In this chapter is found a selection of instructive construction law cases decided in 2015 in British Columbia as well as other Canadian jurisdictions. These cases reaffirm, add clarity to, or expand legal principles applicable to contracts, procurement law, and damages; all of which are a testament to the operational importance of the law in the construction industry.
In contrast to recent years (in which the law was being developed largely in the context of residential construction disputes), 2015 saw a significant number of commercial cases in which a variety of substantive construction law issues were analyzed by the courts.
Constructum Developments Inc. v. Hogaboam, 2015 BCSC 1490 illustrates a few principles related to the interpretation of construction contracts. In that case, the Defendants had hired the Plaintiff to build a new home for them, which was completed except for minor deficiencies that the Plaintiff, during an angry confrontation with the Defendants, refused to rectify until the final progress draw was paid. The contract provided that final payment would be made once deficiencies were corrected. The court found that it would be unfair to strictly enforce this term and the Defendants should not have refused to pay any of the final draw before all deficiencies were remedied, particularly as the Defendants had requested and been granted a variation (early occupancy) and the deficiencies were relatively minor. Nonetheless, the court found that the Plaintiff’s refusal to correct the deficiencies until being paid amounted to a substantial breach of the contract and its repudiation of the contract. That repudiation was accepted by the Defendants when they changed the locks on the house and refused access to the Plaintiff. The contract did not stipulate the consequences of repudiation, and therefore quantum meruit was applied to value the Plaintiff’s work on the house, which amounted to an award in the amount of the final draw less costs to repair deficiencies, plus some expenses for extra work performed by the Plaintiff. Of note to practitioners is the finding that a refusal by a contractor to complete deficiencies can be a fundamental breach, allowing the contract to be terminated. Of course if all payments have been made under the contract, this remedy may not be of assistance to an owner.
In R219 Enterprises Ltd. v. OK Builders Supplies Ltd., 2015 BCSC 1128, the court relied on industry practice to resolve a dispute arising from a situation in which an experienced concrete supplier (OK Builders) took an order from the builder for a specific mix of concrete to be used in exterior slabs on grade. The concrete turned out to be the incorrect mix for the intended use to which the slab would be put. The court found that OK Builders was negligent even though it had supplied the mix of concrete that was ordered because it had not inquired about the intended use and purpose for the exterior slab on grade before supplying the concrete. Had it done so, it would have discovered that the incorrect concrete mix had been ordered. The court held that this obligation arises based on standard industry practice for concrete suppliers. This decision may have limited application based on the fact that the decision was primarily driven by a particular standard industry practice, although it highlights the importance of evidence of industry practice in interpreting construction contracts. To illustrate this point, this decision may not apply to a scenario where the concrete mix design has been specified by a structural engineer.
In Stevens Pools Ltd. v. Carlsen, 2015 BCPC 0023, the court dealt with a situation where a contractor and homeowner had agreed to a cash transaction for a portion of a construction project for no legitimate purpose. The dispute involved an unpaid invoice for construction of a pool. The contract price had been reduced from $50,000 to $35,000, with an undocumented agreement that the difference of $15,000 would be paid in cash. The court found that this arrangement was done for the purpose of avoiding tax on the cash payment, which rendered their agreement immoral and therefore illegal at common law. The court found that none of the exceptions to the rule against enforceability of an illegal contract applied and found that the “gains and losses flowing from the illegal transaction into which [the parties] entered must remain where they have fallen.” This decision is a reminder to parties to a dispute that the courts will not enforce illegal agreements.
