Are “Services” Lienable If They Relate To Something That Is Not An “Improvement”?

Whether something put on land is an “improvement” for the purposes of construction and builders’ liens can be a difficult question of fact and law. Usually the dispute revolves around the degree of attachment of the “thing” to the land and the permanence of the attachment.

Then, add to that dispute the fact that “services” are provided to design the thing, bring it to the land or place it on or attach it to the land. Are the services lienable?

In Grey Owl Engineering Ltd. v. Propak Systems Ltd., the Saskatchewan Court of Appeal appears to have recently held that the services may be lienable even if the “thing” is not an improvement, as long as the services are in relation to a larger project that falls within the lien statute. I say “appears” because the court also seems to have held that the matter was not finally decided. So, while this decision is very important so far as it goes, it may not be the last word on this issue.

In making its decision, the Saskatchewan Court of Appeal over-turned the trial judge’s decision to the contrary: Propak Systems Ltd. v. Grey Owl Engineering Ltd. 2015 CarswellSask 91, 2015 SKQB 43. That lower court decision was reviewed by me in my article of April 28, 2015.


A lessee of land contracted with Propak for engineering, procurement, and fabrication services for an oil extraction system to be provided by Propak for use on the leased land. Propak entered into a subcontract with Advanced Metal for the construction of three storage tanks to be used on the land as part of the extraction facility. In turn, Advanced Metal entered into a sub-subcontract with Grey Owl to provide engineering design services relating to those storage tanks.

The storage tanks were each to be 24 to 38 feet tall and weigh between 34,000 and 43,500 pounds. Each tank was to sit on an engineered gravel pad. Piles would run through the gravel pad and extend about 20 feet into the ground. An anchor chair was to be welded to the base of the tank and then bolted to the piles. The three tanks would then be connected to the entire oil extraction facility through steel and fiberglass piping that would be bolted to the tanks.

Grey Owl materially completed its design services, but Advanced Metal abandoned the project before any of the tanks were built and failed to pay Grey Owl for any of its engineering services. Grey Owl then registered a lien against the leased land pursuant to the Saskatchewan Builders’ Lien Act (the Act).

Propak applied to the Court of Queen’s Bench to vacate Grey Owl’s lien. Propak paid into court the full amount claimed plus an extra 25% as security for costs, and an order was granted vacating the lien.

Propak then applied to the Court of Queen’s Bench for an order releasing the amount held in Court on the ground that Grey Owl was not entitled to register a lien under the Act on the ground that Grey Owl was not entitled to a lien as its engineering services were not provided in relation to an “improvement” as defined in s. 2(1)(h) of the Act.

As noted in my article of April 28, 2015, the judge of first instance decided that Grey Owl did not have a valid lien. The judge held that the storage tanks were capable of being moved, being part of a modular system that could be relocated to another oil field. They were not designed to be moved around the site, but they were capable of being moved beyond that site once the project was finished. Since the tanks were capable of being moved, the judge held that they were not an improvement, and since they were not an improvement, Grey Owl’s claim of lien was not valid. The judge ordered that the money paid by Propak into court be released to Propak.

Decision of the Saskatchewan Court of Appeal

The Court of Appeal allowed the appeal and re-instated Grey Owl’s lien. In doing so, it first engaged in an interpretation of the Act. It noted the definition of “services” and “subcontractor” in the Act:

“(q) “services” means any labour done or service performed on or in respect of an improvement and includes the rental of equipment and the wages of any operator provided with the equipment …

(t) “subcontractor” means a person, not contracting with or employed directly by an owner or his agent, but who provides services or materials to an improvement under an agreement with the contractor or under him with another subcontractor, but does not include a labourer …(Emphasis added)”

The court then stated:

“In short, it is a mistake to begin and end the inquiry with whether the storage tanks are the improvement. The issue is whether Grey Owl provided “services” “on or in respect of an improvement for an owner, contractor or subcontractor” within the meaning of s. 22 and, as part of this analysis, identify the improvement in question.”

