The Duty Good Faith in Contractual Discretionary Powers – Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton

The Ontario Superior Court of Justice (the “Court”) recently dealt with the question of what constitutes a breach of the duty of good faith contractual performance in the context of a construction contract. In Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton, 2020 ONSC 5806 (“Dominus”), the Court held that the City of Brampton’s failure to consent to significant reduction in the amount of a security deposit when much of the contracted work had been completed because of a third party dispute amounted to a breach of the general (and in this case contractual) duty to act reasonably and in good faith in the exercise of contractual discretion.

While decided in 2020, the Court’s decision in Dominus remains consistent with the Supreme Court of Canada’s (the “SCC”) more recent decision in Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd., 2021 SCC 7 (“Wastech”),[1]Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech]. and provides a useful, construction-specific example of when a party is found to be exercising their discretion unreasonably and therefore contrary to the duty of good faith. In short, refusing (or choosing) to exercise contractual discretion based on an overly rigid interpretation is unreasonable and contrary to the duty of good faith.

Good Faith Principle and Discretionary Contractual Clauses

As outlined below, the general organizing principle of good faith contractual performance was first recognized by the SCC in Bhasin v. Hrynew, 2014 SCC 71 (“Bhasin”).[2]Bhasin v. Hrynew, 2014 SCC 71, at para. 63. The organizing principle underlies and manifests various other more specific doctrines governing contractual performance. One such specific doctrine, as identified in Bhasin, is the duty of good faith performance in exercising contractual discretion. Despite being decided before the SCC’s more recent decision in Wastech, the Court in Dominus provides some useful and detailed commentary regarding the exercise of such discretion.

In Wastech, the SCC held that the duty to exercise contractual discretion in good faith requires that a party exercise their discretionary powers reasonably.[3]Wastech at para. 67. Reasonableness is determined based on the purpose for which the discretionary powers were granted under the contract;[4]Ibid, at para. 88. an unreasonable exercise of discretion is one which is unconnected to the contractual purpose and is a breach of the duty of good faith.[5]Ibid, at para. 75. In Wastech, the Greater Vancouver Sewerage and Drainage District (“Metro”) was in a long-term contract for the removal and transportation of waste by Wastech Services Ltd. The contract gave Metro the discretion to choose which site to send the waste to and Wastech’s rate was dependent on the distance the waste was transported. Metro exercised their discretion by choosing the closer site, resulting in Wastech earning less revenue. Contrary to the ruling of the arbitrator, the SCC determined that the contract did not require Metro to use its discretion to ensure Wastech reached its target operating ratio in any given year. As such Metro, was not in breach of the duty of good faith because their exercise of discretion was connected to the purpose of the contract and was therefore reasonable.[6]Ibid, at para. 100.

Summary of the Decision

Facts

Dominus CityZen Brampton SWQRP Inc. (“Dominus”), the developer, was contracted by the City of Brampton (the “City”) to complete an expansion of the Brampton City Hall. Dominus and the City entered into a Site Plant Agreement (the “SPA”) pursuant to the Planning Act.[7]Planning Act, R.S.O. 1990, c. P.13. Under the SPA, the City had two roles: first as the owner of the lands and occupier of the City Hall constructed thereon, and second as the regulator acting on behalf of the community and public interests that are protected by the SPA. The Court was ultimately tasked with the interpretation of a security deposit provision of the SPA. Dominus was required by the SPA to post a deposit of $646,510.00 (the “Security Deposit”) as a performance guarantee for the estimated cost of all works required to be completed as part of the City Hall project.

Section 15 of the SPA provided that Dominus may, “from time to time, apply to the [City] for a reduction in the amount of the security by an amount up to ninety per cent (90%) of the value of the works for which security was deposited […]”.[8]Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton, 2020 ONSC 5806 at para. 26 [Dominus].

Further, section 29 of the SPA contained a provision requiring the parties to act reasonably and in good faith:

Where approval or consent is required hereunder, such approval or consent shall not be unreasonably withheld. Where something is required to be done hereunder to the satisfaction of or in the discretion or opinion of a party or official thereof, such party or official shall act reasonably in exercising such satisfaction, discretion or opinion.[9]Ibid, at para. 30.

Dominus completed the redevelopment of the City Hall with the exception of two relatively minor items: a trench drain and a wooden privacy fence. Dominus took the position that it was unable to complete the two remaining items because of an ongoing suit that the owners of the neighboring properties had commenced against the City and Dominus for nuisance and trespass, claiming damages in excess of $2MM. Dominus requested that a portion of the Security Deposit be returned in amounts relative to the value of the work completed. However, the City denied Dominus’ request for two reasons:

  1. Under the City’s interpretation of the SPA, all work must be completed before any release of funds would be considered or made;[10]Ibid, at paras. 6 and 8. and,
  2. Because of the presence of an indemnity provision contained in the SPA, under which the City was claiming a right to set-off the indemnity claims against the Security Deposit[11]Ibid, at para. 6.
Issues and Decision

In considering the parties’ submissions and arguments, the Court distilled the dispute into six key questions.[12]Ibid, at para. 32. For the purposes of this blog post, we will focus on four of those questions:

  1. Does the SPA Allow for a Partial Reduction of the Security for Completed Works When Some Remain Outstanding?
  2. Was the City in breach of the SPA or any independent duty of good faith, or did it act unreasonably or in bad faith, by refusing to consider this request and/or for refusing to reduce the Security Deposit?
  3. Did the Security Deposit cover, or could it be set-off against, the City’s right to claim indemnity?
  4. If the entitlement to a reduction or refund is established, how much of the Security Deposit is Dominus entitled to receive?

Ultimately, the Court found the City’s refusal to release or reduce the Security Deposit was not reasonable in the circumstances and was contrary to the organizing principle of good faith in the performance of contracts, including under the specific terms of the SPA. Further, the Court held that the SPA did not give rise to any right of set-off against the Security Deposit, and ordered that the City release $596,510.00 plus pre-judgement interest.[13]Ibid, at para. 78.

Analysis

In the result, the OSC found that a proper interpretation of the SPA based on the principles of contractual interpretation would allow for a partial reduction in the Security Deposit, as sought by Dominus.[14]Ibid, at para. 38. The Court held that the City’s interpretation of the SPA was too rigid and therefore unreasonable,[15]Ibid, at paras. 41 and 51. holding that the SPA did not link the Security Deposit to the indemnity provisions, nor did it expressly allow for setting-off of other claims against the Security Deposit.[16]Ibid, at para. 72. Therefore, the presence of the indemnity clause was held to be not relevant to the City’s determination of whether the deposit should be reduced or released, such that its refusal to do same was in breach of its general and contractual good faith obligations.[17]Ibid, at para. 72.

Did the SPA Allow for a Partial Reduction of the Security for Completed Works When Some Remain Outstanding?

The Court found that on a proper, contextual and purposeful interpretation of the SPA that a partial reduction of the Security Deposit for completed works was available even when some works remained outstanding.[18]Ibid, at para. 7. The City argued that in their role as a regulator and holder of public funds they were entitled to insist on strict adherence to the requirements of the SPA because of the recognized overarching planning and public interest objectives of the SPA.[19]Ibid, at para. 50. However, the Court determined that interpreting the SPA to allow for a partial reduction of the Security Deposit did not undermine the public interest or planning objectives associated with the SPA; instead, the Court held that such an interpretation “reflects an appropriate balance between the commercial realities of a significant contract such as this and the objective of securing the completion of the remaining outstanding works in furtherance of the planning objectives embodied in the SPA.”[20]Ibid, at para. 40.

The Court reached the following conclusions regarding the proper interpretation of section 15 of the SPA:

Section 15.3 explicitly provides that Dominus may, from time to time, apply to the City for a reduction in the amount of the security by an amount up to ninety per cent (90%) of the value of the works for which security was deposited. The contemplation of applications from time to time suggests that more then one request may be made and considered before the 90% cap is reached.[21]Ibid, at para. 38.

It makes common and commercial sense that these applications, from time to time, would correspond with the completion of certain works for which the certification requirements have been met to enable a partial release of the security deposit. Section 8 requires an engineering certificate prior to any reduction in security posted for public works purposes or occupancy of the building and section 13.5 requires an architect’s certificate prior to the release of any landscaping securities. The City emphasizes the word “any” in these provisions and says that it should be read as prohibiting “any” reduction in or release of security until all of the works have been completed. The word “any” could be equally read to be referring to any one of a number of potential requests for reductions or releases of the security. Reading the word “any” in this way is harmonious with the contemplation in section 15 that there may be releases or reductions to the security from time to time, for completed works that have received the necessary certifications.[22]Ibid, at para. 39. [emphasis added]

Ultimately, the Court found that the City’s interpretation of the SPA, namely that it did not allow for any opportunity for Dominus to apply for and potentially receive a reduction in the Security Deposit until all work was completed, “is too rigid an interpretation and application of the SPA.”[23]Ibid, at para. 41.

Was the City in breach of the SPA or any independent duty of good faith, or did it act unreasonably or in bad faith, by refusing to consider this request and/or for refusing to reduce the security deposit?

In addressing the issue of good faith, the Court cited Bhasin for the following general proposition regarding the duty of good faith in contractual discretion: “Failing to exercise contractual discretion without any reasonable justification is contrary the common law good faith principles in the performance of a contract.”[24]Ibid, at para. 27.

The City made three main arguments as to why they had reasonable justification for their failure to exercise the discretion granted to them under the SPA:

  1. Based on the overarching planning and public interest objectives of the SPA, they could insist on strict compliance with the SPA, such that all work must be completed before a reduction is to be considered;
  2. The general language in section 21.5 of the SPA, “together with all other applicable provisions of the SPA” gave the City discretion to withhold the Security Deposit until all incomplete works had been completed; and
  3. The existence of the third party tort claim triggered an indemnity by Dominus to the City.