Consortium MR Canada ltée c. Commission scolaire de Laval, 2015 QCCA 598, dealt with some of the common practices in the industry related to change documentation. The Defendant owner issued change directives to the Plaintiff contractor, who responded with quotes reserving the right to claim impact costs at a later time. In each case, the consultant struck out the reservation and wrote that impact costs were already included in the contract. The parties agreed to change orders, but the Plaintiff again attempted to reserve its rights to claim impact costs, which was again struck out by the consultant. The court held that the Plaintiff was not entitled to recover impact costs as the contract required it to propose a fixed price for the changes, or if there was a disagreement on price, to follow the dispute provisions. This holding echoes decisions by the British Columbia Court of Appeal to the effect that a contractor cannot wait until the end of a job and then claim impact costs from the large number of changes after having signed off on individual change orders (Doyle Construction Co. v. Carling O'Keefe Breweries of Canada Ltd.,  B.C.J. No. 832). This is a highly useful case to owners and contractors. Its effect is that owners must be vigilant in enforcing the contract change provisions, and contractors must scrupulously follow the change provisions in the contract (and issue a timely dispute notice if there is a disagreement on price).
In Wallwin Electric Services Inc. v. Tasis Contractors Inc., 2015 ONSC 1612, the court found that the contractor had been “paid” for the purposes of a “pay-when-paid” provision in a contract between a subcontractor and the contractor when the owner had paid the amount specified in an issued payment certificate, even though the contractor had reduced the invoice for that payment certificate by $150,000 to account for a dispute over work under a previous certificate. The court rejected the argument by the contractor that it had not been “paid” because of the reduction of its invoice.
Interborough Electric Incorporated v. Maple Reinders Constructors Ltd., 2015 ONSC 5591, provides some very helpful analysis of a delay claim. In this case, a subcontractor sought recovery of $645,341, mainly delay and related costs, against the contractor (Maple, the general contractor on the project), and the owner. The Plaintiff, Interborough, was the electrical subcontractor on the project who suffered delay when (1) certain prerequisites to its work were not completed on time and (2) it encountered unforeseen site conditions, including inclement weather, that slowed its work once on site. The parties agreed that Interborough suffered delay and that there was a loss of productivity; the main issue in dispute was the amount of damages to which Interborough was entitled. Maple alleged that Interborough had abandoned the project and claimed the value of the uncompleted work and cost to rectify deficiencies ($500,000). The court found no abandonment, as Maple could not establish that Interborough had completely stopped the work.
In analyzing the delay portion of the claim, the court agreed with the three expert witnesses who addressed delay that the “measured mile” approach to delay analysis was not possible because the project had suffered delays from the very beginning, so there was no uninterrupted portion of the work against which the delayed portions could be compared. The court rejected the approach of Interborough’s expert that certain productivity factors established by the Mechanical Contractors Association of America could be applied to place a value on the delay and disruption suffered on the project. The court found such an approach was not suitable for retrospective delay analysis and inappropriately introduced a significant subjective component to the analysis. The court similarly rejected the approach of Maple’s expert, who suggested that the next three lowest bids on the project be averaged and if Interborough’s was greater than 5% lower, it showed Interborough underbid the work. The court found there could be other reasons that Interborough’s bid was lower, and commented that no court or board had ever relied on such an analysis. In the end, the court awarded damages for delay and disruption of Interborough’s work based on the number of actual labour overrun hours versus the hours Interborough budgeted for in its bid estimate. The court also included some costs for extended site overhead, management salary, additional rental equipment and holdback financing. Delay claims are by their very nature uncertain and expensive to establish. As a consequence, presenting a delay claim based on approaches that have previously gained approval by the courts lessens the risk of an outright rejection of the approach taken (and with that rejection, costs thrown away).
In Jessco Structural Ltd. v. Gottardo Construction Ltd., 2015 ONSC 3637, the court dismissed a claim by Jessco, the subcontractor, against the contractor Gottardo for the cost of work performed on the oral instructions of the contractor’s site supervisor. The court rejected the claim on the basis that Jessco’s contract stipulated that any changes had to be made via written order from the contractor and negotiated with the contractor before the work was performed. In this case, Jessco received oral instructions, performed the work in question, and then provided the site superintendent with a purchase order for the extra work, which the superintendent signed. The extra work was invoiced but the invoices were never paid. The court rejected Jessco’s arguments that the contractor’s actions by way of its site supervisor constituted a waiver of the applicable contract provision, or that the contract had been amended through such conduct. The court distinguished this case from other cases where similar waiver arguments were accepted on the basis that no portion of the extra work was paid for in this case. The strict approach taken by the court in this case highlights the fact that the law may not always be sympathetic to the need for urgent decisions during the delivery of a construction project, and that the contract should provide options to allow such urgent decisions to be made. Regardless, the parties need to be aware of the relevant contract provisions and ensure they are followed. In this case, the subcontractor could have, and should have, insisted on a written order before proceeding with the work.