The court applied the approach taken in its prior decision in Hansen v. Canadian National Railway (1983), 22 Sask. R. 126 and other Saskatchewan cases which followed Hansen or applied the same logic. The court described this approach as follows:

“This approach, which focuses on the main contract or contracts rather than its individual subcontracts and the work being done under them, has been consistently followed and applied in this jurisdiction…..Courts appear to have taken it as self-evident that the improvement was the work the owner was performing on the land and not the work performed by the various subcontractors and others contracting with them.”

In enunciating the policy reasons behind this broad approach, the court adopted words of the court in Hansen: “the principal object of this Act is to better ensure that those who contribute work and material to the improvement of real estate are paid for doing so”. The court expanded on this approach as follows:

“Two factors dictate the Saskatchewan Legislature’s approach to its builders’ lien legislation. The first factor is that, unlike any other commercial endeavour, the work, services and materials supplied to an improvement are provided on credit in a pyramidal structure, where payment often depends on whether the parties in the pyramid above the lien claimant are paid. The second factor is that the ordinary law of contract does not provide sufficient remedies to ensure that the contract funds flow from the top of the construction pyramid to those entitled to receive them. The statute supplements the law of contract and fosters the provision of credit in a complex piece of legislation designed to assist and facilitate construction….A restrictive reading of s. 22 does not serve the interests of those who provide services and materials on credit. To do so would not be in line with the protective purpose of the Act. Arguably, a restrictive reading of s. 22 does not serve the commercial interests of the owner and financier of an improvement either in that uncertainty as to who is or who is not entitled to a lien can only increase costs, either in the fixing of the contract price or in the litigation that will inevitably arise.”

The court then considered three questions: did Grey Owl provide “services”; were the services provided to a “subcontractor”; and were the services in relation to “an improvement”?

On the first issue, the court had no doubt: “First, it is clear that Grey Owl provided “services.” The definition of “services” includes “any labour done or service performed,” including equipment rental. The definition of “improvement” in s. 2(1)(h)(iii) also demonstrates the clear legislative intent to extend rights to those who provide design services.”

On the second issue, the court also had no doubt: “Second, it is also incontestable that Grey Owl contracted with a “subcontractor,” i.e., Advanced Metal.”

The only issue was whether the services to the subcontractor were in relation to an “improvement.”   On this issue, the court said the following:

“As can be seen from the Stauth affidavit, Grey Owl was retained to provide engineering drawings with respect to storage tanks that were to be used by the contractor or principal subcontractor “as part of their oil extraction system.” In such circumstances, it is an error to ask whether the claimant claims a lien in the storage tanks as an “improvement.” Applying Hansen, the “improvement” with respect to which the legislation is concerned is the project that will lead to the extraction of oil.”

Having arrived at this conclusion, the court did not finally order that Grey Owl’s lien was valid. Rather, it said the following

“When this principle is understood, it is clear that Propak’s application could not be allowed. It is not sufficiently plain and obvious that Grey Owl’s lien is invalid on the basis put forward by Propak: that Grey Owl did not provide services “on or in respect of an improvement for an owner, contractor or subcontractor” in accordance with s. 22…..Having found error in the decision of the Chambers judge, it is necessary to determine the next step. As I have indicated, Grey Owl did not ask this Court to go on to make any other order, if we were to allow the appeal. Grey Owl maintains the position it took in the Court of Queen’s Bench that Propak’s application should be dismissed leaving the parties to pursue the usual remedies under the Act….In the end, the appeal must be allowed. The Chambers judge erred by not dismissing Propak’s application under s. 56(4). The effect of allowing the appeal is that the parties resume the same positions they occupied before the application was made. Grey Owl’s lien continues to be a charge on the funds in court according to s. 56 until further steps are taken by the parties dealing with the funds and until further order of the Court of Queen’s Bench.


If this decision finally concluded the issue as to whether the services provided by Grey Owl were lienable services, as it appears to have, then it has stated, or re-stated, an important principle, at least in Saskatchewan. That principle is that, in determining whether the services provided by a sub subcontractor to a subcontractor in relation to something placed on the land by the subcontractor, one looks to the whole work on the site, not (just) the work or material of the subcontractor.