The Court rejected the three justifications provided by the City and found that they were unreasonable for the following reasons.

In response to the first justification, the Court found that the reasonableness of this justification is dependent upon whether the SPA allowed for a partial reduction in the Security Deposit.[25]Ibid, at para. 50. As summarized above, the Court found that the City’s interpretation of the SPA was unreasonable, and therefore overarching planning and public interest objectives of the SPA did not give rise to a reasonable justification.[26]Ibid, at para. 51.

In response to the second justification, the Court determined that the City’s interpretation of section 21.5 of the SPA as “granting unfettered discretion to say no to a reduction of the Security Deposit as long as any of the works remain incomplete” was also incorrect.[27]Ibid, at para. 53. Under section 21.5 of the SPA, Dominus acknowledged that the City would not be required to reduce or release the Security Deposit until it was satisfied that Dominus had: (i) complied with the Construction Lien Act;[28]Construction Lien Act, RSO 1990, c C-30 (now the Construction Act, RSO 1990, c C-30). (ii) paid and discharged any and all liens under same; and (iii) indemnified the City for any claims arising out of a failure to comply with the Construction Lien Act. Based on contractual interpretation principles, the Court reiterated that a general phrase “must be read to be qualified by the sections identified immediately before it.”[29]Dominus, at para. 53. Therefore, the Court held that the general phrase in section 21.5 only applied to the specific lien claims contemplated in the sections regarding the Construction Lien Act, and did not provide the City with a general unfettered discretion to reject Dominus’ request.[30]Ibid.

In response to the third justification, the Court found that “the security deposit does not apply to the tort claims, nor has the City even made an indemnity claim against Dominus in respect of the tort claims.”[31]Ibid, at para. 58. Therefore, the existence of the third party tort claim did not provide the City with a reasonable justification to refuse or reduce the Security Deposit. This issue is discussed further below.

Ultimately, the Court concluded:

The City has, in this case, fettered the exercise of its discretion by too narrow an interpretation of the SPA (that unless all works are complete, nothing will be returned) and extraneous and irrelevant self-serving considerations (as security that was not contracted for or a set off for a contingent indemnity claim in tort). The City’s refusal to release or reduce the security deposit is not reasonable in the circumstances and is contrary to the organizing principle of good faith in the performance of contracts and section 29 of the SPA.[32]Ibid, at para. 32. [emphasis added]

Did the security deposit cover, or could it be set-off against, the City’s right to claim indemnity?

Pursuant to the indemnity provision contained in section 20 of the SPA, Dominus agreed to indemnify the City for all actions arising based on Dominus’ performance of the contract.[33]Ibid, at para. 66. However, the Court found that the SPA did not link the Security Deposit to the indemnity provision, noting that the SPA clearly “earmarked” the Security Deposit only to secure the cost of the work Dominus undertook to complete.[34]Ibid.

The City also claimed that it was able to retain the Security Deposit based on a right of set-off. However, the Court noted that the parties did not make substantial submission in this respect. Nonetheless, the Court identified two somewhat tenuous instances that a right to set-off could exist, but which ultimately did not.[35]Ibid, at para. 72. First, for a potential contingent indemnity claim against Dominus in respect of the tort claims.[36]Ibid, at paras 69 and 70. However, the capacity in which the City was being sued in the tort claim and the capacity that the City had entered into the SPA (i.e. their two roles) may affect this right of set-off.[37]Ibid. Second, the uncertain costs to access the neighboring land could result in a contractual claim under section 15.2, however the Court determined that such an interpretation would be a stretch of the indemnity language.[38]Ibid, at para. 71.

If the entitlement to a reduction or refund is established, how much of the security deposit is Dominus entitled to receive?

Having found that the SPA allowed Dominus to be eligible for a possible reduction in the Security Deposit and that the City was in breach of the SPA for failing to exercise their discretion regarding same, the Court determined that Dominus was entitled to a receive a portion of the Security Deposit referable to the completed works.[39]Ibid, at para. 73.

Pursuant to section 15.4 of the SPA, Dominus was eligible to receive up to 90% of the value of the completed works until the two-year warranty lapsed.[40]Ibid, at para. 74. Given that five years had elapsed, the Court determined that Dominus would receive 100% of the Security Deposit, minus the value of the anticipated costs of the two uncompleted items.[41]Ibid. Evidence was given regarding the estimated value of that uncompleted work to be $10,000.00. The Court then multiplied this number by four to allow for a significant buffer given the uncertainty surrounding the additional costs associated with completing the outstanding work. Therefore, the reasonable estimation of the outstanding work, which included a reasonable holdback for uncertain additional costs associated with such work, was held to be $50,000.00.[42]Ibid, at para. 75. As such, the Court ordered the City to release $596,510.00 ($646,510.00 less $50,000.00) of the Security Deposit to Dominus.[43]Ibid, at para. 78.

References

References
↑1 Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech].
↑2 Bhasin v. Hrynew, 2014 SCC 71, at para. 63.
↑3 Wastech at para. 67.
↑4 Ibid, at para. 88.
↑5 Ibid, at para. 75.
↑6 Ibid, at para. 100.
↑7 Planning Act, R.S.O. 1990, c. P.13.
↑8 Dominus/Cityzen Brampton SWQRP Inc. v. The Corporation of the City of Brampton, 2020 ONSC 5806 at para. 26 [Dominus].
↑9 Ibid, at para. 30.
↑10 Ibid, at paras. 6 and 8.
↑11 Ibid, at para. 6.
↑12 Ibid, at para. 32.
↑13 Ibid, at para. 78.
↑14 Ibid, at para. 38.
↑15 Ibid, at paras. 41 and 51.
↑16 Ibid, at para. 72.
↑17 Ibid, at para. 72.
↑18 Ibid, at para. 7.
↑19 Ibid, at para. 50.
↑20 Ibid, at para. 40.
↑21 Ibid, at para. 38.
↑22 Ibid, at para. 39.
↑23 Ibid, at para. 41.
↑24 Ibid, at para. 27.
↑25 Ibid, at para. 50.
↑26 Ibid, at para. 51.
↑27 Ibid, at para. 53.
↑28 Construction Lien Act, RSO 1990, c C-30 (now the Construction Act, RSO 1990, c C-30).
↑29 Dominus, at para. 53.
↑30 Ibid.
↑31 Ibid, at para. 58.
↑32 Ibid, at para. 32.
↑33 Ibid, at para. 66.
↑34 Ibid.
↑35 Ibid, at para. 72.
↑36 Ibid, at paras 69 and 70.
↑37 Ibid.
↑38 Ibid, at para. 71.
↑39 Ibid, at para. 73.
↑40 Ibid, at para. 74.
↑41 Ibid.
↑42 Ibid, at para. 75.
↑43 Ibid, at para. 78.

Notice Commencing Several Arbitrations Held Not To Be Totally Invalid By B.C. Court

In South Coast British Columbia Transportation Authority v. BMT Fleet Technology Ltd.

2017 CarswellBC 2587, 2017 BCSC 1683, the British Columbia Supreme Court recently held that a single notice purporting to commence several arbitrations against several respondents was procedural invalid. However, the notice was not totally void and could be amended by the applicant to provide for several arbitrations and thereby correct the procedural irregularity.

In view of the absence in most arbitration statutes of the right to consolidate arbitral proceedings, this decision is important as it allows an apparently invalid commencement of arbitral proceedings to stand in a corrected form. Whether this decision has any application to arbitrations outside British Columbia, or to an ad hoc arbitration, are issues to be considered.

Background

South Coast British Columbia Transportation Authority (known as, and referred to in this article as, TransLink) entered into two separate contracts with a ship architect, a contract with a ship consultant and a contract with a shipyard for the design and construction of a new ferry. Each contract contained a clause requiring arbitration of any disputes under the British Columbia Arbitration Act.

On April 1, 2011, TransLink delivered a Notice to Arbitrate to the British Columbia International Commercial Arbitration Centre (“BCICAC”). The notice purported to commence one arbitration proceeding under all the contracts against each of the architect, consultant and shipyard. TransLink paid a fee of $1,680 ($1,500 plus H.S.T.), the fee to be paid for one arbitration proceeding for a claim over $50,000. The Notice identified each respondent and the respective contracts with TransLink, set forth the relevant provisions of each contract and separately identified each cause of action and remedy being sought against each party.

BCICAC opened File No. DCA-1313 and wrote to the parties notifying them of the arbitration, stating in part “We acknowledge receipt of a Notice to Arbitrate (the “Notice”) . . . on behalf of . . . TransLink . . . received at this office on April 1, 2011. This arbitration is deemed to have commenced on April 4, 2011.”

Then counsel for the shipyard telephoned BCICAC to raise concerns about the propriety of a single arbitration proceeding against multiple parties under multiple contracts. TransLink advised BCICAC that the Notice to Arbitrate “may have been irregular”. BCICAC suspended the Arbitration until they “have had the opportunity to discuss the form of the Notice further with counsel”. Various correspondence was exchanged and then in May 2011, BCICAC advised TransLink that if it decided to proceed with arbitration, separate Notices to Arbitrate would have to be filed with the BCICAC since the respondents were not bound by the same arbitration agreement.

The parties participated in an unsuccessful mediation of their differences, and in April 2016, TransLink issued and served a Notice to Appoint an Arbitrator, to which the respondents replied, amongst other things, that the issue of the propriety of the commencement of the arbitral proceeding against several respondents under several arbitration agreements would have to be addressed.  Then in February 2017, TransLink’s new counsel wrote to counsel for the ship architect and consultant acknowledging that the Notice to Appoint an Arbitrator dated April 19, 2016 is “arguably irregular”, but stated that three contracts had been effectively commenced, one involving the ship architect and the other two involving the consultant. TransLink issued a new and separate Notice to Appoint an Arbitrator under each contract. TransLink’s counsel requested that BCICAC File No. DCA-1313 be administratively restructured to reflect separate arbitrations for each of the three contracts in issue, and provided BCICAC with an additional fee of $3,150 plus GST for two additional arbitrations. TransLink did not seek to maintain an arbitration against the shipyard.