In Bruell Contracting Ltd. v. J&P Leveque Bros. Haulage Ltd., 2015 ONCA 273, the court was asked to consider a trial level opinion related to highway construction work performed by Bruell for the Ministry of Transportation (“MOT”). The court found that the trial judge had acted reasonably in relying on one expert’s evidence to conclude that the contract was a “method specification” contract, under which Bruell was not responsible for the performance failure of the road because it had followed the contract specifications. As a result, the contractual warranty did not apply. The court rejected the MOT’s argument that the contract contained an implied term that Bruell would perform compatibility testing of the materials used (which was found to be the cause of the road failure) because such a term would have contradicted what was specified in the method specification contract. On a different topic, one of great interest to construction dispute practitioners, the court overturned the trial judge’s findings that the MOT had improperly influenced its expert when it provided additional information and requested edits to the expert report, finding such interactions to be appropriate in the circumstances, and accordingly reduced the costs award based on full indemnity for Bruell by 20%.
In New Brunswick v. Brad Gould Trucking and Bird Construction, 2015 NBCA 47, the court overturned a trial level decision, finding that a contractor encountered changed soil conditions when it, in excavating the foundation of a new courthouse, allegedly encountered more rock than anticipated in its bid. The court agreed that a soil conditions report was incorporated into the contract by reference, but disagreed with the trial judge’s analysis of the implications of that report. The court held that the contractor’s estimator had drawn erroneous conclusions from the report that could have been cheaply and easily caught and corrected by a geotechnical engineer or someone with experience in the field. In addition, the court found that the trial judge had committed a palpable and overriding error by “cherry picking” descriptions of the soil conditions from the narrative description and the actual borehole data of the soils report, but without considering the technical definitions in the Report that applied to the borehole data. In doing so, the trial judge failed to consider the Report as a whole, as the Court of Appeal held was necessary. The Court of Appeal found that there was no change in the conditions of the soil as compared to the Report and dismissed the trial judge’s award. Claims by contractors for changes in soil conditions are prevalent in the construction industry, and this decision underscores the protection offered to owners against such claims when comprehensive soil testing reports are provided as part of the information available to the contractor prior to performance of the work. Interestingly, this case appears to place an obligation on a contractor to seek geotechnical advice if it does not understand the content of the soils report.
In Park Avenue Flooring Inc. v. EllisDon Construction Services Inc., 2015 ABQB 478, the court found that both the contractor and subcontractor had breached an implied term in their contract obligating the parties to be reasonable and cooperate in the performance of the work. The court found that the contractor had improperly terminated the contract and had been disproportionately unreasonable and uncooperative. Specifically, the court discussed how the contractor had “badmouthed” the subcontractor to its employees, had failed to pay any amounts for 14 months or to approve change orders that were clearly appropriate, had failed to declare substantial completion, and maintained a clearly excessive deficiency holdback. This case is a good reminder to parties to a contract to make every effort to wear the “white hat”, and conduct themselves in accordance with the terms and spirit of the contract, as a means to gain favour in the circumstances of a dispute. Allegations of lack of good faith are becoming more common, and the courts appear to be more willing to find breaches of contract for clearly unreasonable behaviour.
Architects and engineers
In Okanagan-Similkameen (Regional District) v. Associated Engineering (B.C.), 2015 BCSC 909, the court found that Associated Engineering, a civil engineering consultant, had been negligent in providing services to its client, the Regional District. The case involved the Regional District’s contract for roadwork, the costs of which were to be shared by the Regional District and the Ministry of Transportation.
