas, power, light, heat, oil, gasoline, service or rental equipment which is supplied or used for or in connection with the performance of the Contract.   (underlining by the court)

APM’s subcontractor was Caribou Island Electric which had in turn subcontractred work to ACS, but had not paid ACS in full. Caribou owed taxes to the Canadian Revenue Agency and CRA made demand on APM for payment in full of the amounts owed by APM to Caribou.  The obligation of APM to pay CRA was undisputed, and the issue was whether, upon payment of those monies, Travelers had any fuher obligation to ACS and the other contractors or suppliers on the project.

ACS acknowledged that the payment by APM to CRA discharged APM’s payment obligation to Caribou under the subcontract and discharged the lien registered by ACS. Indeed, ACS acknowledged that this payment also discharged APM’s trust fund obligation, and in light of that admission the Court of Appeal said that the present case did not decide that issue.

However, ACS asserted that, even though APM’s contractual and lien obligations may have been discharged, the bond was not discharged.  It asserted that the bond was a separate and self-standing obligation which remained in effect, and Travelers was obliged to pay it under the bond.

APM and Travelers asserted that this interpretation of the bond was absurd, and that if Travelers was obliged to pay ACS’s claim, then APM would be obliged to recompense Travelers under the bond.  Effectively, APM would be obliged to pay monies twice, once to CRA and again to ACS. APM and Travelers said that that could not be the proper interpretation of the bond.

The Decision

 The Nova Scotia Court of Appeal helpfully stated the following principles applicable to the interpretation of a bond:


1. The bond is a freestanding contract and its terms ultimately govern the interpretation exercise. The wording of the bond’s terms must be given its ordinary and literal meaning. The words cannot be interpreted in isolation but must be looked at in the context of the bond as a whole.

2. The court will look to the intentions of the parties and, in so doing, will try to give commercial efficacy to the agreement. However, the court will not replace the parties’ agreement with its own. Thus, if the wording of the agreement is clear and unambiguous, parties will be held to their agreement, even where the results appear to be draconian or absurd….

3. Where the disputed contract is part of a series of contracts, the court will look to the surrounding contracts as well. However, in the context of surety bonds, the terms of the bond ultimately govern; while the underlying contract may be considered, it will only be determinative if the specific obligations contained within it are incorporated by reference into the bond.

4. Contra proferentemis available but only where there is an ambiguity that cannot be resolved through other principles of contractual interpretation.”

The Court then considered the form of other bonds. The standard form CCDC bond says:

  “…A Claimant for the purpose of this Bond is defined as one having a direct contract with the Principal for labour, material, or both, used or reasonably required for use in the performance of the Contract….”  (underlining added)

 The bond required by the federal government says:

 “For the purpose of this Bond, a Claimant is defined as one having a direct contract with the Principal or any Sub-Contractor of the Principal for labour, material, or both, used or reasonably required for use in the performance of the Contract …”  (underlining added)

 The Court noted that in the CCDC form, only subcontractors were protected by the bond, while in the federal form, contractors and subcontractors are protected.  The bond in the present case protected any person providing work or materials to the project.


If a payment bond taken out by the contractor is premised on payment, not just of subcontractors by the contractor, but payment of any person performing work or service or placing or furnishing any materials, or for any purpose related to the performance of the main contract, then the bond will not be discharged by payment by the contractor to the subcontractor nor by the discharge of the contractor’s obligations under construction or builders lien legislation.

Rather, if so expressed, then the bond is a self-standing independent obligation to pay all persons performing work on the project which, if not fulfilled, may be called upon by any of those persons. Accordingly, if the contractor is obliged to pay a taxation authority which claims unpaid taxes against the subcontractor and therefore has a claim to the monies due by the contractor to the subcontractor, that payment may discharge the contractor’s liability under the subcontract with the subcontractor and under construction and builders lien legislation, but it will not discharge the bond, and the contractor may be liable a second time to recompense the bonding company.

Construction liens  –  bonds  –  priorities  –  subcontractors  –  interpretation

APM Construction Services Inc. v. Caribou Island Electric Ltd.,  2013 CarswellNS 291, 2013 NSCA 62, 21 C.L.R. (4th) 106

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                        September 9, 2013

Can Someone Be Compelled To Arbitrate By Estoppel?

Can the conduct of the parties after they have signed a commercial contract influence the interpretation of the arbitration agreement contained in that contract? If they take one position during the performance of the contract with respect to whether a dispute is arbitrable, can they be estopped from asserting to the contrary when a dispute actually arises?  The Albert Court of Queen’s Bench has recently answered Yes to both questions in Alberta Oil Sands Pipeline Ltd v. Canadian Oil Sands LimitedThis decision raises important issues relating to the conduct of parties leading up to arbitration, particularly under long term commercial agreements.


