Is A Deposit Forfeited In Absence Of Proven Damages?

The forfeiture of a deposit is one of the major tools for ensuring that contracts are performed.  But there is a debate about whether a deposit can be forfeited if the party forfeiting it has suffered no damages, or damages less than the amount of the deposit.  Until recently in British Columbia, there were decisions of the Court of Appeal going both ways:

-one holding that a deposit can be forfeited if the forfeiting party has suffered no damages;

-the other holding that a deposit can only be forfeited to the extent that damages are suffered by the forfeiting party.

The British Columbia Court of Appeal has recently resolved this debate. In Tang v. Zhang, that court adopted the first approach: the deposit can be forfeited even if the forfeiting party has suffered no damages.  However, the court still retains discretion to reduce or disallow the amount of the forfeiture if the amount of the deposit is unreasonable or its forfeiture would be unconscionable.

The Facts

The facts in the Tang case involved an agreement of purchase and sale in the standard form contract used by the Greater Vancouver Real Estate Board. The sale price was $2,030,000 and the buyer paid a deposit of $100,000.  The agreement said in effect that if the buyer did not complete the agreement, then “the amount paid by the Buyer will be absolutely forfeited to the Seller….on account of damages, without prejudice to the Seller’s other remedies.”

The buyer failed to close the transaction and the seller forfeited the deposit.  The buyer sued to recover the deposit and argued that the proper interpretation of the agreement was that the deposit could only be forfeited to the extent that the seller had suffered damages.

The Decision

The British Columbia Court of Appeal traced the law relating to deposits back into English law.  It referred to the decision of the English Court of Appeal in Howe v. Smith (1884) 27 Ch. D. 89 as being the “seminal authority on the nature of a deposit.”  That decision held that a deposit is “security for the completion of the purchase” and “creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.”  While the contract in that case said that the monies were paid “as a deposit and in part payment of the purchase money”, the court said that “the reference in the contract to part payment would have come into operation had the buyer completed the purchase.  That ‘alternative’, however, did not overcome the nature of the ‘deposit’ as security for performance that was forfeited when the buyer repudiated his bargain.”  The English Court of Appeal allowed the deposit to be forfeited even though the defendant had sold the property at the same price and had suffered no damages.

The British Columbia Court of Appeal traced the rule in Howe v. Smith into Canadian law and its adoption by the Supreme Court of Canada. That rule, the B.C. Court of Appeal explained, is an exception to the rule against penalties. A deposit, it said, is “non-refundable” by definition.  It is not necessary to use the word “absolutely” or other modifier to qualify “non-refundable” as the non-refundable nature of a deposit is “simply a matter of definition” subject to a contrary intention being shown.

Accordingly, the words “on account of damages” in the agreement in Tang-Zhang agreement referred to the fact that the monies would be applied on account of the purchase price if the purchaser completed the contract but did not mean that the deposit could not be forfeited if the seller suffered no damages.

The Court held that, while the rule relating to deposits was an exception to the common law rule against penalties, it was not an exception to the rule of equity prohibiting unconscionable forfeitures.  Accordingly, if the deposit was excessive, the court could grant relief.  The buyer had not argued that the deposit was penal or unconscionable. The court referred to a variety of cases and other sources in which a 10-20 percent deposit had been held to be reasonable. In those circumstances, the court upheld the deposit and over-ruled its prior decision to the contrary. The court set forth five helpful rules to apply to the interpretation of agreements referring to deposits.

Discussion

Deposits are not just found in real estate transactions. A wide range of commercial agreements use deposits to secure performance of the contract, and construction law often uses them for tenders.  So this decision is of general commercial interest.

The Tang v. Zhang decision is significant for a number of reasons:

First, the five principles stated at the end of the decision are a useful touchstone to pull out any time a refresher on the law of deposits is needed.

Second, the decision reminds us that, if the word “deposit” is used, then other adjectives will not destroy the forfeiture unless they demonstrate that forfeiture was not intended, and using words such as “on account of damages” or “in part payment of the purchase price” will not remove the forfeiting nature of a deposit.

Finally, if the amount of the forfeiture is egregious, the court still retains the equitable jurisdiction to relieve against the forfeiture.

 

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

Tang v. Zhang, 2013 BCCA 52         

Building Contract  –  Deposits  –  Liquidated Damages and Penalties  –  Relief against Forfeiture

Thomas G. Heintzman O.C., Q.C., FCIArb                                                        October 4, 2013

www.heintzmanadr.com                                                                                         www.constructionlawcanada.com 

 

Is There An Intermediate Position Between An Invitation To Tender And A Request For Proposal?

Not all requests for bids issued by an owner are the same. A request for bids that will be binding on the chosen bidder is usually referred to as an Invitation to Tender.  On the other hand, a request for bids which is not binding on the chosen bidder is usually referred to as a Request for Proposals (or RFP). The RFP results in proposals which can be considered by the owner but are not binding on the bidder.

But how do you really tell an Invitation to Tender from a Request for Proposals? What sort of clause in the owner’s request results in a RFP rather than an Invitation to Tender?

And is there in intermediate position in which the owner and bidders do not have an obligation to enter into a contract but only an obligation to negotiate exclusively with each other for a period of time?

This was the issue faced by the Ontario Superior Court in Everything Kosher Inc. v. Joseph and Wolf Lebovic Jewish Community Centre.

Facts

In 2006, the Campus issued an RFP for food services and the lease of a kitchen at a community centre which the Campus was building in north Toronto.  When fully developed the community centre was to include a private high school owned and run by a separate organization (the Academy). When the 2006 RFP was issued, the construction of the community centre had not begun, and the 2006 RFP stated that it was subject to design change.