Conduct by Associated that was found to be negligent included its preparation of a cost estimate for the portion of the cost of the work to be paid by the Ministry and its pricing of a change order during the execution of the work. In relation to the former, Associated neglected to include over $23,000 in costs in the overall estimate of which it was aware, resulting in the Regional District losing the opportunity to either reduce the scope of the work or negotiate a larger payment by the Ministry.
In relation to the latter, Associated admitted that it was incorrect when it presented a change order to the Regional District that indicated there would be no increase to the contract price. In fact, the change order increased the contract price by over $91,000. The court found that the Regional District would not have approved the change order had it known of the true impact on the contract price and rejected the argument of Associated that the change was inevitable based on the facts.
In both cases, Associated argued that no damages flowed from the negligent conduct, but the court did not agree. The Regional District had proved that but for the negligent conduct, the Regional District would not have incurred additional expenses.
In last year’s Construction Law Chapter we reviewed the BC Supreme Court’s decision in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2014 BCSC 1568 (pages 151 and 152). In 2015, the Court of Appeal affirmed of that decision, which we review below, followed by a discussion of the Alberta Court of Appeal’s decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2015 ABCA 121, (the latter providing further clarity on what constitutes “resultant loss” under an “All Risks” policy).
In Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347, the court upheld the trial judge’s decision that approximately $8.5 million of the $15 million claimed by a contractor for the repair of faulty concrete slabs was covered by the its “All Risks” policy. The facts were not generally controversial: certain concrete slabs that were designed, built, and installed by a subcontractor were over-deflecting, resulting in cracks and concave recessions in the middle of the slabs. As a result, the floors did not meet the serviceability standard in the subcontract or the contract with the owner, though they were found to be structurally sound and safe. Critically, the trial court found that the defect was not caused by faulty design, but instead, was caused by defective formwork and re-shoring procedures during construction.
The court found that the trial judge’s findings were ones of mixed fact and law, and thus applied the standard of “palpable and overriding error”. The court dismissed the insurers’ arguments that the deflection of the slabs did not constitute direct physical loss of or damage to the insureds’ property, and that the trial judge erred by excluding from coverage only “preventative or avoidance costs” (the amount that would have remedied that defect before occurrence of the damage).
In doing so, the Court of Appeal held that “physical loss” and “damage” denote an alteration in the appearance, shape, colour, or other material dimension of the property insured, and that the irreparable damage to the rebar in the slabs, and the over-deflection and cracking of the slabs themselves constituted damage under this definition. The court rejected the insurers’ argument that the over-deflection was merely a functional inutility, and in doing so distinguished cases involving construction of items that had not worked as intended but had not been physically deformed or damaged.
The Court of Appeal also rejected the insurers’ argument that the trial judge misinterpreted the Defects Exclusion clause, which stated that the policy excluded all costs rendered necessary by defects of material workmanship, design, plan, or specification, to exclude only avoidance costs. The court endorsed a recent Ontario Supreme Court decision (PCL Constructors Canada Inc. v. Allianz Global Risks US Insurance Co., 2014 ONSC 7480) in which it was held that under an exclusion for faulty workmanship, the insurer does not pay the costs that would have been incurred by the contractor or subcontractor to have done the work right the first time. Such a clause protects the insurer from the moral hazard of contractors under-spending on material or labour and then passing on the risk of their own poor performance to the insurer. As a result, the peril is not excluded; a deduction is made for doing the job correctly the first time, which the court found had been correctly assessed by the trial judge.
Finally, the Court of Appeal also rejected the contractor’s argument that the trial judge erred in (1) considering the damaged slabs, rather than the whole project, to be the insureds’ property, and (2) by treating the contractual obligations of the contractor to the subcontractors for increased subcontractor costs as consequential rather than direct costs. The court found that only the slabs were damaged and only the costs arising directly or indirectly from that damage was insured. As the subcontractor costs did not arise from the damage to the slabs, it was not found to be covered.
Although this decision is in relation to the wording of commonly used but specific exclusion clause, it has the very real potential of narrowing what constitutes direct physical loss of damage to the insured’s property, and conversely expanding rights for recovery for resultant loss.