However, the Court of Appeal declined to make an order to that effect, and instead found that it was not plain and obvious that Grey Owl had no lien. Yet, there does not seem to be any further evidence that would be needed to arrive at the final conclusion. It appears that the only reason that the court did not make that finding is that Grey Owl did not ask for it, or that there might be other reasons that Grey Owl’s lien could be challenged so the court was not precluding any such debate.

The principle that the Court of Appeal has apparently adopted seems to leave sub-subcontractors who are instrumental in providing improvements in different positions. If the sub-subcontractor provides the physical improvement itself – in the present case, the tanks – then if those tanks are not attached to the land and are moveable, then the Court of Appeal seems to have assumed that they are not improvements and no lien could be registered by that sub-subcontractor. But if the sub-subcontractor provides services to the subcontractor in relation to the provision of the tanks, then according to the Saskatchewan Court of Appeal, those services are lienable because one looks to the overall project. In that context, the total project amounts to an improvement to the land and so the services to design or install the tanks are lienable because they are part of the overall improvement.

Why should the services in relation to something brought onto the land be lienable when that something itself is not lienable? Certainly the policy behind the statute is well expressed by the Court of Appeal, but why should that policy apply to the services in relation to that thing if the policy does not apply to the thing that is brought onto the land (and the person who brought it there)?

The Saskatchewan legislature has said that the Act (and its policy) do not apply to the thing itself if it is not an “improvement”. Section 2 of the Act includes within the definition of improvement the following words: “except a thing that is not affixed to the land or intended to become part of the land.” That is where the Act has drawn the line. If that is so, can the policy behind the Act draw the line at a different place for the services?

See Heintzman and Goldsmith on Canadian Building Contracts, (5th ed.), chapter 16, parts 4(a)(i))II and 4(a)(ii).

Grey Owl Engineering Ltd. v. Propak Systems Ltd., 2015 SKCA 108, 2015 CarswellSask 612

Construction and Builders’ liens – improvement – services – subcontractors

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

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.


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.                                                                                                                               July 25, 2012

When and How is a Subcontractor Bound by its Tender in a Bid Depository System?

The process by which subcontractors’ tenders are accepted in a bid depository is fundamental to the efficacy of that system.  If that process does not effectively bind the subcontractors, then the subcontractors will be able to unilaterally withdraw their bids later.  The British Columbia Supreme Court addressed this issue in its recent decision in Civil Construction Co Ltd v. Advance Steel Structure Inc.

This case required the court to unscramble the “Contract A – Contract B” legal structure created by the Supreme Court of Canada in Ontario v. Ron Engineering & Construction (Eastern) Ltd, [1981] 1 SCR 111 and apply it to the relationship between a contractor and subcontractor.  In Ron Engineering, a distinctly Canadian legal structure was created for contracts between the owner and the contractor in a bid depository system.  Under that structure, there are two contracts which are potentially formed in such a bidding system. The first contract, Contract A, is the contract formed by the submission of a bid. That contract is a judge-made creation arising from the wording of a bid depository system. It is based upon and regulates the bid system itself and requires the bidding contractor to leave its price in place for the duration of the bid and requires the owner to award the contract only to a compliant bidder. The second contract, Contract B, is the ultimate construction contract which may be entered into if the bidder is successful.

That process is workable at the owner-contractor level but becomes more difficult to apply at the contractor-subcontractor level.  Nevertheless, in Naylor Group Inc. v. Ellis-Don Construction Ltd, [2001] 2 SCR 943, the Supreme Court held that the same structure applies to the relationship between a contractor and subcontractor when the subcontractor files a bid in a bid depository system and the contractor carries that bid in its bid to the owner.

What Binds a Subcontractor to a Bid?

In Naylor v. Ellis-Don, it was the contractor, Ellis-Don, which refused to award the subcontract to the subcontractor, Naylor, whose bid it carried in its bid to the owner.  So the dispute dealt with whether the contractor was in breach of its obligations, not whether the subcontractor was.  The Supreme Court held that, by carrying the subcontractor’s bid in its own bid, a Contract A was created between the parties which “required the successful prime contractor to subcontract to the firms carried in the absence of a reasonable objection.”  (My emphasis added).