The 2006 RFP stated that the Campus might reject any proposal or might negotiate with more than one party responding to it. The RFP contained a provision which stated as follows:

…The submission and acceptance of any proposal does not obligate [the Campus] to enter into a binding legal contract with the successful proponent, nor does acceptance of the proposal imply that a contract has been entered into with [the Campus]. The implementation of the project by the successful proponent is dependent upon entering into a separate legal contract with [the Campus], to be negotiated and signed prior to implementation of the project.

The Plaintiff made a proposal which was favoured by the Campus. The parties entered into an exclusive 90 negotiation period.  A final agreement was never reached, but the parties continued to negotiate until October 2007.

The Plaintiff began providing food services to the Academy which commenced operations in the campus premises in the fall of 2007. The high school submitted a Memorandum of Understanding to the Plaintiff but that MOU was never signed.

By 2011, the Campus’ plans had changed and it issued a new RFP for the provision of food services to the community centre. The Plaintiff protested that it already had a contract for those services. However, it did participate in the 2011 RFP, but was not successful.  After the issuance of the 2011 RFP, the Plaintiff continued to provide food services to the Academy but those arrangements were terminated in 2012. The Plaintiff then sued the Campus to assert that it held a contract to provide for food services to the community centre.

Decision of the Trial Judge

The trial judge held that the 2006 RFP did not lead to a contract between the parties for the provision of food services. The trial judge said that the 2006 RFP:

“made it clear that it was not an offer that would lead to a firm acceptance. Rather, as the courts have said elsewhere, the 2006 RFP was “a request for proposals and nothing more. The prize at the end of the exercise was…the opportunity to negotiate for a contract”…. While the 2006 RFP created an obligation to negotiate terms over a 90 day period, it presented to the Plaintiff nothing more than an opportunity to attempt to conclude an agreement. It was not itself a binding document.

The trial judge also concluded that the negotiations after the 2006 RFP did not lead to a written agreement for the provision of food services which was a specific requirement of that RFP before any contract could arise. The final draft agreement which was exchanged in October 2007 was not signed because there were still terms and issues to be concluded.

Discussion

The challenge of this case is to fit it into the Contract A – Contract B analysis under the Ron Engineering decision of the Supreme Court of Canada. Did the trial judge find that a contract arose for the tender process (Contract A in Canadian tender law under the Ron Engineering), but that no Contract B arose from the bidding process?  Or did the trial judge find that there was no Contract A because the Contract B that was being offered by the owner was too indefinite for Contract A to arise?

The first sentence of the provision in the request issued by the owner referred to above into bid documents appears to be very similar to a standard privilege clause. A privilege clause is usually inserted by owners to state that the owner has no obligation to accept the lowest or any tender. Such a privilege clause would not normally preclude a Contract A arising in a true tender situation, namely a contract for the purpose of the tender. That contract would normally carry with it the implied terms discussed in many decided cases, including an obligation on the owner to act fairly and not accept non-compliant bids.  A privilege clause may allow an owner to accept a bid other than the lowest bid and not to accept any bid if the privilege clause specifically allows that to happen.

Interpreted as a privilege clause, the provision referred to above should have been sufficient for the court to decide the case. Based upon the owner’s original request, the owner had no obligation to accept any bid, including the Plaintiff’s bid

But the plaintiff had a second agreement. It said that the conduct after the initial request by the owner resulted in, or evidenced, a contract.  By selecting the Plaintiff’s bid as the preferred bid and by negotiating with the Plaintiff, the owner had moved beyond the privilege clause. It was no longer a question of the owner’s right to not enter into any contract. The owner had effectively waived the privilege clause and entered into a contract with the Plaintiff by its conduct.

To address this point, the court seems to have adopted a hybrid conclusion.  The trial judge seems to have concluded that, yes, there was an obligation between the parties.  But that obligation was to negotiate with each other exclusively for a period of 90 days, not a final contract for food services. That “exclusive negotiation” obligation explained the subsequent conduct of the parties.  And when no final contract resulted for those negotiations, then there were no continuing contractual relations between the parties.

There is no question that a contract to negotiate exclusively with one party is a binding contract. The contract is not too indefinite to be enforced because it requires negative conduct, that is, no negotiation with another party, and it sets a specific period for that negative conduct to occur. But what an “exclusive negotiation” contract cannot compel is a specific result, a specific substantive contract at the end of the negotiation period.

In this sense, the trial judge may have been incorrect, and contradictory, to say that “while the 2006 RFP created an obligation to negotiate terms over a 90 day period, it presented to the Plaintiff nothing more than an opportunity to attempt to conclude an agreement. It was not itself a binding document.”  The obligation to exclusively negotiate with a party can be a binding contract. But it is only a contract not to negotiate with other parties. It is not a binding contract to conclude an agreement on the substance of the negotiations. In the present case, it was not a binding contract for the food services contract.

The present case creates, therefore, a potential intermediate or hybrid position between the normal Invitation to Tender and RFP, or between Contract A and Contract B. Under this hybrid position, a Contract A does arise for the bidding process.  That Contract may well contain the usual implied terms that apply to Contract A.  But the Contract B that the owner is offering is not a substantive building or supply contract on specific terms.  Rather the owner is offering an “exclusive negotiation” contract for a specific period of time.  That sort of Contract B is specific enough to allow Contract A to come into existence. But it does not compel the owner to agree to any specific terms for the final supply or building contract, except to the extent that those terms are stated in the original request.

The advantage to a bidder of this sort of arrangement is that it means that the Contract A-Contract B analysis applies to the original request by the owner. That analysis requires the owner to comply with the implied terms of Contract A, including the obligation to treat the bidders fairly. The disadvantage to a bidder is that, if the bidder is successful, the bidder will only obtain an exclusive right to negotiate with the owner for a specific period of time. But this disadvantage may not be a severe one since that sort of negotiation may be the reality in a tender process involving a privilege clause.