TransLink then applied to the B.C. court for a declaration that an arbitration proceeding against each of the ship architect and the consultant had been effectively commenced, and for an order that a specified individual be appointed as arbitrator for each arbitration.

British Columbia Arbitration Act and BCICAC Rules

Like most of the arbitral statutes in Canada, the B.C. Arbitration Act (section 21) empowers the court to consolidate two or more arbitrations if, among other conditions, “all parties to those agreements agree on the appointment of the arbitrator and the steps to be taken to consolidate the disputes into the one arbitration.”

Unlike most other provincial arbitral statutes, the B.C. Act (section 22) provides that unless the parties to an arbitration otherwise agree, the domestic rules of the BCICAC apply to arbitrations governed by that Act, unless those rules are inconsistent with another governing arbitral statute or the B.C. Act. .

The BCICAC rules provide for the payment of fees upon the commencement of an arbitration and state (in rule 10) that “the arbitration is deemed to have commenced when the Arbitration Notice or Joint Submission has been filed with the Centre and the commencement fee paid. The Centre shall notify the parties when an arbitration has commenced.”

Decision of the B.C. Supreme Court

The B.C. Supreme Court held that the Notice to Arbitrate contained all of the information required by the rules of the BCICAC relating to the commencement of an arbitration: the names of the parties and their addresses for delivery; a brief statement of the matter in dispute; the remedies sought; a precise estimate of the amount claimed; and the number of arbitrators proposed.

The court found that “the respondents clearly understood the nature and substance of the specific claims being made against them, the contractual provisions being relied upon, the remedy being sought, and the fact that a request for arbitration was being made in respect to those claims. Had TransLink photocopied the Notice to Arbitrate and filed the same document four times (including in respect of the claim against Victoria Shipyards), there could be no dispute that it was fully compliant.” The parties had “adopted arbitration as the means by which their disputes would be resolved and must now be content with the informalities of the arbitration process.”

The court noted that BCICAC accepted the fee that accompanied the Notice to Arbitrate, stated that the arbitration was deemed to have been commenced and had not returned the funds. The court held that “BCICAC’s deeming that the arbitration proceedings had commenced is analogous to the court registry having accepted a civil action for filing. The matter of the payment of a fee is for the BCICAC to address and administer. It is not a matter between TransLink and the respondents, and does not prejudice the respondents in any way. The payment of the incorrect fee can hardly be described as a fundamental breach of the parties’ contracts or going to the substance or “root” of the parties’ rights inter se.”

Accordingly, the court found that “TransLink’s April 1, 2011 Notice to Arbitrate, although an irregularity, was effective to commence four separate arbitration proceedings”, two against the ship architect and one each against the consultant and shipyard.

The court also held that the irregularity in the appointment of the arbitrator had been remedied by TransLink by its issuance of separate notices of appointment in February, 2017. The language of Section 17 of the B.C. Arbitration Act was mandatory and required the court to appoint an arbitrator if the arbitrator was not appointed by the parties. Accordingly, the court appointed the arbitrator nominated by TransLink for each of the arbitrations.

Discussion

This decision deals with the classic problem faced by arbitration in construction projects. There is an arbitration agreement in each of the contracts between the owner and various participants in the project (say, the contractor and the consultant). There is also an arbitration agreement in each of the contracts between the various other participants in the project (say, the subcontractors, suppliers, etc). Standard arbitral law requires that there be separate arbitrations for each of these arbitration agreements, even though that will result in much greater time, inconvenience and the expense of multiple arbitrations instead of one consolidated arbitration, and with the possibility of inconsistent decisions.

The solution to this problem is not the one first adopted by TransLink, namely, the issuance of one Notice to Arbitrate under four contracts. Ultimately, TransLink did not gain consolidation of the arbitrations. Indeed, it was fortunate to end up with a court decision that validated the commencement of the arbitrations, and divided them into separate arbitrations. So TransLink was back to where it would have been had it commenced separate arbitrations.

Although the decision in this case seems fair, an appellate court might not uphold it having regard to section 21 of the B.C. Act. That section only contemplates the consolidation of multiple arbitrations with the parties’ consent. Accordingly, it might be read, by inference, as prohibiting the commencement of multiple arbitration by one commencement document. In addition, this decision might also not apply in the case of an ad hoc arbitration conducted under an arbitration agreement which is not subject to the auspices or rules of an arbitral tribunal.

The fact that the notice was accepted by BCICAC, that BCICAC stated that an arbitral proceeding was deemed to have been commenced, and that the BCICAC rules deem the proceeding to have been commenced, were key factors in the court’s decision. In effect, the court held that the fault was that of BCICAC, if there was “fault”, in accepting the single Notice of Arbitration in respect of several arbitrations, and that if there was something ineffective about that notice, then it was BCICAC that should not have accepted it. Having accepted the notice, separate effective arbitrations against each of the respondents had been commenced. The joinder of those arbitrations was an irregularity which could be cured.

The arbitration agreement contained in most Canadian building contracts provide for ad hoc arbitration, not arbitration conducted under the auspices of an arbitral institute, such as the BCICAC, ADRIC, ICC, LCIA or ICDR. Thus, the arbitration clause in the CCDC contracts does not name an institute under which the arbitration is to be conducted. If the arbitration is not conducted under the auspices of an arbitral institution, the authority of the ad hoc arbitrator to decide that multiple arbitrations were commenced by one notice to arbitration seems more doubtful.

If an arbitration is commenced under the auspices of an arbitral institution other than BCICAC, the institution’s rules may not state that an arbitration is “deemed to have commenced” when an Notice to Arbitrate is received by the institution, and the facts may not otherwise satisfy a court that multiple valid arbitrations were commenced against multiple parties just because the institution accepted the notice of arbitration and stated that an arbitration proceeding has commenced.

The better solution for the multiple arbitration problem is to deal with it up-front in the arbitration agreement in each of the contracts between the owner and other parties, such as in main contract between the owner and the general contractor and in the contract between the owner and the consultant.

That arbitration agreement can provide that each party agrees to participate in, and agrees to a consolidation of the disputes into one arbitration before one arbitral tribunal in respect of all contracts on the project. The owner and general contractor can then ensure that this sort of wording is incorporated into subcontracts through an “incorporation by reference” clause in the general contract requiring that the provisions of that contract are to be incorporated into each subcontract, and for the contractor to ensure that that occurs. That “incorporation by reference” clause may appear in either the arbitration agreement itself, or may be applicable to all the parts of the general contract that are to be incorporated into the subcontracts.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 4

South Coast British Columbia Transportation Authority v. BMT Fleet Technology Ltd.

2017 CarswellBC 2587, 2017 BCSC 1683

Building contract – arbitration – commencement of arbitration – consolidation of arbitrations

Thomas G. Heintzman O.C., Q.C., LL.D. (ontHon.), FCIArb              January 18, 2018

www.heintzmanadr.com

www.constructionlawcanada.com

 

Contract To Build A Building Contrary To A Building Bylaw Held To Be Illegal

In Nzeadibe v. Khan, 2017 CarswellBC 2251, 2017 BCSC 1456, the British Columbia Supreme Court recently held that a building contract was illegal and unenforceable because it provided for the construction of a building which would have been contrary to the municipal building bylaw. The decision raises, once again, the contentious role of the doctrine of illegality in contract law.

The defendant agreed to manage the construction of a residence for the plaintiff. The plaintiff said that he bought the property after entering into that agreement with the defendant. The plaintiff alleged that the management agreement called for the construction of a house of 3,638 square-foot and containing a self-contained suite. The written agreement between the parties did not refer to those features, but the plaintiff alleged that they had been agreed to orally. The defendant denied agreeing or representing that the building would have those features. The plaintiff sued for breach of the contract and fraud.

The building as built was substantially smaller than 3,638 square feet and it did not contain a self-contained unit. The construction of a residence in that location with that square footage and incorporating a self-contained suite would have been contrary to the municipal bylaw.

The Trial Judge’s Findings  

The trial judge found that the plaintiff obtained a draft copy of the plan for the building prior to purchasing the property and that the defendant orally committed to building the house according to that plan and informed the plaintiff that he could build a 3600 square-foot house with a secondary suite before the plaintiff purchased the property. However, the judge found that “the plaintiff’s experience would have shown him that this rough plan would not be the final or last plan necessary to obtain a building permit” and that the plaintiff “did not reasonably expect the defendant to build a house contrary to Surrey’s bylaws limiting the size of the structure and prohibiting a secondary suite” and was aware that a self-contained suite would be unlawful. The trial judge also found that the defendant forged the plaintiff’s signature on the alleged written agreement.

The Trial Judge’s Conclusions

The trial judge concluded that: the plaintiff agreed to purchase the property “based on the defendant’s statement that he could build a house with an area of 3500 ft.”; that the defendant’s statement was not a promise but was a representation; and that the defendant “knew that the house could not be built to the size or anywhere close to the size shown on the roof plan.”