Alberta Oil Sands Pipeline Ltd. (AOSPL) owned and operated a pipeline between Fort McMurray and Edmonton in Alberta. AOSPL entered into an agreement with Canadian Oil Sands and other companies (the Participants) which had refineries in Fort McMurray.  Under that agreement, AOSPL agreed to build a new portion of the pipeline.  However, AOSPL did not complete 4.1 kilometres of the new pipeline. The Participants said that this failure amounted to a breach of the agreement. AOSPL said that it did not, and that the existing pipeline, together with the new portion it had constructed, satisfied all of the obligations it had undertaken in the agreement. In April 2009, the parties entered into a tolling agreement preserving their right to raise claims and defences with respect to the 4.1 kilometre pipeline dispute.

Then, other disputes also arose. One related to an increased pipeline tariff imposed by AOSPL and another relating to the details of invoices submitted by AOSPL. The Participants asserted their right under the agreements to audit the books and accounts of AOSPL. As a result of the 2009 audit, the Participants submitted a claim against AOSPL. Article 18.3 of the agreement provided for arbitration of audit claims.  The Participants submitted their claim under that article. In June 2010, AOSPL submitted its response and the Participants replied to AOSPL’s response, both within the time period called for in that article. After the 180 day period for resolving disputes referred to in Article 18.3, in November 2010 the Participants delivered a notice of arbitration of their claims.

In December 2010, AOSPL commenced an action for a declaration that the audit claims were not subject to arbitration.  The Participants filed a Statement of Defence asserting that they were subject to arbitration and brought an application to stay the action.  In that motion, AOSPL asserted that the right of audit was only a right to verify its books and records from an accounting or mathematical standpoint, and not from a contractual correctness standpoint and that therefore the arbitration agreement did not apply to the Participants’ claims.  The Participants asserted that the audit and arbitration processes applied to any errors in the books and records of AOSPL.

In March 2011, AOSPL gave the Participants 60 days’ notice of the termination of the tolling agreement.  The Participants then immediately commenced an action for damages for breach of contract by reason of AOSPL’s failure to complete the 4.1 kilometres of pipeline. Both parties agreed that this claim was not an audit claim and was not arbitrable.  AOSPL brought a motion to consolidate this action with its action relating to the audit claims.

The Decision

The Court found that the arbitration clause applied to the audit claims. It held that “it is unreasonable commercially to accept that the intention of the parties was to resort to two different forums for the resolution of disputes about a single aspect of the pipeline tariff,” one relating to accounting correctness and the other relating to contractual correctness.  The court noted that the Alberta Arbitration Act specifically gave the arbitrator the authority to determine questions of law, and there was nothing in the arbitration agreement that removed that authority.

The judge also held that, if she was incorrect in that interpretation, she would arrive at the same conclusion by reference to the conduct of the parties subsequent to the making of the contract, and this is the interesting point which is addressed in this article.  The judge held that the conduct of the parties was relevant for two reasons:

First, as an aid to interpret the contract, and

Second on the ground of estoppel

The conduct of AOSPL that the judge found relevant was of two kinds.

First, during the claims process arising from the present dispute, AOSPL had followed the claims and arbitration process and only asserted that the claims were not arbitrable after they had been submitted to arbitration by the Participants.  In that process, personnel of AOSPL made statements, both within AOSPL and in meetings with the Participants, that the claims were arbitrable.

Second, AOSPL had participated in arbitration proceedings relating to audit claims in 2001, 2002 and 2005.  In 2001, when the Participants had issued a Statement of Clam with respect to audit claims, AOSPL had referred the issue to arbitration, the action was stayed and the dispute was arbitrated.

AOSPL submitted that none of this conduct was relevant due to the clause in the contract stating that there was to be no waiver of a party’s rights by virtue of its conduct. To this the judge replied that the relevance of AOSPL’s conduct was not whether it had waived any rights but the proper interpretation of the contract in light of the parties’ conduct.

As to estoppel, the judge found that AOSPL’s conduct amounted to a representation by conduct. AOSPL had participated in the claims process leading to arbitration and that amounted to a representation to the Participants that the “audit procedure …was not disputed.” If it was an essential ingredient in an estoppel that the Participants had altered their position, that alteration was present. If AOSPL had notified the Participants of its position at the outset, then the Participants would have issued a Statement of Claim immediately, and not be faced with the limitations defence that AOSPL now raised.

While silence is not always a representation, the judge concluded that silence is a representation when the parties are in a contractual relationship with each other and engaged in a dispute resolution process. In those circumstances, AOSPL had a duty to respond and to not remain silent about its position that the audit claims were not arbitrable.

The judge then considered whether the audit claims should proceed to arbitration or be tried with the 4.1 kilometre claim. The judge refused to exercise her discretion to order that the audit claims proceed in court, for two reasons.

First, the audit and 4.1 kilometre claims were different.

Second, AOSPL had asserted a limitation defence to the audit claims if they proceeded in court. In the result, there was good reason to apply the mandatory language in section 7 of the Alberta Arbitration Act and stay AOSPL’s action brought in the face of the arbitration agreement.