The advantage to the owner of this arrangement is that the result of the process is only an obligation to negotiate with one or a number of preferred bidders for a specific period of time, but not to agree to any specific terms other than those mandated in the original request.  This arrangement gives the owner the flexibility to deal with one or a few bidders and arrive at the best arrangement. The disadvantage may be that, during the initial request, the owner will have to abide by the Contract A obligations, including the obligation of fairness and the obligation not to deal with a non-compliant or higher priced bidder unless a privilege clause expressly permits it to do so.

This case demonstrates that the Contract A – Contract B analysis of Ron Engineering is not just a strait jacket as is often assumed. The analysis permits various types of Contract A and Contract B to emerge. And it permits variants between a strict Invitation to Tender and a strict RFP.

The genius behind Ron Engineering is that it separates the bidding contract – Contract A – from the contract emerging from the bidding contract.   It enables the court to imply into the bidding contract the necessary elements to allow the bidding process to proceed fairly. But it allows the contract emerging from the bidding process to be whatever contract the bidding process may contemplate.

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

Everything Kosher Inc. v. Joseph and Wolf Lebovic Jewish Community Centre, 2013 ONSC 2057

Building Contract  –  Tenders

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                          April 29, 2013

www.heintzmanadr.com

www.constructionlawcanada.com

 

When Does An Arbitral Limitation Period Commence?

An arbitration is usually considered to be a less formal type of dispute resolution than court litigation.  For this reason it may be thought that less formal rules about limitation periods apply to arbitrations.

If you had this impression, then the recent decision of the Ontario Court of Appeal in Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation will quickly disabuse you of that view.  Just like a court action, unless an arbitration is started within the appropriate limitation period, the right to commence the arbitration claim will be lost. The issue may be trickier in an arbitration than in a court action since, unlike in a court action, there is no court office in which to issue the arbitration claim.  But it is still the same question: was the proceeding commenced within the limitation period?

The appeal to the Court of Appeal in the Penn-Co case was from a 2011 decision of the Ontario Superior Court.  I commented on that decision in my article of November 6, 2011.

The Legal Background

In Ontario, there are two enactments that are relevant to the limitation period for an arbitration claim.

First, the Limitations Act, 2002 says that the general limitation period in Ontario is two years from the discovery of the facts giving rise to the claim. Section 52(1) of the Ontario Arbitrations Act, 1991 (the Act) says that “the law with respect to limitation periods applies to an arbitration as if the arbitration were an action and a claim made in the arbitration were a cause of action.” So, an arbitration must be commenced within two years of the date that the would-be applicant first had knowledge of the facts giving rise to its claim.

Second, section 23 of the Act says that an arbitration may be commenced “in any way” including three particular ways:

A party to the arbitration agreement serving on the other parties to that agreement a notice to appoint or to participate in the appointment of an arbitrator under the agreement;

If a third party has the power to appoint an arbitrator, serving a notice on that third party to exercise that power, and serving the other parties with that notice;

A party serving on the other parties a notice demanding arbitration under the agreement.  (emphasis added by the Court of Appeal)

As a result, the limitation issue in the Penn-Co case was whether Constance Lake took one of these three steps before the limitation period expired.

The Background Facts

In 2003, the parties signed a standard form building contract for the construction by Penn-Co of a school for Constance Lake.  The contract contained a three-step process for resolving disputes: negotiations involving the consultant, mediation and arbitration.  By the summer of 2005, there were several alleged deficiencies in Penn-Co’s work that were the subject matter of dispute.  In December 2005, Constance Lake served a cure notice on Penn-Co. Penn-Co’s counsel responded by asking for mediation.  Then, on January 20, 2006, counsel for Constance Lake suggested that the parties dispense with the provisions under their contract and proceed directly with arbitration under an amended form of the CCDC 40 Rules for Arbitration of Construction Disputes. In response, Penn-Co’s counsel suggested that the parties proceed with a neutral third party “peer review”. However, the parties could not agree upon the terms of the peer review and by mid-2006 that process was abandoned.

In June 2007, Penn-Co commenced an action against Constance Lake.  In response, in May 2009 Constance Lake instituted a counterclaim in that action.  That counterclaim was instituted more than two years after December 2005 when, as acknowledged in its own cure notice, Constance Lake had knowledge of its claim against Penn-Co.  Penn-Co brought a motion to dismiss the counterclaim on the ground that the counterclaim was barred by the limitation period.

The Superior Court judge had held that the counterclaim was barred, and the Court of Appeal agreed.  It held that the letter of January 16, 2006 did not commence an arbitration.  It said that that this letter, and the other correspondence between the parties, amounted to “mere proposals for an arbitration agreement” and not a notice under the existing arbitration agreement which satisfied section 23 of the Act. The Court of Appeal held that the “parties failed to commence an arbitration under the building contract or any other agreement.”  Accordingly, the limitation period to do so had expired.

In these circumstances, the Court of Appeal also held that section 52(2) of the Act had no application. That sub-section gives powers to the court when it sets aside an arbitration award or terminates an arbitration or declares an arbitration to be invalid. In those circumstances, the court may order that the “period from the commencement of the arbitration to the date of the order” is to be excluded from the computation of time for limitation purposes. The Court of Appeal held that, if no arbitration was commenced, then this sub-section had no application.

Finally, the Court of Appeal held that Penn-Co was not estopped by its conduct from relying on the limitation period. None of the elements of estoppel were present.  There was no evidence that Penn-Co gave any assurance or representation that it would not rely on the limitation period, or that Constance Lake relied upon any such assurance.

Discussion

This decision is a good reminder that an arbitration is a formal proceeding and must be formally commenced. But this decision does not answer the question of what exactly such a formal commencement might encompass.