The trial judge first found, in one short paragraph, that he could not arrive at a conclusion as to what exactly the contract between the parties was. He then considered, in forty-three paragraphs, whether the contract asserted by the plaintiff would have been illegal and thereby unenforceable, and concluded that it would have been:

“….in the context of personal contracts the inflexible application of the law of illegality is sometimes mitigated so that justice may be done. This principle does not, in my view, extend to the specific context and particular public policy considerations that pertain to the imposition on neighbourhoods of houses built at 30 percent above the allowable limit and encompassing illegal secondary suites that affect each neighbours’ enjoyment of their neighbourhood. Taking into consideration the context of the contract between the parties and the fact that the plaintiff has suffered little if any damage due to the alleged breach of the contract I find that the principles outlined in Top Line supports a conclusion that the contract alleged by the plaintiff is unenforceable….I conclude this case falls squarely within the parameters of an illegal contract that is unenforceable and against public policy. Municipalities have responsibilities to enforce the building protocols set out in their bylaws because of the aesthetic impact on neighbours and additional strains on public services. All neighbouring properties have an interest in enforcement of secondary suite bylaws because the densification created by unlawful suites affects neighbours….The contract to build a structure with an area of 3638 square feet with a secondary suite was contrary to a City bylaw permitting only 2765 square feet and precluding a secondary suite was an illegal contract and should not be enforced.”

In arriving at this conclusion, the trial judge relied principally upon the decision of Justice Newbury in Top Line Industries Ltd. v. International Paper Industries, 2000 BCCA 23. In that case, a lease of a portion of unsubdivided parcel of land was entered into, contrary to the restrictions established under s. 73 of the Land Title Act, and the court found that the lease was illegal.

The trial judge in the Nzeadibe case also concluded that the defendant misrepresented to the plaintiff that a house on the property could comprise more than 3000 square feet, that this representation induced the plaintiff to buy the property, that the defendant knew of the size limitation and suite prohibition affecting the property and made the representation to the plaintiff knowing that it was not true or being reckless as to its truth.

Discussion

This decision raises important questions about the role or purpose of the doctrine of illegality in construction law.

Is that role or purpose to prohibit contracts that have as their object or purpose the doing of something that is illegal or immoral? Or is its role or purpose to prohibit any contract the actual performance of which is contrary to a bylaw or other public law? And in either case, should the court delete the illegal portion of the contract and enforce the rest of it? None of these questions were satisfactorily addressed by the court in this case.

The doctrine of illegality has been addressed by the Supreme Court of Canada several times in the last twenty years or so, most noticeably in KRG Insurance Brokers (Western) Inc. v. Shafron, [2009] 1 S.C.R. 157, Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1S.C.R. 249 and Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986. These cases were not dealt with by the trial judge in the Nzeadibe decision.

The modern trend has been to not strike down a contract just because a statute is violated, and to apply judicial discretion across a broad spectrum of remedies, particularly if the rights of third parties are affected. The court may allow the contract to stand and apply the “blue pencil test” and excise the objectionable portions, but only if the purpose and policy of the statute is not subverted.

There are older Supreme Court of Canada decisions, in Walker v. McMillan, 1882 CarswellNB 71, 6 S.C.R. 241 and Spears v. Walker, 1884 CarswellNB 64, 11 S.C.R. 113, holding that a contract for the erection of a building which is itself contrary to municipal bylaws is an illegal contract. These decisions were not cited by the court in the present case, and they have hardly been cited by any court in the last 50 years. One wonders if these decisions, from an older era when contracts were routinely struck down if their performance infringed a public law, would still be applied.

Although the judge in this case did not address the “blue pencil test”, it is unlikely that the application of that test would have saved this contract. The court was confused enough about the terms of the contract. It is unlikely that the court could have concluded that the parties would have entered into the contract had it not contained, say, the provision relating to the separate suite.

One might expect that the legal principles would be clear in determining whether a building contract is illegal if it involves the construction of a building which is contrary to building or zoning bylaws. One might have that expectation since the construction of buildings that contravene bylaws is not an exceptional event. Yet, no clear statement of those principles emerges from the present decision.

In the present case, the judge seems most motivated by the degree to which the proposed building violated the bylaw, and the aesthetic impact upon neighbours that the building would have had. These are fairly subjective criteria and leave the court with a large discretion, and the parties with considerable uncertainty as to whether the contract will or will not be struck down.

The mere fact that a building contravenes a bylaw, no matter how incidentally, should not invalidate a building contract. Is it the degree to which the building violates the bylaw that makes it illegal? Is it the knowledge of both parties, or the plaintiff, or the defendant, that the building contravenes the bylaw? Is it the mutual purpose of the parties to contravene the bylaw? Is there any difference between a building bylaw (which this case involved) and zoning bylaws? And when, if ever, will the “blue pencil test” be applied to a building contract involving the breach of a bylaw?

We’ll wait for some appellate court to answer these questions.

See Heintzman & Goldsmith on Canadian Building Contracts (5th ed.), chapter 1, section 3(e)

Nzeadibe v. Khan, 2017 CarswellBC 2251, 2017 BCSC 1456

Building contract – illegality – breach of building bylaws – “blue pencil” test

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                      December 10, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

How Does The Loss Of A Chance Apply To Damages For Breach Of A Building Contract?

Construction law practitioners must keep their eyes and ears open to the evolving case law in other areas of the law. That case law may have direct application to building contract issues.

This fact is especially true for the assessment of damages. Because of the numerous contracts involved in a building project, a breach of one contract may cause the innocent party to lose a chance to recover, or avoid a loss, on another contract. But is the loss of a chance to negotiate a better deal on another contract sufficient?

This is the issue that the recently Ontario Court of Appeal addressed in Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544. While the facts arose from a franchise relationship, the principles set forth by the Ontario Court of Appeal are directly applicable to construction law due to the intersecting contractual relations in both settings.

The Background

The facts arose from economic downturn in 2008-2009 and General Motors’ efforts to save itself from bankruptcy. GM wanted to avail itself of financial assistance from the U.S. and Canadian governments, but to do so it had to shed financial liabilities and put itself on a sounder financial footing. This involved terminating many franchises with its dealers.

In this case, the trial court found that by May 2009, the law firm Cassels Brock was acting for three of the parties to this tangled web: the Canadian government, certain specific GM Canada dealers and the GM Canada dealers association. GM offered a buy-out proposal to the dealers, including payment of a termination amount to the terminated dealers. Cassels Brock told the dealers they could not act for the dealers on that proposal. After many dealers accepted a buy-out from GM Canada, they sued Cassels asserting that it had been in conflict of interest. The trial judge and the Court of Appeal found that Cassels Brock had been in breach of its retainer contract with the dealers. The question then became: what is the amount of damages to which the dealers were entitled?

The dealers asserted that, had they had independent counsel, they would have been able to negotiate a much better financial settlement with GM Canada, and that by reasons of Cassels Brock’s conflict of interest, they had lost the chance of making a better settlement with GM Canada. Cassels Brock asserted that the dealers had to show that they had suffered a loss on a balance of probabilities, not just on the basis of a loss of a chance, and that in any event, the dealers’ assertion that they would have made a better settlement with GM Canada was purely speculative and not a sufficient basis to award damages.

Judgment of the Court of Appeal

Both the trial judge and the Court of Appeal held that the dealers’ damages were to be assessed based on the loss of a chance to make a gain or avoid a loss, not on the basis of the balance of probabilities of making a gain or avoiding a loss. That is because the dealers’ claims were in contract, not tort. In contract, the existence of damage is not an element in determining liability, while it is in tort. The dealers had satisfied the evidentiary test for contractual liability – on a balance of probabilities. When it came to damages, the courts held that the loss of a chance to negotiate a better deal was a sufficient basis to assess damages.

The Court of Appeal quoted from its previous decision in Folland v. Reardon (2005), 74 O.R. (3d) 688 (C.A.) to explain its reasoning:

“Whatever the scope of the lost chance analysis in fixing liability for tort claims based on personal injuries, lost chance is well recognized as a basis for assessing damages in contract. In contract, proof of damage is not part of the liability inquiry. If a defendant breaches his contract with the plaintiff and as a result a plaintiff loses the opportunity to gain a benefit or avoid harm, that lost opportunity may be compensable. As I read the contract cases, a plaintiff can recover damages for a lost chance if four criteria are met. First, the plaintiff must establish on the balance of probabilities that but for the defendant’s wrongful conduct, the plaintiff had a chance to obtain a benefit or avoid a loss. Second, the plaintiff must show that the chance lost was sufficiently real and significant to rise above mere speculation. Third, the plaintiff must demonstrate that the outcome, that is, whether the plaintiff would have avoided the loss or made the gain, depended on someone or something other than the plaintiff himself or herself. Fourth, the plaintiff must show that the lost chance had some practical value…..” (underlining added)

The Court of Appeal then said:

“Recently, in Berry v. Pulley, 2015 ONCA 449, 335 O.A.C. 176, at para. 70, this court described a “two-step framework” for the determination of a loss of chance claim. Associate Chief Justice Hoy explained, at para. 72, that the court must first determine if the four criteria set out in Folland are met. If they are, then the court proceeds to the second step and “will award damages equal to the probability of securing the lost benefit (or avoiding the loss) multiplied by the value of the lost benefit (or the loss sustained)”.”

Having held that the loss of a chance gave rise to compensable damages for breach of contract, the Court of Appeal referred to the following facts, among many others, in holding that the opportunity of negotiating a better deal with GM Canada fell within the realm of a compensable loss of a chance:

“GMCL had a GM-approved fund of $218 million to conclude the WDAs with 290 dealers. In the end, it offered $143.5 million to 240 dealers. This gave GMCL the financial flexibility to improve the compensation offered under the WDAs….The considerable and varied risks of a CCAA filing by GMCL to both GMCL and GM itself outweighed the benefits of such a filing and would have operated to make GMCL amenable to discussions with the dealers…These factual findings, which were available on the evidence, provide compelling support for the inference that it was likely, at the end of the day, that GMCL would have negotiated with the dealers about the WDAs had the negotiation option been put on the table and had the dealers acted as an organized bloc in opposition to the offers under the WDAs……The amount of the potential chance (to which the percentage of potential chance can be applied) is the difference between what the defendant offered and what the defendant internally had been authorized to offer.”

Discussion

These conclusions are important and readily applicable to a building contract dispute.