In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2015 ABCA 121, the Alberta Court of Appeal overturned the trial court’s decision in finding that damage caused by the cleaning of the windows in a newly constructed tower was not covered under the applicable “All Risks” policy because, contrary to the trial court’s finding, the damage resulted from “poor workmanship” and was not “resulting damage” that would have been covered under the policy.
In this case, Station Lands Ltd. retained Ledcor Construction as a Construction Manager for the construction project. Station obtained the “All Risks” policy from Northbridge, which covered all “direct physical loss or damage except as hereinafter provided”. The policy excluded the “cost of making good faulty workmanship […] unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.” Bristol was only involved with cleaning the windows, which had been installed by other contractors, and in doing so, caused damage by using inappropriate materials and procedures. The windows had to be replaced at considerable expense. The court found that the presumptive test for when the cost is excluded as a “cost of making good faulty workmanship” versus included as “resulting damage” is whether that damage is physically or systematically connected to the very work being performed. The court used an illustrative example where a company hired to wash the windows would not be covered for scratching the window while doing so, but would likely be covered for dropping a bucket and causing damage unrelated to the actual work performed. Practitioners may wish to lean on this decision for the practical guidance it offers when assessing the character of the loss.
There were no changes to the Builders Lien Act, S.B.C. 1997, c.45 in 2013 (the “BLA” or the “Act”) and a limited amount of cases reported in British Columbia. However, the Supreme Court of Canada did rule on a contractor’s lien trust obligations under the Manitoba lien legislation in Stuart Olson Dominion Construction Ltd. v. Structural Heavy Steel, 2015 SCC 43, which decision, and a few others in British Columbia, are reviewed below:
In Oasis Windows Ltd. V. Coppergate Developments Inc., 2015 BCSC 342, the court struck out a claim in unjust enrichment by a subcontractor (Oasis) against the owner (Coppergate) where the subcontractor had failed to file a lien by the statutory deadline. The court found that the claim was an attempt by Oasis to invoke the benefits conferred by the Builders Lien Act despite failing to comply with its provisions. Oasis supplied windows to the general contractor, Houser Homes, and had no relationship, contractual or otherwise, with the owner. The court found that there were two bases on which Oasis could have theoretically claimed against the owner; the first being by contract, either of indemnity or through Coppergate directly promising to pay the sums to Oasis. Neither had occurred in this case. The second possibility was through unjust enrichment; however the court found that it would be an unwarranted intrusion into the construction field to extend the remedies conferred by unjust enrichment in circumstances where a non-contracting party had no direct or indirect dealings, communications, or conversations with the subcontractor. The court noted that Oasis had not pled any facts to support a claim for unjust enrichment, and even if it had, the contract between Coppergate and Houser Homes provided the juristic reason for any enrichment of Coppergate. The court awarded Coppergate special costs. This decision reinforced similar and earlier decisions in our jurisdiction (K.S. Mechanical Ltd. v. Park, 2012 BCSC 1751; NR Excavating & Services Ltd. v. Mand, 2013 BCSC 723; and Sabihi v. Dr. Mansur Roy Inc., 2013 BCSC 1571), sees the law tending towards a near prohibition for recovery by a party against a non-contracting party for unjust enrichment where no builders lien is filed.
In A.A.A. Aluminum Products Ltd. v. Grafos, 2015 BCSC 2128, the court found that the Plaintiff was entitled to claim of lien for the installation of a deck for the Defendant, in an amount that included any relevant inputs making up the price including applicable taxes, overhead, profit, and administrative costs directly connected to the work. The court also held that an “improvement” included a custom patio constructed elsewhere but intended to be added to the deck, such that the value of the work and materials put into the patio off-site were properly lienable. This case is an important reminder that the cost of off-site building work which is intended to be added to the work on site is lienable provided that the off-site work is an integral and necessary part of the actual improvement (see also, Kettle Valley Contractors Ltd. v. Cariboo Paving Ltd.,  B.C.J. No. 226).