Section 23 of the Act says that an arbitration may be commenced “in any way recognized by law”.  That is just about as broad a definition as could be drafted.  One wonders what the limit of that definition might be, apart from the examples given in the section.  The legislature has said that a notice demanding arbitration is sufficient.  If that is so, and if that is included within but is not exhaustive of the definition, then something less than such a notice may amount to a commencement. The Court of Appeal has said that proposing arbitration under some other procedure or regime is not sufficient, at least until that regime is agreed to. But exactly what can amount to a “commencement” of an arbitration less than a notice of arbitration is left uncertain.

Several lessons can be learned from this decision.

One is that, before a party suggests alternatives to the arbitration agreement that is already in place, that party should first give notice of arbitration under that agreement.  Then, other dispute resolution solutions can be proposed.

The second lesson is that the institution by one party of mediation or arbitration does not protect the other party.  In the present case, Penn-Co instituted the mediation provisions of the building contract.  Whether the commencement of mediation proceedings stops the limitation period from running is open to question.  As I have commented upon in previous articles, the Ontario Court of Appeal has issued two decisions on this issue which arrived at contradictory results.  But the commencement of mediation proceedings by one party will not likely stop the running of the limitation period against the other party.

Finally, the limitation issue may not entirely deprive Constance Lake of its cause of action.  It may still be able to rely upon that cause of action by way of defence and setoff against the claim by Penn-Co.  The limitation statutes bar the commencement of a claim but not the reliance on the cause of action in any other way.

See Heintzman & Goldsmith on Canadian Building Contracts (4th ed.) at Chapter 10, part 6

Penn-Co Construction Canada (2003) Ltd. v. Constance Lake First Nation, 2012 ONCA 430

Building Contract  –  Arbitration  –  Limitation Periods  –  Commencement of Arbitration

Thomas G. Heintzman O.C., Q.C., FCIArb                                                            August 27, 2012

www.constructionlawcanada.com

www.heintzmanadr.com

May a Contractor Sue a Subcontractor When It Agreed With The Owner To Obtain Project Insurance?

One of the most difficult issues in Canadian construction law is the impact of insurance on claims between owners, contractors and subcontractors.

There are two levels to the issue:

What is the impact of a clause in the building contract by which one party agrees to obtain insurance?

And what is the impact of the terms of the insurance itself?

Decisions of the Supreme Court of Canada and provincial appellate courts make it clear that insurance clauses and insurance policies can bar claims between the parties engaged in a building project.  Those decisions adopt two principles:

 First, the insurance regime relating to a building project should benefit all the parties to the project, so that each party does not have to go through the duplicative and expensive process of obtaining insurance for the same risk.

Second, the fundamental insurance law rule is that an insurer cannot pay a claim under a policy, say by the owner, and then bring a subrogated claim against a party that is a named or unnamed insured under the policy, say against the contractor.  But while the principles seem clear, the effect of a specific clause or policy remains unclear.

In Castonguay Construction (2000) Ltd. v. Commonwealth Plywood Co. Ltd, the Ontario Superior Court of Justice applied these principles to a new situation.  In this case, a subcontractor (or consultant to the contractor) sought to rely upon the insurance clause in the main contract between the owner and the contractor.  It did so in a motion to dismiss an action against it by the contractor.  While the court dismissed the motion, there are a number of fascinating issues raised by the subcontractor’s reliance upon the insurance clause in the main contract to which it was not a party.

The Background Facts

As the general contractor, Castonguay entered into a contract with Commonwealth for the expansion of a warehouse owned by Commonwealth.  At the end of the project, Castonguay sued for the holdback and Commonwealth counterclaimed for alleged deficiencies. Castonguay then issued a third party claim against Zenix which had provided engineering consulting services to Castonguay on the project, alleging that any fault with the construction was due to Zenix’s faulty design.

In the main contract between Commonwealth and Castonguay, Castonguay had agreed to obtain “wrap-up” liability insurance which was expressly to cover the “Contractor’s Consultant” as an unnamed insured and was to “preclude subrogation claims by the insurer against anyone insured thereunder.”

The main contract also required Castonguay to obtain comprehensive general liability insurance, which was to include coverage for damages to property, including blanket contractual and cross liability coverage. The CGL policy contained exclusions for improper material, workmanship and design.

In fact, Castonguay didn’t read the main contract and didn’t obtain this insurance.  But it did have a CGL policy of its own, and that policy had “Contractor’s Edge” coverage which provided coverage, subject to exceptions relating to defective materials and workmanship.  Castonguay’s insurer was defending it under this insurance policy.

Zenix brought a motion to dismiss Castonguay’s third party claim against it.  It made two submissions:

First, Zenix submitted that, in light of the total circumstances it was entitled to the benefit of Castonguay’s CGL and Contractor’s Edge policy even though Zenix was not named as an insured in those policies.

Second, Zenix said that it was entitled to the benefit of Castonguay’s obligation in the main contract with Commonwealth to obtain insurance.  Because of that obligation in the main contract, Zenix said that Castonguay was prohibited from asserting any claim against it.

The Decision

The motion judge dismissed Zenix’s motion.  What is not entirely clear is why he did so.  On the one hand, he could have said that the action had some apparent merit and that the insurance issues were too complicated to be dealt with by way of motion.  At some points in his reasons, the motion judge appears to be saying that.  But he went on to deliver sixteen pages of reasons which contain some very pointed comments about the insurance clause and policy issues.