First, since that dispute is based on a breach of contract, not a tort, then the loss of a chance, and not the probability of loss, is a sufficient basis to award damages to the plaintiff.

And second, according to this decision, the loss of a chance to negotiate a better contract with a third party falls within the loss of a chance.

The first point – that contract damages can be awarded based on a loss of a chance – has already been applied in the building contract setting. In Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, the damages of the plaintiff, who was wrongly not chosen as the successful tenderer, were assessed based upon the chance of site conditions and related performance problems impacting the amount of damages. In Maritime Excavators (1994) Ltd. v. Nova Scotia (Attorney General) (2000), 183 N.S.R. (2d) 236 (N.S.S.C.), the trial judge assessed the loss of a chance of the plaintiff being awarded the tender, and awarded the plaintiff its full damages, finding that the plaintiff would have been 100% likely to have been awarded the tender if it had been properly conducted. In Borcherdt Concrete Products Ltd. v. Port Hawkesbury (Town) (2008), 262 N.S.R. (2d) 163, the Nova Scotia Court of Appeal applied a 35 percent reduction to the plaintiff’s damage for the possibility that it would not have been awarded the tender even if properly conducted.

Now, based upon the Trillium Motor decision, the opportunity to use the “loss of a chance” approach to the assessment of damages in building contract cases is, arguably, much broader. The loss of a chance of negotiating a better contract with a third party now falls within the scope of assessable damages.

There may be many contracts in a building project. A breach of any of those contracts may give rise to the opportunity to claim a loss of an opportunity to negotiate a better contract with another party to the building project. For example, a breach of contract by the owner may cause the contractor a loss of a chance to negotiate a better contract with a subcontractor or supplier. A breach of contract by a contractor may cause the loss of a subcontractor’s opportunity to negotiate a better deal, or a better settlement agreement, with a supplier or other subcontractor. The combination of factors that may give rise to a claim for recoverable loss of a chance of negotiating a better deal seems only limited by the number of contracts or potential contracts involved in the project.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 9, section 6(d)

Trillium Motor World Ltd. v. Cassels Brock & Blackwell LLP, 2017 CarswellOnt 10114, 2017 ONCA 544

Building contract – assessment of damages – loss of a chance – negotiation of contract

Thomas G. Heintzman O.C., Q.C. LL.D (Hon.), FCIArb                                         August 2, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

Construction Contract Held To Mandate The Payment Of Extras

One of the most contentious issues in building contracts is mechanism to ensure that the contractor is guaranteed payment for extras, and that the owner is guaranteed not to pay for something that is not an extra. It would be simple to state these propositions in a building contract, but they usually aren’t there.

However, in King Road Paving and Landscaping Inc. v. Plati, the Ontario Superior Court of Justice found that that is exactly what the contract said. The contract was for the renovation of a barn, to convert it into a “marijuana grow operation” said the contactor, or a nightclub said the owner. The parties entered into an initial written contract to renovate the barn. However, there were no signed contracts for much of the work that was done and the payments for the work were largely made in cash without any receipts. There were disputes over a large amount of work for which additional payment was claimed by the contractor.

The Decision

The court performed a two-stage test to determine if the owner was obliged to pay for this work:

“in the absence of any written agreements relating to extras, the only way to determine whether something is an extra is by reference to the original contract. A secondary issue is whether the work claimed was actually performed, and, if so, the cost of such work.

Having performed this exercise, the court held that under the following term of the contract, the contractor was entitled to be paid for this work:

“All work not stated will be a charge of time and materials.”

Accordingly, the court found that since the work was done, and was not covered by the written contract, the owner was required to pay for it. Payment was to be the basis of “time and material” where invoices or other evidence supported the claim.

In arriving at this conclusion, the court found that the owner’s representative was on the site and therefore aware that the work was being done. As the court said:

“[the owner] often assumed (or perhaps hoped) that any extras would be covered by the price set out in the contract. That, however, is not what the contract provides.”

Discussion

Why make a fuss about this simple little case? Because the building contract stated an express obligation to pay for extra work that so many building contracts don’t quite state.

Thus, the CCDC contracts never quite state that obligation. Instead, they construct an elaborate regime under which the consultant is to oversee the progress of the work and rule on whether work or materials are extras, and then an equally elaborate procedural regime relating to dispute resolution, change orders and changed conditions. Those regimes appear to intend that the contractor will be paid for extra work and materials, and that the owner won’t pay for work and materials that are covered by the contract. But they never quite say that expressly.

The real problem is with respect to work that, during the job, the owner says the contractor must perform as it is within the contract and the contractor says is not within the contract. If the consultant sides with the contractor and the contractor feels obliged to proceed with the work, the contractor may be shut out of a quantum meruit claim based upon the decision of the Supreme Court of Canada in Peter Kiewit Sons Co. of Canada v. Eakins Construction Ltd. [1960] S.C.R. 361. If the contractor refuses to do the work, then the owner may terminate the contract and sue the contractor for damages.

It is this conundrum that the dispute resolution and change order provisions of the CCDC contracts are intended to address. They are intended to ensure that the contractor can proceed with the work without prejudicing its claim for extra payment for the work. The court or arbitrator can later determine that the work or materials were or were not part of the contract, and if they were not, then the contractor is entitled to be paid for them.

This is the result that the Supreme Court of Canada arrived at in Corpex (1977) Inc. v. Canada, 1982] 2 S.C.R. 643. The Court said that, as long as the contractor gives timely notice under these procedural clauses of its claim that the work is an extra (or is due to unforeseen circumstances, or due to the owner’s delay or whatever the claim arises from), then the contractor is “practically certain of being compensated for additional costs”.

The words “practically certain” aren’t the strongest foundation for a claim in these chancy circumstances, but coming from the Supreme Court of Canada contractors have been relying on them to proceed with the work and assert the claim. But those words are, perhaps, appropriate because the sorts of extras/changed condition/dispute resolution provisions dealt with in Corpex provide procedural remedies. They don’t actually say that the contractor will be paid. But they must mean that, as long as the contractor gives timely notice and the work and labour is later found to be extra to the contract.

Refreshingly, in twelve rather inelegant words, the contract in the King Road Paving case said exactly that: the contractor will be paid for extra work. Maybe other building contracts can say exactly that.

Thomas G. Heintzman O.C., Q.C., LL.D (Hon.) FCIArb                   April 1, 2017

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 4, part 8 and chapter 10, part 6(c).

King Road Paving and Landscaping Inc. v. Plati, 2017 CarswellOnt 1712, 2017 ONSC 557

Building contract – extra work and materials – quantum meruit –

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

Is A Notice Of Intention To Recover Costs A Proper Notice Of Claim Under A Building Contract?

In Ledore Investments Ltd. v. Ellis-Don Construction Ltd., the Ontario Superior Court has recently held that a letter from a contractor to a subcontractor stating that “we intend to recover these costs from you” was a sufficient notice to the subcontractor to satisfy the notice provision of the building contract. Accordingly, the court set aside an arbitrator’s decision holding that the letter was only a notice of intention to claim, not a notice of claim.

This decision highlights the uncertain state of the law with respect to notices and claims under building contracts. That uncertainty is due to the different circumstances in which such a notice may be given and the different approaches to those circumstances taken by different courts.

Background

Articles 15 of the subcontract between Ellis-Don and Ross Steel stated as follows:

“the contractor [Ellis-Don] expressly waives and releases the subcontractor [Ross Steel] from all claims against the subcontractor, including without limitation those that might arise from the negligence or breach of this agreement by the subcontractor, except one or more of the following:

(a) those made in writing prior to the date of the final certificate for payment of the prime contract and still unsettled. (underlining added)

The letter which Ellis-Don then sent to Ross Steel stated that:

– “there are a number of outstanding issues to be resolved between Ellis-Don and Ross Steel regarding Ross Steel’s performance on this project.” The letter recited a number of alleged defaults by the subcontractor causing the delay of the project. The letter asserted that the subcontractor’s slippages had caused “serious impact on the work of Ellis-Don and other subcontractors and affected the overall completion of the project” and “forced Ellis-Don to expend substantial monies to accelerate the work in an effort to recover the schedule. We are currently assessing the financial impact that Ross Steel’s schedule slippages have had on Ellis-Don and we intend to recover these costs from you.” (underlining added)

– Ellis-Don had received an interim assessment of the liquidated damages by the owner for the late completion of the project, and that these damages “are solely attributable to Ross Steel and on account of this we are withholding the release of any further monies to you at this time.”

Arbitrator’s Decision

The following contents of the arbitrator’s decision are taken from the decision of the court reviewing the arbitrator’s award.

The arbitrator acknowledged that there was considerable judicial authority dealing with the sufficiency of notice of claims under building contracts; and that Ellis-Don’s letter to its subcontractor met the requirements, set forth in those cases, for sufficient written notice of a claim under a construction contract.

However, the arbitrator held that those cases did not apply to the present situation. The arbitrator drew a distinction between provisions requiring written notice of a claim, (to which the Doyle decision, and others following it, applied); and provisions requiring the making of a claim in writing, which in his view Article 15 represented. It was the arbitrator’s view that the first line of cases did not apply to Article 15.

The arbitrator accordingly concluded that there was an absence of any legal authority on the point, and he was obliged to interpret and apply Article 15 as a matter of first impression. He held that the wording of the article required “more than simply notice of an intention”, and that “a demand must be made”, or “a right must be asserted with consequences or relief sought”.

The arbitrator held that Ellis-Don’s letter to Ross Steel failed that test. In his view, the language employed by Ellis-Don in its letters was prospective, and pointed “to an intention to make a claim but not to an actual claim“. [Emphasis added] In finding that Ellis-Don had not satisfied the requirements of Article 15.1 (a), the arbitrator found that Ellis-Don’s letter was merely “notice to Ross Steel of an Ellis-Don intention to make a claim”, and “threatened” and “contemplated” claim that was “never quantified nor pursued”. The arbitrator held that a mere “intention to claim is not the same as a claim”, [emphasis added], and that the Ellis-Don’s letters, even when taken together, did not rise to the level of a ‘claim in writing’ that was still unsettled before the date of the final certificate for payment, as required by Article 15.1.