In Vancouver City Savings Credit Union v. Avicenna Group Holdings (Chilliwack) Ltd., 2015 BCSC 31, the court considered an application by a wage lien holder for a declaration of priority over two unproven builders lien claims in respect of the proceeds of a sale of a property. A prior court order had been made requiring the builders lien claimants to prove their claims by a certain date. The court found for the applicant in relation to one of the lien claims, in relation to which the lien claimant had commenced an action over six years earlier, but had taken no further steps to prove its claim despite the court order to do so. The court found against the applicant in relation to the other lien claim, Lalli, in relation to which Lalli had scheduled a trial that was subsequently adjourned by consent on two occasions, had unsuccessfully sought a summary trial, and had taken positions on the applicant’s prior legal proceedings. The court, despite expressing some reservations that Lalli was “dragging its feet”, found it would be inequitable to deprive Lalli of the opportunity to prove its claim of lien, and further extended the deadline for Lalli to prove its claim. This decision is a sound warning that while builders’ lien claimants cannot “sit on their rights indefinitely”, undertaking some procedural steps towards proving the claim may be sufficient to preserve a lien claim.
In Stuart Olson Dominion Construction Ltd. v. Structural Heavy Steel, 2015 SCC 43, the Supreme Court of Canada (SCC) was asked to consider whether a lien bond, posted with the court by a contractor in the full amount of a claim of lien by a subcontractor, satisfies the contractor’s trust obligations under the Manitoba Builders’ Liens Act, R.S.M. 1987, c. B91 (the “MBLA”) concerning money paid to it by the owner in respect of the subcontractor’s work.
In this case, Stuart Olson had been hired to construct a football stadium for the University of Manitoba, and entered into a subcontract with Structural Heavy Steel for the supply and installation of much of the steel for the project. Stuart Olson withheld payments from Structural, mainly due to delay, and Structural filed a claim of lien for an amount in excess of $15 million. Stuart Olson filed a lien bond in the full amount of the claim of lien and as a consequence, Structural discharged its claim of lien. Stuart Olson continued to refuse to make further payments to Structural, claiming set-off, and asserted that there was no breach of the trust under the MBLA as Structural was fully secured by the lien bond. Structural responded by requesting that the owner withhold payment from Stuart Olson or face an action for violating the trust provisions of the MBLA (note that under the BC BLA, no trust is imposed on the owner). The owner obliged and Stuart Olson brought an application seeking a declaration that it had satisfied its MBLA trust obligations to Structural.
The Manitoba Court of Queen’s Bench ruled that the lien bond secured Structural’s trust claim and extinguished Stuart Olsen’s trust obligations under the MBLA. The Court of Appeal overturned the trial court, concluding that the MBLA created two separate and distinct rights – the right to the statutory trust and the right to file a claim of lien claim against the property.
The SCC reviewed the relevant provisions of the MBLA, and while finding that it was silent as to the interaction between the two rights (which emerge under the same provision), held that the contractor had not satisfied its trust obligations. The court held that the purpose of the claim of lien is to create a charge against the land in favour of lienholders, whereas the purpose of the statutory trust is to help assure that money payable by owners, contractors, and subcontractors flows in a manner which is in accord with the contractual rights of those engaged in a construction project and is not diverted out of the proper pipeline. As a corollary, the filing of a lien bond merely secures a contractor's or subcontractor's lien claim rather than satisfying it through payment. It does not extinguish the owner's or contractor's obligations under the statutory trust. To the degree that the lien and trust claims are for the same work, services, or materials, payment into court under the trust will eliminate the equivalent amount payable to satisfy the claim of lien, but the security by way of a lien bond does not have the same effect.
There is little question that Stuart Olson is applicable in BC such that subcontractors have access to both the trust remedies and the lien remedies under the BLA separately, however the trust provisions under the BC BLA are not as broad as those MBLA, which may somewhat limit the implications of this decision. Under the BC BLA, a trust is imposed over money in the hands of the owner only in relation to the holdback account, however in Manitoba, a trust is imposed over money in the hands of the owner in relation to the holdback account but also over sums that are payable on the basis of a certificate of payment or over mortgage amounts advanced for the construction of a project. Therefore, the key ratio in Stuart Olson, at least in relation to monies held by a BC owner, only applies to the holdback account and not to other amounts to which it may be relevant in other provinces.