The motion judge dismissed the motion for two reasons:

First, he was not satisfied that the “wrap-up” or CGL insurance which Castonguay should have obtained under the main contract would have applied to Castonguay’s claim against Zenix in the present case.  He referred to various exclusions in that sort of insurance which might well apply to the claim against Zenix.  He noted that there was no evidence that the provision of insurance, and the terms in the main contract relating to insurance, had been discussed in the negotiations leading up to the Castonguay-Zenix contract. In the result, he was not prepared to find that there was an implied term, in the contract between Castonguay and Zenix, that Zenix was entitled to the benefit of the insurance that Castonguay actually obtained or ought to have obtained.

Second, he declined to find that Castonguay was a third party entitled to rely on the insurance provisions in the main contract. He was unwilling to analogize a subcontractor or consultant on a construction project to an employee or tenant entitled to the insurance protection of the employer or landlord. In the result, he concluded that the “law of privity does not provide for a principled exception that should extend to the circumstances of this case.”

The Implications of this Decision

On one level, this decision is simply a pleadings decision in which the motions judge has held that the claim should proceed further.  On this basis, it would demand little attention.

But the decision does reveal some fascinating tensions in two recently judge-made rules:

the Rule providing a defense based upon insurance clauses and policies;

and the Rule relating to third party beneficiaries.

The third party beneficiary rule requires that, before a party can gain the protection or benefit of a contract to which it is not a party, it must prove that:

1.  The parties to the contract intended to extend the contractual rights or protection in question to the third party; and

2. The activities performed by the third party are the very activities coming within the scope of       the contract.

In the present case, the motion judge held that it was not plain and obvious to him that these conditions were satisfied. He examined the terms of the main contract and the terms of “wrap-up” policies and held that it was not clear that either the terms of those sort of policies, or the third party beneficiary rule, applied to Castonguay’s claim against Zenix.  He concluded his decision by saying: “In the absence of any evidence of express terms in the subcontract between Castonguay and Zenix contemplating a waiver of liability, it is not plain and obvious that the Third Party Claim cannot succeed.”

So in this case, this issue will have to be finally decided at trial.  For the moment, the decision must be read that there is a possibility that the consultant/subcontractor may be able to rely on the insurance provisions in the main contract.

Clearly, there are some good policy reasons for the subcontractor or consultant to have the protection of the insurance regime put in place under the main contract.  Those policy reasons have been repeatedly stated by the courts as they have developed the rule precluding claims in the face of insurance clauses. Those rules have not depended upon the negotiations or dealings between the third party and a contracting party, but upon all of the circumstances.  Nor are those negotiations or dealings relevant to the two components of the third party beneficiary rule (the “intention to benefit” and the “very activities”). Thus, if Castonguay had taken out the insurance called for in the main contract, and if a claim had been made by either the owner or Castonguay against Zenix, then it is hard to see why Zenix would not fall within the third party beneficiary rule.

If this is so, then two very interesting issues emerge.

First, does the third party beneficiary rule apply at all if the party to the contract has failed to perform its contractual duty?  Can a third party rely on a breach of a contract to which it is not even a party?  In this case, was Zenix entitled to rely on a breach by Castonguay of its contractual obligation to Commonwealth to obtain insurance? It certainly seems to be a stretch of the third party beneficiary rule to allow a third party to rely upon a breach of a contract to which it is not a party.

Second, was it necessary to consider the terms of the policies to decide the motion?  Castongauy and Zenix apparently argued the motion on the basis that it was.  But wasn’t the real issue whether Zenix was entitled at all to the benefit of the insurance which Castonguay ought to have placed?  If Zenix was, then judgment to that effect might have been granted. If judgment to that effect was granted, then there would simply be a coverage dispute as to whether Castonguay’s claim fell with the coverage.  That dispute might be no different than Castonguay’s own claim for coverage.

A resolution of the motion in this fashion seems possible if Castonguay had taken out the required insurance, but difficult or impossible when it had not and the court was required to surmise or guess at what that insurance coverage might have been.  In the result, the Castonguay decision does not answer the question of whether a subcontractor or other third party may rely upon the insurance clause in the main contract if the insurance policies are in fact taken out in compliance with that clause.

Another interesting aspect of the Castonguay decision is that there is no reference to the main contract being incorporated into the subcontract or consultant’s contract.  If there had been such incorporation, then the insurance clauses in the main contract might have been directly relied upon by Zenix.

In the result, we will have to await the trial in this action, or further decisions, to resolve the degree to which those engaged in construction projects can rely upon insurance clauses in contracts to which they are not a party, or insurance policies taken out by the parties to those contracts.

Building Contract  –  Third Party Rights  –   Subcontractor   –   Consultant – Insurance

Castonguay Construction (2000) Ltd. v. Commonwealth Plywood Co. Ltd, 2012 ONSC 3487

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                        June 24, 2012

www.heintzmanadr.com

www.constructionlawcanada.com

 

Condominium Unit Owners Can Claim Common Elements Relief

Construction projects involve many participants and each of those participants may have a claim against other participants.  Developers, immediate and subsequent purchasers, contractor and subcontractors, consultants: they are all potential plaintiffs.

So one of the main issues in construction law is:  who can be a plaintiff against what defendant and for what relief?

This issue becomes more complicated with condominiums, and in particular the common elements in the condominium building.  The developer may have sold units to purchasers, but generally speaking it is the condominium corporation that is responsible for, and can sue for relief relating to, the common elements.  Can the purchaser of a condominium unit sue the developer for relief in respect of the common elements?  In 1420041 Ontario Inc. v. 1 King West Inc., the Court of Appeal for Ontario has recently answered Yes to this question, provided that the relief is directly related to the unit owner’s enjoyment of his or her unit.

The Background

The numbered company purchased eight units in a condominium complex to be constructed by 1 King West in Toronto.  The purchase contract provided for the exterior doors, windows and walls of the units to be installed in a way to meet the specific requirements of the numbered company, even though those elements were part of the common elements of the building.