Court’s Decision

A single judge of the Ontario Superior Court set aside the arbitrator’s award for the following reasons:

  1. The cases, and in particular the decision of the British Columbia Court of Appeal in Doyle Construction Co. v. Carling O’Keefe Breweries of Canada Ltd. [1988 CarswellBC 204, indicated that a notice provision will be satisfied if:
  • The complaint goes beyond “grumblings” to display or indicate an “intention to claim”;
  • The claimant gives some particulars as to what the complaint is, so that the other party has an opportunity to consider its position and the possibility of taking corrective measures; and
  • The complaint is timely; e.g. given “in enough time” to permit the other party to take “guarding measures” if it so desires.
  1. Doyle also provided legal authority for the general proposition that provisions requiring claims to be made in writing should be treated as provisions requiring written notice of claims, contrary to the approach taken by the arbitrator. Accordingly, the arbitrator erred in finding that ‘claims made in writing” should not be treated as provisions requiring written notice of a claim.

The court accordingly set aside the arbitrator’s decision.

Discussion

The decisions of the arbitrator and judge reveal a starkly different approach to notices, and claims under building contracts, and to the effect of decided case law in Canada on these matters. The author understands that this matter is being appealed to the Ontario Court of Appeal where, hopefully, this debate will be clarified.

  1. Is there a difference between notices of occurrences, notices of claims, and claims under building contracts? The arbitrator said yes, and the judge said no:
    1. The arbitrator says that the waiver clause requires the contractor to give notice of a claim; that a claim involves a present statement of a claim that contains the proper elements of a claim; and that a statement of intention to make a claim is not a notice of a claim.
    2. The court says that a claim under a building contract is no different than a notice of occurrence or a notice of a claim; and that a statement of an intention to make a claim is sufficient under either a notice requirement or a claim requirement.

It is interesting to note that the Ontario Court of Appeal just recently dealt with a claim procedure under a contract. In Ross-Clair v. Canada (Attorney General), 2016 CarswellOnt 3854, 2016 ONCA 205, 265 A.C.W.S. (3d) 289, the Ontario Court of Appeal held that the claim was invalid because sufficient particulars of it were not provided. The claim provision in that case related to claims to be filed at the end of the project, and not during the project, similar to the situation in the Ellis-Don case. The Court of Appeal applied very strict requirements for the particulars of a valid claim, requirements would not seem applicable at all to a notice. It does not seem likely that a court would hold a contractor to such a high standard of particulars in a notice situation.

That decision was reviewed by me in an article dated July 10, 2016 on my www.constructionlawcanada website.

  1. Do the prior cases decide this issue? Do they deal with the same clause in the contract?

Before reviewing the cases referred to in the Ellis-Don case, it is well to remember that notice and claims provisions appear in various parts of a building contract. Thus, in the CCDC-2 Stipulated Price Contract, the main notice/claims provisions are as follows:

6.4.1. Changed conditions. Notice in Writing is required of “such conditions” and in no event later than five working days after the first observance of the occurrence.

6.5.4 Delay. No extension of the time for performance may be granted unless a “Notice in Writing” is given within 10 days of the commencement of the delay.

6.6.1. Increase or decrease in (credit against) the cost of the work. If the owner or contractor “intends to make a claim” the claimant must give “timely Notice in Writing” and submit, within a reasonable time, a “detailed account claimed and the grounds upon which the claim is made.”

7.1.2 and 7.2. Default. The notice must be in writing. No period of time is specified in which to give notice.

8.2.2. Claims. Notice of dispute must be in writing and given within 15 working days of the receipt of the Consultant’s findings. The responding party has 10 working days to send a reply.

12.2.1.1 and 12.2.3.1 Waiver of claims. “Claims” arising prior to the date of Substantial Completion, are waived and released unless “Notice in Writing of claim” is given prior to the fifth or sixth day after the expiry of the applicable lien period.

12.3.3 Warranty. The owner shall promptly give contractor Notice in Writing of defects and deficiencies.

The first three notices apply during the course of the project. The claims provision applies to the dispute resolution procedures. The waiver and warranty provisions apply at the end of the project. Thus, these provisions apply in different circumstances and may be seen to have different purposes.

The following are the cases referred to in the Ellis-Don decision of the court:

  • Doyle Construction Co. v. Carling O’Keefe Breweries of Canada Ltd.

The plaintiff’s claim was dismissed on several grounds, one of which was that, under the claims procedures of the contract, GC 22.2, “Claims under this General Condition shall be made in writing to the party liable within reasonable time after the first observance of such damage” and the procedures required that there be notice of “any wrongful act or neglect” of the person against whom the claim is made. So, the notice provision in Doyle related to notice during the project, not a notice at the end of the project. In addition, the plaintiff’s claim in Doyle was dismissed because no notice of wrongful act or neglect was identified in any notice. The Doyle case seems very different than the Ellis-Don case on both accounts. Also the judges’ remarks in Doyle on the notice issue may arguably be obiter dicta. In fact, the Doyle judgments appear to be a strong endorsement of the need for the contractor to give effective notice of its claim. In that case the court found that the contractor did give a notice of intent to claim, but that was not sufficient. Justice Locke said:

“The grumblings of this contractor, recorded though they may be in site minutes, display no intention to claim until December 1983. Even then, no claim was actually advanced, but intent was indicated. But no details were given: an owner would be hard put to know exactly what it is to meet, and hence what it is to do. The purpose of the notice is to give the owner an opportunity of considering his position and perhaps taking corrective measures, and he is prejudiced by not being able to do it.” (underlining added)

–Northland Kaska Corp. v. Yukon Territory, 2001 CarswellBC 1477.

This was a changed conditions case, not a waiver-at-the-end-of-the-project case, as in Ellis-Don. Under the changed conditions provision, GC 35 of the contract, the contractor was required to give the owner “written notice…as soon as practicable and in any event no later than five Days following the occurrence thereof and shall give MCL subsequent written notice of the termination of any such lease.” Under GC 14, the claims provision, the contractor was required to submit a “Notice of a Claim …..in writing ….within seven Days after the Contractor first becomes aware of the events or circumstances giving rise to such Claim. As soon as practicable thereafter the Contractor shall submit full details of such Claim in order to permit MCL to review and evaluate it.” In holding that the contractor had not satisfied these requirements of the contract, and after quoting the words of Justice Locke referred to above, the court said:

“it is my opinion that any notice of a change in soil conditions must be unequivocal in stating the contractor’s intention that: (1) it has encountered what it considers to be a substantial difference in soil conditions than that indicated in the pre-tender information, or a reasonable assumption as to soil conditions based upon the pre-tender information, as the case may be; and (2) that it intends to make a claim under GC35.2 for any extra expense, loss or damage resulting therefrom. This does not mean that the written notice must be overly detailed, as the extent of the change in soil conditions nor the full impact upon the contractor’s planned schedule and budget might not yet be fully appreciated. However, the notice should contain such particulars so as to enable the owner to appreciate the contractor’s concerns, to consider its position, and to make an informed decision as to how to proceed. Timeliness and certainty of the notice is essential. The contractor may always withdraw its claim if it circumstances warrant, but it should not deprive the owner the opportunity to assess its options in light of the likelihood that contractor will make a claim for extra compensation under GC35.2.” (underlining added)

– Bemar Construction (Ontario) Inc. v. Mississauga (City), 2004 CarswellOnt 222 (affirmed in the Ontario Court of Appeal)

Bemar was a delay claim. The contractor, Bemar, sent a letter to the owner stating that it was giving “formal notice that the completion date for said project will be extended accordingly” but did not give notice of any delay claim for damages or compensation. Quoting Justice Locke in Doyle, the court dismissed the delay claim for failure to give proper notice of it.

–Technicore Underground Inc. v. Toronto (City), 2011 CarswellOnt 14960

This was an increase-in costs and a claims procedure case. GC 3.14.03 of the contract required the contractor to give “oral notice ….of any situation which may lead to a claim for additional payment immediately upon becoming aware of the situation and shall provide written notice to the Contract Administrator of such situation or of any express intent to claim such payment, within seven days of the commencement of any part of the work which may be affected by the situation or will form part of the claim.” Then, the contractor was required to “submit detailed claims as soon as reasonably possible and in any event no later than 30 Days after the completion of the work affected by the situation.” The detailed claim was required to: identify the items in respect of which the claim arose; state the grounds, contractual or otherwise, upon which the claim is made; and include the Records supporting such claim. The court referred to the Doyle and Bemar decisions and held that the contractor’s claim was limited to those items for which it had given notice during the contract, and could not include claims for which it gave notice three years later.

In all of these cases, the court dismissed the contractor’s claim because of a failure to give proper notice. Two of the cases involved claims procedures, one involved a delay claim and two involved changed condition claims. None were a waiver-at the end-of the contract case, such as Ellis-Don. All of these cases involved specific contractual provisions that influenced the court’s treatment of the notice/claim issue.

Not only do the claims in these cases arise in different circumstances, it is not obvious that they give rise to the three principles that the judge in Ellis-Don stated that they give rise to.

If the Ellis-Don case is appealed to the Ontario Court of Appeal, it is hoped that issues like the following will be considered:

  1. Should the same kind or detail of notice or claim be required for notices arising during the project – such as for delay, changed conditions, increase or decrease in the cost of the project – as opposed to claims in the dispute resolution process or at the end of the project through the waiver/release clause? Should the notice requirements during the project be less onerous than those at the end of the project or in the dispute resolution process, because during the project the parties are busy building the project, and do not have full knowledge of the consequences of the delay, changes or defaults?