The judge’s decision to apply the principles of estoppel to an arbitration agreement is novel, but one could argue that it is heartening.   It is novel because estoppel is usually thought of as either a principle of evidence or a principle of substantive law.  In this case, estoppel was applied in a procedural setting, in the lead-up to the commencement of an arbitration.

But some will see this decision as welcome on the ground that estoppel is an ideal response when contradictory positions are taken in pre-arbitral proceedings, especially when the result is the loss of time and expense and, possibly, a limitation period.  Indeed, in the face of an assertion that a limitation period has been lost, it is hard to imagine that a court could take any other position than sustain the earlier proceeding.

Estoppel has a particular application to the commencement of arbitration proceedings. As I have commented in a recent article, it is sometimes difficult to know whether an arbitration proceeding has been commenced, or properly commenced.  There is no court office in which the arbitration claim may be issued. When the agreement requires that certain steps be taken before the arbitration is started, there is no court to rule on whether those steps have been properly taken. Even after notice of arbitration is given and before the arbitral tribunal is appointed, there is no body to rule on whether the arbitration has been properly started.  Yet time is passing and a limitation period may go by. The whole process seems dependent on each party stating a timely objection to any steps leading to the appointment of the arbitral tribunal.

Estoppel also seems appropriate when the parties have an ongoing contractual relationship.  Thus, under a labour, franchise or construction agreement, when the parties deal with each other over a period of time and are not just engaged in a one-off transaction, they make daily decisions which are instantly understood to be acceptable to the other party if there is no objection, and without turning to each other each time and saying “Right?”  True, each party is not expected to be the other party’s lawyer.  But making timely procedural objections does not seem to be too much to ask, or if not made, that the silent party live with the procedural result.

Alberta Oil Sands Pipeline Ltd v. Canadian Oil Sands Limited, 2012 ABQB 524

Arbitration – Stay of arbitration – Limitation Period – Estoppel  –  Refusal to arbitrate

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

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

Remember Rainy Sky: The Commercially Sensible Interpretation Prevails

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

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

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

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

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

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

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

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

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

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

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

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

The Supreme Court ended its judgment with the following statement:

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

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

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

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

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

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

Construction Law  –  Interpretation of Building Contracts  –  Bonds:

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

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

How Does A Court Find And Interpret An Oral Construction Contract

Construction Contract  –  Interpretation – Oral Contract

A contract in the construction industry is usually in written form.  Often the contract will follow the CCDC form of contract.  But what principles should apply to the interpretation of oral contracts?  The British Columbia Court of Appeal recently addressed this issue in Copcan Contacting Ltd v. Ashlaur Trading Inc.

The alleged contract was for the logging of lands in British Columbia.  While the contract was not for the construction of a building, the principles that the court applied are the same that are applied to building contracts.

The parties did not agree that there was a contract, and if there was such a contract, what the terms of it were.  The plaintiff asserted that there was a contract and the defendant said that there was not.  The trial judge held that there was a contract.  An appeal was taken to the British Columbia Court of Appeal.

The parties acknowledged that the test to determine whether there was a contract was an objective test, that is, whether a reasonable bystander observing the parties would have concluded that they had made a contract.  In dealing with this question and with the question of what terms the contract (if made) contained, the Court of Appeal held that two principles applied.

 First, the Court must assume that the parties understand the business environment in which they were conducting their negotiations.  As the court said, the issue “must be viewed from the perspective of a reasonable person familiar with contracting practices in the British Columbia logging industry.”

Second, since the contract was an oral contract, the court would give a certain latitude or flexibility in determining what the terms of the contract were.  The court held that, having found there was an oral contract, the trial judge “was therefore entitled to exercise greater flexibility in the use of evidence in order to construe the contractual terms than can be utilized where the terms of the contract have been reduced to writing.”

In arriving at this latter conclusion, the Court of Appeal relied upon the reasoning in one of its prior decisions in which it had said that “this flexibility follows intuitively from the recognition that oral contracts must often be construed without the key interpretive tool used to understand written contracts – the words of the agreement.”

This decision demonstrates the inclination of a court to ensure that the reasonable expectations of the parties are not disappointed if, on the evidence, the court is satisfied that the parties made a contract.  Of course, the party asserting that a contract was made must demonstrate that fact on a balance of probabilities.  But if the court is satisfied that they did, then the court will be receptive to arguments about the contents of the contract in such a way that will give effect to the contract.

This decision is also a handy reference in relation to any dispute over an alleged oral contract.  It contains the three essential principles applicable to the existence and terms of the oral contract: the objective test to determine its existence; the industry perspective from which the parties must be assumed to be acting; and the flexibility with which the court will determine the terms of the contract.

See Goldsmith and Heintzman on Canadian Building Contracts, Chapter 1, Parts 1(b)-(c) and 3

Construction Contract  –  Interpretation  –  Oral Contract :

 Copcan Contracting Ltd v. Ashlaur Trading Inc., 2010 BCCA 597

Thomas G. Heintzman O.C., Q.C.                                                                           August 8, 2011

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

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

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

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

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

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

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

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