After occupancy became available, the numbered company sued for damages relating to the faulty installation of these and other elements in the units it had purchased.  The condominium corporation also sued for damages relating to the common elements. It brought the action on behalf of itself and the individual unit holders, including the numbered company, and the action was against the developer, construction manager, general contractor, architect and engineers. The numbered company did not opt out of that action. The condominium corporation settled that action.

The developer brought a motion to stay or dismiss the numbered company’s action relating to the common elements, on the basis that only the condominium corporation could assert any claim relating to the common elements.  While the Divisional Court agreed with the developer, the Court of Appeal reversed that decision and held that the numbered company had the status to bring its claim relating to the common issues.

The Decision

The dispute largely turned on the meaning to be given to section 23(1) of the Ontario Condominium Act, 1998 (the Act). That section states that the condominium corporation “may”, on its own behalf and on behalf of unit owners, commence, maintain or settle an action relating to the common elements or the individual condominium units, and may do so even though it is not a party to the contract in respect of which the action is brought.

The Court of Appeal held that section 23(1) of the Act does not deprive the condominium unit holder from suing for relief relating to the common elements.  The purpose, history and permissive language of that sub-section did not support a legislative intent to take away the unit holder’s claim.  Even though the Act created a proprietary regime in which the condominium corporation has a dominant role, that regime does not eliminate the contractual regime arising from the contract made by each unit purchaser with the developer.

Moreover, the logic of the developer’s position would be that the unit holder has no claim even with respect to the unit itself, since section 23(1) says that the condominium corporation has the right to sue both in respect of the individual units and the common elements. This latter proposition was absurd, in the Court’s view.

The Court of Appeal held that, unless the Act explicitly takes away the contractual right of the condominium unit holder, the Act should not be interpreted to do so. Since section 23(1) contained no such express language, the Court held that the enactment did not have this effect.

The Court also held that the authority of the condominium corporation to bring its own action would not lead to a multiplicity of proceedings since the corporation’s action would necessarily be in relation to what the Court called a “problem that affects the condominium community as a whole.”  The individual unit holder’s action would have to be “to pursue a remedy that is contractually unique to the unit or that deals with some other unit-specific wrong raising a discrete issue relating to common elements immediately pertaining to the unit.”

The Court also held that the condominium unit holder would not effectively make a double recovery – one through the condominium corporation and the other in its own action.  The recovery by the corporation would only be for its own claim, not for the unit holders’ claims, since the wording of section 23 makes it clear that it is only the corporation’s interest that the corporation can recover by way of judgment.  If there was any risk of double recovery, the court could deal with that issue by staying the unit holder’s claim to that extent.

Conclusions

There are at least three conclusions or concerns that arise from this decision.

First, this decision contains a firm statement by the Court of Appeal that contractual rights will not be annulled by statutory regimes in the absence of clear language to that effect. Since building contracts are surrounded by statutory regimes – such as construction lien and building code legislation – it is well that the Court of Appeal has re-emphasized this principle.

Second, this decision will necessarily give rise to a very careful analysis of claims in respect of common elements.  Will it be difficult or impossible to separate claims that are “unique to the unit” or “unit specific” as opposed to those that pertain to the condominium “community” as a whole?  One can foresee that there may be multiple motions, at the time of pleadings or by way of summary judgment, to sort out the two sorts of claims.  In addition, when a settlement is made, either by the condominium corporation or the unit holder, then care will have to be taken to determine exactly what is being settled and paid for.

Finally, the decision makes no mention of the “class action” aspect of this dispute.  The condominium corporation’s action was on behalf of unit holders, as well as itself.  The numbered company unit holder did not opt out of the condominium corporation’s action.  The condominium corporation settled that action as it was entitled to do. Should the numbered company have opted out of the action, or have done something at the time of the settlement?  Apparently not, because the corporation’s claim and settlement was only in respect to the “community’s” claim in respect of the common elements, not the unit holder’s “unique” claim.

If this is so, then the right of the condominium corporation to bring an action on behalf of unit holders may be quite different than the class action regime contained in the Ontario Class Proceedings Act, 1992.  The latter regime contains certification and settlement approval procedures intended to govern and protect the rights of class members.  Now that it is established that both condominium corporations and condominium unit holders have claims in respect of the common elements, similar rules and protections may have to be adopted by the parties to condominium litigation.

Building Contract   –  Claim for Damages   –  Condominium   –   Common Elements

1420041 Ontario Inc. v. 1 King West Inc, 2012 ONCA 249

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                         June 21, 2012

www.heintzmanadr.com

www.constructioncanada.com

 

Can An Agent Claim Damages As An Owner Under A Building Contract?

Agents of contractors and subcontractors often play a role and assert rights during construction projects. This is because contractors often use agents to perform the work, and construction lien legislation recognizes their right to assert a lien for the improvement of the land.

But agents of owners do not often assert rights under a building contract. Can they do so? And if they can, can they be sued as parties to the building contract?

These issues were recently addressed in the decision of the Nova Scotia Supreme Court in Ross v. Garnett. That court held that the agent could assert a claim for damage for breach of the building contract. This decision is significant because it could dramatically widen the scope of persons who can sue or be sued through the owner’s rights under a building contract.

The background

Ross entered into a contract with Garnett to purchase a log home kit manufactured by Riverbend and to have Garnett build the home. The home was built on a lot formerly owned by Ross but transferred by him to his mother shortly before the contract with Garnett was made. The transfer occurred because Ross’s mother could obtain mortgage financing and he could not. He paid all the mortgage payments, and the other expenses relating to the construction of the home. The lot was to be re-transferred to Ross once the mortgage was paid.

Ross claimed that the home kit and construction were defective and he sued Riverbend and Garnett. The defendants asserted that Ross had not suffered damage as he was not the owner of the lot. They brought a summary judgment motion to dismiss Ross’ claim.