Procurement law: Tenders and requests for proposals
The following notable tender law cases decided in 2015, although some are from other provinces, are of interest because out-of-province cases are often relied upon by British Columbia courts and are relevant to best practices in procurement in this province.
In Elan Construction Ltd. v. South Fish Creek Recreational Assn., 2015 ABQB 330, the court found that the Defendant, a non-profit society, breached its duty of fairness in Contract A when it awarded Contract B to a bidder, Chandos, using an evaluation process that involved the application of undisclosed evaluation criteria. However, the court only awarded nominal damages to Elan, who would have been awarded the contract had South Fish acted fairly, because it found that, due to the conditions encountered on the project, Elan would have suffered a loss had it been awarded Contract B.
South Fish had issued a tender for the construction of two ice rinks, including evaluation criteria consisting of price, date of completion, previous community and arena experience, and references.
In relation to date of completion, the instructions to bidders stated that achieving substantial completion by August 2011 was an important factor. It had allotted 30 of 35 points to substantial completion and 5 points for final completion.
However, when evaluating the 11 bids received, South Fish averaged the substantial completion dates provided by some of the bidders to create a “nominal date” of Sept. 5, 2011 and awarded points based on how close a bidder was to that date. In calculating the nominal date, South Fish excluded the substantial completion dates from three of the bids with the earliest dates, which skewed the nominal date. South Fish could not offer a reasonable explanation for this exclusion at trial. Elan’s substantial completion date of August 1, 2011 was awarded 25 points, and Chandos, the winning bidder, received 34 points for its substantial completion date of August 31, 2011.
In relation to previous experience, South Fish was found to have placed much greater emphasis on arena experience than on community experience, which the court found breached the duty of fairness to bidders as such preference was not disclosed to the bidders. Similarly, the court found that experience with Leadership in Energy and Environmental Design (“LEED”) was a factor relied on within the previous experience criterion, however the instructions to bidder did not specify that LEED experience would be considered, and as such, was a second breach of fairness as such a preference should also have been disclosed to bidders. Additionally, South Fish required interviews immediately after bid submission, which the court recognized may have fallen within South Fish’s right under Contract A to seek further information from bidders, but found that bidders should have been made aware that interviews were a possibility. South Fish further breached its duty of fairness by forcing Elan to attend an interview at which it knew Elan would not be able to bring its key proposed employees for the project. This case underscores a party’s ability to establish its own evaluation matrix that considers factors other than price, but offers a powerful warning that when doing so, an owner must play by the rules it has established. The court was willing in this case to examine in great detail the evaluation process used in order to uncover specific factors considered within each evaluation criterion, and, surprisingly to some procurement practitioners, was willing to characterise some of those as undisclosed criteria.
In True Construction Ltd. v. Kamloops (City), 2015 BCSC 1059, True responded to a tender by the City by submitting a sealed bid that was missing certain appendices. The instructions to bidders allowed bidders to increase or decrease the value of their bids by faxing in corrections on a specified form, which True used shortly before bid closing to submit its completed appendices and not for the sole purpose of effecting an increase or decrease in the value of its bid. The court found True’s bid to be materially non-compliant and incapable of acceptance by the City. The court found that the method used by True to submit its bid was more than a mere irregularity as it provided True with a competitive advantage over other bidders, (namely that True had additional time to continue to negotiate with its subcontractors and suppliers), and put the integrity of the bidding process at risk.