In the Ontario Court of Appeal, the result was stated somewhat differently.  There the Court of Appeal said: “Thus, unless the successful prime contractor has a reasonable objection to the subcontractor it has proposed, the prime contractor must communicate its acceptance of the subcontractor’s bid.” (Again, my emphasis added, for comparison purposes).

In Civil Construction v. Advanced Steel, it was the subcontractor that refused to adhere to its bid.  And it said that its bid had not been accepted by the contractor.  In these uncharted waters, what is the right result under the Ron Engineering structure, or is the structure being bent so out of shape that it cannot apply?  What event binds the subcontractor to its bid, a communicated acceptance or the filing of the contractor’s bid?

Civil Construction was a bidder as the general contractor in a tender by the City of Richmond, British Columbia for the construction of a drainage pump station upgrade.  Advanced submitted an unsolicited bid dated June 10, 2009 to Civil Construction for the structural steel subcontract work.  In its bid, Advanced stated that its bid was “valid for acceptance for the next 30 days and valid for delivery within 90 days after acceptance”.  Civil incorporated Advanced’s bid into its own bid dated June 10, 2009 to the City of Richmond.

On July 10, 2009, Civil was advised by the City that it was the successful bidder.  Civil’s project manager testified that, on that same day, he called each of the subcontractors, including Advanced, to advise them that they were named as sub trades in its tender submission.  On July 13, 2009, the City wrote to Civil to formally award the general contract on the project to Civil, and Civil wrote to Advanced on the same day to award it the structural steel subcontract.

Advanced refused to enter into the subcontract for two reasons:

First, it said that Civil’s acceptance on July 13, 2009 of Advanced’s bid of June 10, 2009 was outside the 30 days stipulated in that bid.

Second, it said that Civil’s acceptance of its bid contained conditions not set forth in its bid, and therefore amounted to a counter-offer, which Advanced refused to accept.

Civil proceeded to hire another structural steel subcontractor and sued Advanced for the extra cost of that subcontract.

The Court rejected both of Advanced’s arguments

First, it held that the relevant acceptance by Civil of Advanced’s bid occurred on June 10, 2009. That acceptance occurred by reason of Civil including Advanced’s bid in Civil’s own bid to the owner.  By doing so, Civil created the Contract A with Advanced under the bid depository system.

Under that system, the B.C. Court held that Advanced’s bid was accepted by Civil under Contract A once that bid was submitted by Civil as part of its bid to the owner.  Relying on previous decisions in the Supreme Court of Canada and Alberta, the Court held as follows:

“[C]ontract A is formed when a subcontractor tenders in response to a general contractor’s invitation and the general contractor incorporates that bid as part of its tender to the owner. Under contract A a subcontractor may not withdraw its tender for a set period and must enter contract B upon acceptance of its bid, which is when the general contractor’s bid with the subcontractor’s tender included is accepted by the owner.

The general contractor’s obligation to a subcontractor under contract A arises once the general contractor chooses to carry the subcontractor’s bid in its tender to the owner.

In return for the subcontractor being bound by its bid, the general contractor, upon acceptance of its bid, which includes the subcontractor’s bid, is obliged to enter into a construction subcontract B with the subcontractor.”

The Court accordingly held that, since Civil had included Advanced’s bid in its own bid on June 10, 2009, the relevant acceptance had occurred within the 30 days set forth in Advanced’s bid.  In effect, the Court interpreted the words “valid for acceptance” in Advances’ bid as meaning “valid for acceptance for Contract A, not Contract B”.  The Court did not refer to any communication of that acceptance by Civil to Advanced, or any necessity for such a communication.

Second the Court also held that Civil’s purported addition of further work in the subcontract was not permissible under the Contract A system.  Therefore, Civil and Advanced were bound to enter into a Contract B that conformed to the bid, and the additional work specified by Civil was ineffective and Advanced was bound by a subcontract which did not include that additional work.  Accordingly, Advanced was liable in damages to Civil based upon that subcontact.