The decision

The motion proceeded on the basis that Ross had entered into the contract with Garnett as agent for his mother. The motion judge concluded that a contract made by an agent can be enforced by and against the agent if the agent had a demonstrable intent to be personally bound by the contract and the other party elected to so deal with the agent. The motion judge concluded that Ross could not succeed in establishing those elements at trial. Ross’ own evidence demonstrated that he acted only as trustee and agent for his mother and did not intend to be personally bound by the contract.

However, the motion judge held that there was a second exception to the rule that an agent cannot sue on a contract made by the agent’s principal. Under this exception, the agent can sue on the contract if he has a “special interest” in the contract. A special interest could be shown if the agent has “some special property in the subject matter of the contract, or a lien upon it, or some special interest in the completion of the contract”, citing Fridman on The Law of Agency. The motion judge held that Ross had an arguable “special interest” in the contract between Ross’ mother and Garnett and therefore his claim could not be dismissed on a summary judgment motion.

The importance of this decision

This decision is important for those interested in building contracts because it has the potential to significantly widen the scope of the contracting parties on the owner’s side of the contract. The decision seems problematic from several standpoints.

First, the concept of “special interest” seems to be suitable to determine whether the agent has suffered damage, but it seems unsuitable to determine whether the agent is a party to the building contract. Without a “special interest” it would seem difficult for the agent to assert any loss. Combined with an initial entitlement to sue based upon a demonstrated intention to be a party to the contract from the inception, a “special interest” may provide the necessary loss which will give rise to a claim to damages. But it is more difficult to understand how a “special interest” can make the agent a party to the owner’s contract and entitle the agent to sue on that contact.

Second, if a “special interest” of an agent gives rise to a separate entitlement by the agent to enforce the building contract, then the contract should be as enforceable against the agent as by the agent. So the concept of “special interest” may create a whole new and dangerous basis of liability for owner’s agents.

Third, “special interest” appears to be an imprecise basis to create a pool of persons who have rights or obligations under a building contract. Who falls within the pool? Do the architects, engineers and consultants of the owner fall within it? Do they fall within it if they have an interest in the property? Do they have a “special interest” if they have a contingent interest in the success of the project, for example if the price of their services is influenced by the ultimate cost of the project? If so, is it advisable or inadvisable for a consultant to take an interest in the property or in the project, if that interest may allow rights to be asserted by or against the consultant under the building contract? And is it necessary for the contractor to inquire as to what agents of the owner have a “special interest” in the building contract?

The answer to these questions will await future cases about the rights or obligations of owners’ agents under building contracts.

Ross v. Garnett, 2012 NSSC 132

Building contract – consultants – enforcement – third parties

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

www.heintzmanadr.com
www.constructionlawcanada.com

When The Contractor Plays Hard-Ball What Does A Sub-Contractor Do; Peter Kiewit Redux?

An age-old problem arising from a tender on a construction project is:   what does a sub-contractor do when it is the successful bidder but believes that the work is different than shown in the tender documents and the contractor says:  Those are the conditions: Take ‘em or leave ‘em.   But if you back out of your bid, I am going to sue you!

Should the sub-contractor perform the work and sue later, or leave the job?  That is the issue that, once again, the Superior Court of Ontario faced in Asco Construction ltd. v. Epoxy Solutions Inc.

Asco was the general contractor and Epoxy was the successful bidder for the concrete floor subcontract on a theatre construction project.  As part of the tender process, the subcontractors were provided with a sketch of the floor levels.  After signing a letter of intent, Epoxy had a surveyor check the elevations on the site and found that the elevations were substantially different than represented in the sketches.

Asco demanded that Epoxy proceed with the job, asserting that Epoxy should have checked the levels before bidding. Epoxy asserted that Asco was in breach of the terms of the tender. In the result, Epoxy refused to sign the formal subcontract or proceed with the job.  Asco retained a new subcontractor and sued Epoxy for the higher cost of that subcontract, and Epoxy counterclaimed for damages for breach of the tender.

The trial judge quoted from the harsh and oft-cited judgment of the Supreme Court of Canada in Peter Kiewit Sons’ Co. v. Eakins Construction Ltd, [1960] S.C.R. 361.  Showing little sympathy for the predicament of the subcontractor in this situation, the Supreme Court said:

“Nothing could be clearer. One party says that it is being told to do more than the contract calls for. The engineer insists that the work is according to contract and no more, and that what is asserted to be extra work is not extra work and will not be paid for.  The main contractor tells the sub-contractor that it will have to follow the orders of the engineer and makes no promise of additional remuneration. In these circumstances the subcontractor continues with the work.  It must be working under the contract. How can this contract be abrogated and another substituted in its place?… Whatever Eakins recovers in this case is under the terms of the original sub-contract and the provisions of the main contract relating to extras.

…The work was not done as an extra and there can be no recovery for it on that basis. When this position became clear, and it became clear before any work was done, the remedy of the Eakins company was to refuse further performance except on its own interpretation of the contract and, if this performance was rejected, to elect to treat the contract as repudiated and to sue for damages.”

Following that approach, the trial judge in the present case held that Epoxy had only two options.

One was to sign the formal contract, and renounce any claim for additional payment or damages.

The other was to renounce its bid and refuse to proceed with the sub-contract.

The trial judge found that the elevation conditions were materially different than represented in the invitation to tender, and therefore the contractor had repudiated Contract A arising from the tender process.  The sub-contractor was entitled to accept that repudiation, terminate that contract and recover damages.

In arriving at that conclusion, the trial judge relied upon Goldsmith & Heintzman on Canadian Building Contract (4thed) at pages 1-60, 4-19 to 21, 5-8 and 7-4.