Is the arbitrator’s approach more suitable to the waiver-at-the-end-of-the-project situation, which is the situation in Ellis-Don, and the judge’s approach more suitable to the notices given during the course of the project?

  1. Should a “notice of claim” be the same as a “claim”? What degree of “notice” is required for a “notice” or a “notice of claim” or a “claim”? Is it too complicated to have different standards applicable to these three situations? Or were the expressions – “claim” and “notice of claim” and “notice” –intended to be different, and an “notice” or “notice of claim” intended to be a less detailed document, just like, under the Rules of Civil Procedure, a Notice of Claim is less detailed than a Statement of Claim.
  1. What is the fair balance between burdening the claimant with filing a detailed claim and notice, and providing the respondent with reasonable notice of the claim and its repercussions? Should the amount, or lack, of detail that Ellis-Don put in its letter to its subcontractor be more or less important than its use of the word “intention”? And dealing, for instance, with notices in the dispute resolution procedures, is there a good reason to require a claimant in that procedure to provide as much information in its notice of claim as a Statement of Claim in a civil action, especially when the claim may go through a mediation and arbitration process when those details will be dealt with in the dispute resolution process?

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 6, part 9(d), chapter 7, part 5 and chapter 9, part 4.

Ledore Investments Ltd. v. Ellis-Don Construction Ltd., 2016 CarswellOnt 13567, 2016 ONSC 5441

Building contract – claim and notice of claim – waiver of claims at time of completion

Thomas G. Heintzman O.C., Q.C., FCIArb                                   December 3,2016

www.heintzmanadr.com

www.constructionlawcanada.com

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

 

Is A Pay When Paid Clause Applicable If The Contractor’s Account To The Owner Is Reduced For Reasons Unconnected With Subcontractor’s Work?

A pay when paid clause is one of the most contentious clauses in a building contract. Indeed, the clause is outlawed in most circumstances in the United Kingdom and some states of the United States. In Canada, there is conflicting case law about the application and interpretation of the clause. In Wallwin Electric Services Inc. v. Tasis Contractors Inc., the Ontario Superior court recently gave guidance as to when such a clause is applicable, and held that it does not apply if the contractor voluntarily reduces its account to the owner for reasons unconnected to the subcontractor’s work.

Background

A pay when pay clause purports to entitle the contractor to refuse payment to the subcontractor if the contractor has not been paid by the owner. In the Wallwin case, the payment clause read as follows:

“(3) Provided that, as a condition precedent, the contractor has been paid the certificate, in which such amount has been included, by the owner.”

The contractor, Tasis said that it had no obligation to pay the subcontractor since it, the contractor, had not been fully paid by the owner. The main contract had been certified to be substantially completed. There were no outstanding deficiencies with respect to the electrical work done by Wallwin and its work was included in the certificates that had been issued by the consultant.

The owner asserted that there were deficiencies in previously certified work. Accordingly, the contractor Tasis subtracted $150,176.65 from its invoice for these deficiencies. That work was unrelated to the work performed by Wallwin. Tasis was paid for this invoice.

As the judgment in the case recorded, the parties were agreed that

“1. Wallwin made regular applications for payment as provided for in the subcontract.

  1. At no time did Tasis or the project consultant make any changes to the amount of Wallwin’s applications for payment.
  2. At no time did Tasis or the project consultant give notice to Wallwin of any changes to the amount of Wallwin’s applications for payment.
  3. Tasis was paid by the owner for each certificate in the amount certified.”

Nevertheless the contractor Tasis submitted that “the subcontractors legal entitlement to payment is contingent upon the general contractor being paid, then the subcontractor must bear the risk of nonpayment by the owner to the general contractor; the only exception being where the reason for nonpayment by the owner is the default of the general contractor.”

Decision of the Ontario Superior Court

The application judge disagreed. He held that the proper interpretation of a “pay when paid clause is as follows:

“A contractor is obliged to pay a subcontractor when:

  1. the subcontractor makes application for payment,
  2. neither the contractor or certifier have given written notice to the subcontractor of a change in the amount the subcontractor has applied to be paid
  3. the amount the subcontractor has applied to be paid has been included in a Certificate for Payment, and
  1. the contractor has been paid that Certificate for Payment by the owner.”

In particular, the court held that a contractor cannot:

“avoid its obligation to pay a subcontractor by adjusting an invoice to allow for an owner to retain contract funds when a dispute arises over previously certified payments. The certification process creates the obligation to pay. Disagreements over subcontractor applications for payment may be resolved prior to Certificate for Payment being issued, as contemplated at the end of Article 4.2, or they may be resolved after payment, but once the above conditions have been satisfied payment must be made.”

Accordingly, the court held that the subcontractor was entitled to be paid by the contractor.

Discussion

This case is, perhaps, an easy one. It is hard to contemplate that a “pay when paid” clause could be interpreted to apply if the money held back by the owner is not in relation to the work undertaken by the subcontractor and the contractor has been paid in full for that work. The more difficult cases arise when the contractor is unpaid for all or part of the work done by the subcontractor because of, say, the owner’s insolvency or faulty work by the contractor.

The present decision is interesting because it introduces two ingredients into the application of the “pay when paid” clause:

whether there has been a written notice of change in the subcontract and

whether the consultant has certified the payments due under the subcontract.

These ingredients appear to introduce two new hurdles that the subcontractor must get over before payment will be paid. It is unclear where those ingredients come from.

The Canadian law relating to “pay when paid” clauses is complicated by the conflicting decisions of the Ontario Court of Appeal in Timbro Developments v. Grimsby Diesel Motors Inc. (where the clause was applied) and the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd v. Alta Surety Co. (where the clause was not applied). Until the law is clarified by the Supreme Court of Canada, the proper scope and application of “pay when paid” clauses will be contentious.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 6, part 2(d)(i)

Wallwin Electric Services Inc. v. Tasis Contractors Inc, 2015 CarswellOnt 3177
2015 ONSC 1612

Thomas G. Heintzman O.C., Q.C., FCIArb                              April 10, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

 

What Is An “Organizing Principle”, a “Duty” And A “Term” Of A Contract?”

In the last two articles I have been considering the recent decision of the Supreme Court of Canada in Bhasin v. Hrynew. In its decision, the Supreme Court of Canada established two fundamental principles for the Canadian common law of contract.

First, it is an “organizing principle” of contract law that the parties must perform the contract in good faith.

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

In its decision the Supreme Court said that this “organizing principle” and “duty” are not “terms“of the contract, so the parties cannot contract out of them. Yet, the court found that the defendant had breached the contract by acting dishonestly. How could the defendant breach the contract if this obligation or duty are not terms of the contract?

Background

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

Hrynew was a competitor of Bhasin and wanted to take over Bhasin’s agency. He campaigned with Can-Am to direct such a merger of the agencies. Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew. Bhasin sued Can-Am and Hrynew.

The trial judge held that a term of good faith performance should be implied based on the intentions of the parties in order to give business efficacy to the agreement. The trial judge found that Can-Am had breached that implied term in its contract with Bhasin. He found that Can-Am had dealt dishonestly with Bhasin.

The Supreme Court of Canada restored the trial judge’s finding that Can-Am had breached its contract with Bhasin by dealing with him dishonestly.

Decision of the Supreme Court relating to Organizing Principles and Terms of the Contact

Speaking for a unanimous court, Justice Cromwell stated the following propositions:

“…good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. …a further manifestation of this organizing principle of good faith…is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.” (underlining added)

The Supreme Court explained what it meant by “an organizing principle.” Such a principle “states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations.”

Having recognized the organizing principle of good faith performance of contracts, Justice Cromwell held that the court should now recognize a contractual duty of honest performance:

“I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step.”

Justice Cromwell then summarized the position:

“(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.” (underlining added)

Justice Cromwell then discussed the nature of these duties and organizing principles. He held that:

“a new duty of honest performance….should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability.”

He then noted that;

“There is a longstanding debate about whether the duty of good faith arises as a term implied as a matter of fact or a term implied by law… I do not have to resolve this debate fully, which…casts a shadow of uncertainty over a good deal of the jurisprudence.  I am at this point concerned only with a new duty of honest performance and, as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties……. Viewed in this way, the entire agreement clause in cl. 11.2 of the Agreement is not an impediment to the duty arising in this case. Because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it.” (underlining added)

In any event, he concluded that since “the duty of honest performance interferes very little with freedom of contract, since parties will rarely expect that their contracts permit dishonest performance of their obligations.” However, Justice Cromwell did not discount the possibility that the parties might try to limit their obligations of good faith and honesty. He said:

“I would not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.”

When it came time to apply these principles to the actual facts, Justice Cromwell found that “Can-Am breached its duty to perform the Agreement honestly.” He concluded that:

“this dishonesty on the part of Can-Am was directly and intimately connected to Can-Am’s performance of the Agreement with Mr. Bhasin and its exercise of the non-renewal provision. I conclude that Can-Am breached the 1998 Agreement when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause.”

Discussion

This decision leaves us asking a number of questions:

Did Can-Am breach a term of the contract? If it didn’t, how could it be in breach of the contract? If it did, what term did it breach?

Is the “organizing principle” of good faith performance a term of the contract?

Is the duty of honest performance a term of the contract?

The answer to the last two questions seems to be No. The Supreme Court differentiated between an “organizing principle” and a duty and a term. It held that good faith performance fell into the first category, an organizing principle. It held that honesty fell into the second category, a duty. It held that neither the “organizing principle” of good faith nor the ”duty” of honest performance amounted to a term, with the result that the parties cannot contract out of them and the entire agreements clause does not apply to them.