Two Disquieting Features:

While this decision is the common sense result of a bid depository system, it does have two disquieting features.

First, when the contractor includes the subcontractor’s bid in its tender to the owner, should the contractor be obliged to tell the subcontractor, at that time, that the latter’s bid is included in the contractor’s tender?

Normally, an acceptance only occurs when the acceptance is communicated to the offeror.  There could be many subcontractors who tender for the work.  If there is no communication from the contractor to the subcontractor when the contractor submits its bid, should the subcontractor be presumed to know that its bid is the one which has been accepted for inclusion in the general contractor’s bid?

As noted above, in Naylor v. Ellis-Don, the Ontario Court of Appeal said that the contractor “must communicate its acceptance of the subcontractor’s bid” to the subcontractor.  But what if it doesn’t?  Does that let the subcontractor off the hook?  And while the Supreme Court said in that case that Contract A “required the successful contractor to subcontract to the firm carried”, is the subcontractor similarly bound to proceed with the subcontract in the absence of an express and timely acceptance by the contractor?

The courts can, of course, create exceptions to the normal rule that an acceptance occurs when it is communicated to the offeror.  Those exceptions are based upon business efficacy and the presumed intent of the parties.  One such exception is the old rule that a posted acceptance is deemed to occur at the time of posting, not the time of receipt.

The Court Constructed a New Exception for Subcontractors

It appears that in the present case, the court constructed a new exception for subcontractors’ bids in the bid depository system.  According to this decision, the acceptance of a subcontractor’s bid for purposes of Contract A occurs when the contractor includes the subcontractor’s bid in its own bid, even though that is not communicated to the subcontractor.  The real question is whether that is a good rule, and if it is, whether the rule should be specifically set forth in the bid documents. Otherwise, it could be argued that the contractor should be required to notify the specific subcontractor whose bid has been included in the contractor’s bid to the owner, so that the subcontractor knows that its bid has been accepted for the purpose of Contract A.

For the moment, and based on this decision, contractors and subcontractors may proceed on the basis that if a subcontractor states a time for acceptance in its bid, then that statement will be taken to mean the time in which the contractor has to insert that bid into its own bid to the owner, that there is no need for the contractor to advise the subcontractor that that has occurred, and that it is up to the subcontractor to inquire, if it wishes to know, whether its bid has been included in the contractor’s bid.

Warning to Contractors:

The other question which is raised by this decision is whether a subcontractor can avoid this result by a more specific tender. Can the subcontractor specifically state in its bid that its offer of a construction contract (ie:  Contract B) must be accepted within a specific period of time, and a time period shorter than the contractor’s bid period?  In other words, could the subcontractor specifically state that its bid could only result in a construction contract if that construction contract is entered into within a specific period of time which is less than the bidding process allows?

The short answer is that such a bid is non-compliant with the bid depository system and Contract A under the Ron Engineering structure.  This answer follows from the requirement in Contract A that the subcontractor keep its bid open during the bid period and enter into Contract B on the terms set forth in the bid, that is, up to the time the contract is awarded and a reasonable time thereafter.  But if this is the right answer then contractors will have to be alert to ensure that any subcontractors’ bids they receive do not have such a short fuse in them, and if they do, to disqualify them from the bidding process.

Advanced may have intended to raise this question in the present case.  But the court did not answer the question by holding that Advanced’s bid was non-compliant with the terms of the bid.  Rather, it interpreted the word “valid for acceptance” in Advance’s bid to mean “valid for acceptance under Contract A”, and it arrived at that conclusion by reference to the bid depository system and Ron Engineering.  It will require a more specifically drafted subcontractor’s tender to raise the “non-compliant acceptance period” issue.

Construction Law – Subcontractors – Bid Depository System

Civil Construction Co Ltd v. Advance Steel Structure Inc., 2011 BCSC 1341

Thomas G. Heintzman O.C., Q.C.
November 13, 2011

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

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

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

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

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

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

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

Arbitration  – Construction Agreement –  Subcontract:

Sunny Corner Enterprises Inc v. Dustex Corporation, 2011 NSSC 172

Thomas G. Heintzman

May 15, 2011