The decision of the subcontractor to terminate the contract was a gutsy one.  After all, the subcontractor is exposing itself to a claim by the contractor for substantial damages.  But the other choice was to proceed with the sub-contract under apparently changed circumstances, which might have been equally onerous.  Is there no better solution?

Surely there should be a better solution than these two stark alternatives.  One would think that, in the 50 years since the Peter Kiewit decision, Canadian construction law would have come up with one.

At least three solutions are apparent.

One solution would be to permit the subcontractor to deliver a notice stating that it was performing the work under protest, and asserting that the claim for extra payment is to be resolved later.  That notice would contradict the suggestion that the subcontractor was agreeing to perform the work in accordance with the contract.  In other fields of business, performance or acceptance under protest has been held effective to contradict the assertion that the party giving the notice had agreed to perform under or accept the terms of the contract.

But to date, there is no evidence that Canadian courts will give effect to such a notice in the field of construction law.  Some might say that allowing the dispute to remain open under such a notice does not fit in with the need for consensus on the job site during the project. But this objection seems unreasonable since the parties would still accept that the project was proceeding under the terms of the contract, and they would only be reserving their financial position until later.  Moreover, this sort of solution might encourage the parties to settle their differences immediately.

Another solution is to have the parties agree that the subcontractor will proceed with the job on the basis that its claim for further payment will be dealt with later.  This solution could only be implemented with the consent of both parties and would have the same effect as performance under protest in terms of delaying the resolution of the dispute to later.

The third solution is to have the dispute resolved immediately by a process in which the parties have confidence.  It may be unlikely that the parties would have confidence in the consultant chosen by the owner.  But other means of immediate resolution of the dispute are certainly available.  However, parties to most construction projects seem unwilling to put this sort of an interim dispute resolution regime in place during the project.

Whatever the solution, it certainly seems that the hard-ball approach of Peter Kiewit is out of step with the modern approach to dispute resolution and the efficient performance of building contracts.

Building Contract  –  Tender  –  Repudiation  

Asco Construction ltd. v. Epoxy Solutions Inc., 2011 ONSC 2454.

Thomas G. Heintzman, O.C., Q.C.                                                                               September 4, 2011

www.constructionlawcanada.com

www.heintzmanadr.com

Pay-When-Paid: When Is The Contractor Not Obliged To Pay The Subcontractor?

Construction Law  –  Building Contract  –  “Pay When Paid”

The Ontario Superior court recently wrestled with the issue of how to interpret and apply a “Pay When Paid” clause in a subcontract.

In 1473662 Ontario Limited v. Avgroup Consulting Services Limited, the Court appears to apply the traditional approach to this clause, but opened a door for subcontractors to avoid its severity.

Avgroup was the general contractor for a hotel construction project. The numbered company (which carried on business as “Dyson Electric”) was the electrical subcontractor.  Avgroup alleged that the parties had contracted pursuant to the CCDC subcontract, and that the contract contained a “Pay When Pay” clause which read:

“The Contractor shall pay the Subcontractor no later than thirty (30) days after the Submission Date or three (3) working days after the Contractor receives payment from the Owner, whichever is the later.”

However, that contract was never signed.  Dyson alleged that the contract was found in the invoices which it had submitted to Avgroup and which Avgroup had accepted as the basis for payment.  Those invoices did not contain a Pay When Paid clause.

The Court appeared to accept that the Pay When Paid clause in the form of CCDC contract relied upon by Avgroup was substantially similar to the clause in the contract which had been considered by the Ontario Court of Appeal in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc (1988) 32 C.L.R. 32 (Ont. C.A.).  The clause in that case stated:  “Payments will be made not more than thirty (30) days after the submission date or ten (10) days after the certification or when we have been paid by the owner, whichever is the later.”

The Court of Appeal in Timbro held that such a clause was not just a payment-timing clause operating during the project, but entirely precluded the sub-contactor from recovering from the contractor in the event that the contractor was not paid by the owner.

The court in the present case evidently felt itself to be bound by the Timbro decision.  But the court held that there was a triable issue relating to whether the contract was in the form of the CCDC subcontract or in the form of the subcontractor’s invoices.  Accordingly, the court dismissed Dyson’s motion for summary judgment.

This decision highlights the need for the Supreme Court of Canada to review the Pay When Paid issue.  There is conflicting authority in Nova Scotia (Arnoldin Construction & Forms Ltd. v. Aslta Surety Co (1995), 19 C.L.R. (2d) 1 (N.S. C.A.)) and leave to appeal that decision was dismissed by the Supreme Court of Ontario.  Moreover, members of the construction industry, and the drafters of the CCDC subcontract, should clarify their intention about the meaning of a Pay When Paid clause.

The fundamental questions are these:  Who should bear the risk of the owner’s insolvency, the contractor or the subcontractor?

Why should the subcontractor, who has no dealings with the owner and no means of managing the risk of the owner’s insolvency, bear that risk rather than the contractor?  A subcontractor may reasonably be expected to bear the risk of the timing of the payments by the contractor during the project, but it is more difficult to understand why the subcontractor should bear the risk of the owner’s insolvency.

The same issue can, of course, arise in a sub-subcontract or a supply contract if that contract contains a Pay When Paid clause.  Here, the risk is the contractor’s insolvency.  Is it reasonable for the sub-subcontractor or supplier to the sub-contractor to bear the risk of the contractor’s insolvency when they have no dealings with the contractor?

These are questions which the courts and the construction industry need to carefully consider.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed), Chapter 4, part 2).

Construction Law – Building Contract – “Pay-when-Paid”: 

1473662 Ontario Limited v. Avgroup Consulting Services Limited, 2011 ONSC 2900 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                               June 26, 2011

www.constructionlawcanada.com