If that is so, it is hard to see how a breach of these non-terms can amount to a breach of the contract. In addition, how should drafters of contracts deal with these non-terms? The parties may want to define what is permissible conduct so that no argument can be made that it is in bad faith or dishonest. While Justice Cromwell said that the parties are entitled to “relax the requirements of the doctrine” of honest performance as long as they respect the “core requirements” of the doctrine, how do they do so since these concepts are, according to the Supreme Court, not part of the contract? Will the terms that the parties write into the contract be effective, and to what degree?

The concept of “organizing principles” has been adopted by the Supreme Court in various areas of the law. For instance, it has been used by that court in the law relating to conflict of laws, criminal law, constitutional law and employment law. But contract law is very different from those areas of law because, in their contract, the parties can make their own law and contract out of other legal principles, unless precluded by some principle of law from doing so.

In those other areas of law, there has been a tension between “organizing principles” and the substantive law. In the Provincial Judges’ Reference (1997), Chief Justice Lamer noted that the preamble to the Constitution Act, 1867 “recognizes and affirms the basic principles which are the very source of the substantive provisions of the Constitution Act, 1867.” He continued:

“although the preamble is clearly part of the Constitution, it is equally clear that it has no enacting force…In other words, strictly speaking, it is not a source of positive law, in contrast to the provisions which follow it. …But the preamble does have important legal effects. Under normal circumstances, preambles can be used to identify the purpose of a statute, and also as an aid to construing ambiguous statutory language…. The preamble to the Constitution Act, 1867, certainly operates in this fashion. However, in my view, it goes even further……It recognizes and affirms the basic principles which are the very source of the substantive provisions of the Constitution Act, 1867. As I have said above, those provisions merely elaborate those organizing principles in the institutional apparatus they create or contemplate. As such, the preamble is not only a key to construing the express provisions of the Constitution Act, 1867, but also invites the use of those organizing principles to fill out gaps in the express terms of the constitutional scheme. It is the means by which the underlying logic of the Act can be given the force of law.” (underlining added)

If the “organizing principles” of contract law are of this nature, can a breach of them amount to a breach of contract?

A further question arises. Does the decision in Bhasin v. Hrynew re-introduce, in one form or another, the doctrine of fundamental term or fundamental breach that the Supreme Court of Canada discarded in the Tercon v. British Columbia decision (2010)? Is the Supreme Court saying in Bhasin v. Hrynew that there are some core elements of contractual conduct –now defined more by morality than by the terms of the contract – which the parties cannot contract out of?

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Performance – Good Faith –  Honest Performance

Thomas G. Heintzman O.C., Q.C., FCIArb                                        December 20, 2014

tgh@heintzmanadr.com

constructionlawcanada.com

 

 

 

The Supreme Court Of Canada Avoids The Open Windows Issue

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

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

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

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

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

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

Background

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

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

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

Supreme Court’s Decision re Damages

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

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

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

Discussion

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

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

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

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

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

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Damages – Least Onerous Performance  – Honest Performance

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

www.heintzmanadr.com

www.constructionlawcanada.com

Contracts Must Be Honestly Performed Says The Supreme Court of Canada

In its recent decision in Bhasin v. Hrynew, the Supreme Court of Canada has established two fundamental principles for the Canadian common law of contract.

First, parties are under a general obligation to perform contracts in good faith.

Second, the parties have a duty to act honestly in the performance of contracts. These contractual obligations can no longer be relegated to some kinds of contracts or situations. Rather, they are principles that apply to every sort of contract.

It is, perhaps, somewhat surprising that these principles were still in dispute under Canadian contract law and that the Supreme Court had not previously ruled on them. Having now done so in Bhasin v. Hrynew, this decision is of great importance to the common law of contract in Canada and should be well understood by anyone concerned with the performance of contracts.

Background

The following facts were found by that trial judge:

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

Hrynew was in effect a competitor of Bhasin and wanted to obtain capture Bhasin’s market. On many occasions, Hrynew had proposed to Bhasin that they merge their dealerships and he campaigned with Can-Am to direct such a merger. Bhasin had resisted any such merger. Can-Am appointed Hrynew as the officer to review dealership compliance with securities laws, but Bhasin object to Hrynew reviewing his business records.

Can-Am had discussions with the Alberta Securities Commission about restructuring its agencies. Can-Am did not tell Bhasin about these discussions. Can-Am repeatedly misled B about its future plans for its agencies. When Bhasin continued to refuse to allow Hrynew to review his records, Can-Am gave notice of non-renewal of the agreement. As a consequence, Bhasin lost his business and his workforce went to work for Hrynew.

Decisions of the Trial Judge and Alberta Court of Appeal

Bhasin sued Can-Am and Hrynew.  The trial judge held that Can-Am breached the implied term in its contract with Bhasin that the contract would be performed in good faith. He found that Mr. Hrynew pressured Can-Am not to renew its Agreement with Mr. Bhasin and that Can-Am dealt dishonestly with Mr. Bhasin and ultimately gave in to that pressure.

The Court of Appeal allowed the appeal and dismissed B’s lawsuit. The court held that there was no self-standing contractual duty of good faith in Canadian law. In addition, the court found that Bhasin had suffered no recoverable damages because, quite apart from any alleged bad faith conduct by it, Can-Am was entitled in any event to give notice of non-renewal of the contract.

Decision of the Supreme Court of Canada

The Supreme Court forthrightly stated that it was necessary to clarify – or some might say, reform – the Canadian common law relating to the performance of contracts. Speaking for a unanimous court, this is how Justice Cromwell approached the matter:

“In my view, it is time to take two incremental steps in order to make the common law less unsettled and piecemeal, more coherent and more just. The first step is to acknowledge that good faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance. The second is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.” (emphasis added)

The Supreme Court explained what it meant by “an organizing principle.” Such a principle “states in general terms a requirement of justice from which more specific legal doctrines may be derived. An organizing principle therefore is not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations.”

Having recognized the organizing principle of good faith performance of contracts, Justice Cromwell held that the court should now recognize a contractual duty of honest performance:

“I would hold that there is a general duty of honesty in contractual performance. This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step.”

Justice Cromwell then summarized the position in three paragraphs which should be duly noted for application in future cases:

“A summary of the principles is in order:

(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.” (emphasis added)

Having stated the legal principles, Justice Cromwell found that Can-Am had breached its contractual duty of honest performance. Can-Am wanted to force a merger of the Bhasin and Hrynew agencies, effectively giving Mr. Bhasin’s business to Mr. Hrynew. To accomplish that end, it acted dishonestly with Bhasin throughout the period leading up to its exercise of the non-renewal clause. It told the Alberta Securities Commission that Bhasin’s agency was to be merged under Hrynew’s but it said nothing of this to Bhasin. Can-Am was working to forestall the Commission’s termination of its license in Alberta and was prepared to do whatever it could to forestall that possibility.  When questioned by Bhasin about Can-Am’s intentions with respect to the merger, it equivocated and did not tell him the truth. Nor was it truthful with Bhasin about its dealings with the Commission and the Commission’s intentions, and repeatedly misrepresented to Bhasin that he was bound by duties of confidentiality. Can-Am continued to insist that Hrynew audit Mr. Bhasin’s agency, on the supposed basis that it required to do so by the Commission, even though it arranged for its own employees to conduct the audit of Hrynew’s agency.

The Supreme Court noted that the trial judge had found that this dishonesty on the part of Can-Am was directly and intimately connected to Can-Am’s performance of its agreement with Bhasin and its exercise of the non-renewal provision. The court concluded that “Can-Am breached the 1998 Agreement when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause.”

Discussion

The decision in Bhasin v. Hrynew is significant on three levels.

First, it firmly establishes good faith performance as an organizing principle in the common law of contract in Canada. From now on, the interpretation of all contractual obligations of performance involves asking this question: is this interpretation consistent with good faith performance? Similarly, the actual performance of contracts can be analyzed by asking this question: does this conduct amount to the good faith performance of the contract?

Second, every contract will now have an implied term that the contract will be performed honestly. In Bhasin v. Hrynew, the Supreme Court noted that Bhasin was not a franchisee of Can-Am. Nor was there any fiduciary obligation between the two parties. Bhasin’s claim was dealt with on the basis of the general law of contract. Accordingly, the court’s conclusions will apply to all contracts.

It appears that the parties cannot contract out of these duties. In the Bhasim decision, the Supreme Court said that “because the duty of honesty in contractual performance is a general doctrine of contract law that applies to all contracts, like unconscionability, the parties are not free to exclude it”. However, Justice Cromwell did say that he would “not rule out any role for the agreement of the parties in influencing the scope of honest performance in a particular context. The precise content of honest performance will vary with context and the parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements.” In any event, it’s hard to imagine parties to a contract expressly agreeing that ‘dishonest performance of this contract shall be permitted” or words to that effect.

Third, the facts in the Bhasin v. Hrynew case provide good examples of the kind of circumstances that may constitute dishonest contractual performance. Misleading or acting untruthfully toward the other party, particularly in the lead-up to the termination of the contract or contractual rights; misrepresenting the intentions of a regulatory tribunal or dealings with the tribunal; and preferring one contracting party over another in a like position; all have the potential to amount to dishonest performance of the contract.

Honesty is, however, a word which may have different meanings in different circumstances. It may mean one thing for the principles of equity and another thing for the principles of criminal law. Using the conclusions in Bhasin v. Hrynew, Canadian courts will now, through actual cases, develop the scope of that word for Canadian contract law, just like they have with the words “reasonable”, and “good faith”. This is a serious matter for building contracts and one which American courts have wrestled with. Thus, for a cost plus contract, what sort of unjustified additions to the costs amount to “dishonesty”? What sort of mis-management of a project site amount to “dishonesty”? Perhaps we just know it when we see it.

Bhasin v. Hrynew, 2014 SCC 71

Building Contract – Performance – Good Faith – Honest Performance

Thomas G. Heintzman O.C., Q.C., FCIArb                                                              November 30, 2014

www.heintzmanadr.com

www.constructionlawcanada.com