In Todd Brothers Contracting Ltd. v. Algonquin Highlands (Township), 2015 ONCA 737, the court upheld a trial judge’s finding that a broadly worded waiver provision in a tendered contract barred the claim of the appellant, Todd Brothers, when the Township eventually decided to cancel substantial portions of the work under the contract. The clause read that Todd Brothers would not seek any compensation for damages for “any other public issues/concerns, or the withdrawal of funding from applicable sources.” By the time an environmental report that was required before work began was completed and sent to Council, a new Council had been elected that was opposed to the project. The new Counsel deferred execution of the report (and hence the project) until further review. The court held that there was a public outcry about the project, and it was an issue in the election which brought in a Counsel opposed to the project, and these combined were a “public issue/concern” against which Todd Brothers could make no claim. Furthermore, the court held that a joint project proposed by the Ministry of Natural Resources, through which the work under the contract was reorganized and awarded to another contractor, had the potential to deliver the project at lower cost, and therefore the Township had a duty to consider it (a duty that was reflected in the contract), and had it not done so, could have lost its project funding. This case illustrates the potential power of a waiver of claims clause in procurement and therefore should be a warning to pay particular attention to the wording of a waiver clause given the willingness of this Court to uphold a broadly worded waiver clause.
Good faith obligations
In last year’s Contract Law Chapter, Professor MacDougall reviewed Bhasin v. Hrynew, 2014 SCC 71, in which the Supreme Court of Canada found that good faith is a general organizing principle of the common law of contract, and based on this principle, created a new duty of honesty in contractual performance of all contracts, which means that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” There have been several cases in jurisdictions outside of British Columbia in the past year that have considered this new duty in the construction context.
In Combined Air Mechanical Services v. Computer Room Services Corp., 2015 ONSC 610, a sub-contractor, Combined Air, reached an oral agreement with a contractor, Computer Room Services Corp. (“CRSC”), that CRSC would include Combined Air as a sub-contractor in its bid in exchange for Combined Air not submitting its own bid for the same tender. CRSC’s bid included Combined Air’s quote as well as a profile of a key Combined Air employee. CRSC never intended to use Combined Air, believing it could obtain a cheaper price from another sub-contractor, and in fact, once it won the tender, hired another sub-contractor. The court found that CRSC’s actions were in bad faith as CRSC “basically iced Combined Air from submitting its own competitive bid” and led Combined Air to change its position to its detriment, including withdrawing itself as a qualified bidder and not submitting a bid.
Since the Bhasin case, it has become more common for pleadings in construction case to contain allegations of breach of the duty of good faith, but Combined Air is one of only a handful where an actual breach has been found. In light of the courts’ focus on preserving the integrity of the bidding process in tendering cases, it is perhaps not surprising to see cases involving breach of the duty of good faith.
In the Elan Construction case (discussed above), the court noted that the Supreme Court of Canada in Bhasin had confirmed the existence of a good faith requirement in the tendering context. The court found that where a bid evaluation has been conducted in an arbitrary manner or on the basis of undisclosed criteria, which is sufficient to constitute a breach of the duty of good faith in the tendering context.
In HB Construction Co. v. Potash Corp. of Saskatchewan Inc., 2015 NBQB 80, the Defendant sought an order striking the Defendant’s allegations of a breach of the duty to act in good faith, claiming that the claim failed to disclose a reasonable cause of action. The Plaintiff had entered into a contract with the Defendant to provide the mechanical/piping/HVAC/electrical and instrumentation services in the construction of a potash compaction plant in New Brunswick. When the completion date for the project was not met, the Defendant terminated the contract.
The court held that a finding of bad faith or of breach of a duty of good faith is a conclusion of law that must be based on material facts in the pleadings, not mere assertions that are unsupported by specific allegations of fact. On the facts before it, the court refused to strike that portion of the Plaintiff’s claim related to alleged breaches of the duty to act in good faith, holding that the following acts, if proven, could support such a cause of action: (1) refusal to process change orders in a timely manner, (2) failure to deal with requests for extensions of time expeditiously, (3) providing unclear directions concerning alleged defaults, (4) and providing inconsistent and unclear responses to claims for change orders. Given the common nature of such occurrences in construction matters, the court’s finding is highly relevant to practitioners advising owners and contractors on the duties that may arise during a construction project.
In Park Avenue (discussed above), the court implied a term into the contract that the parties would be reasonable and would cooperate in their performance of the contract, and that such an implied term was consistent with the principles of good faith discussed in Bhasin (though the court did not expressly rely on Bhasin in its findings).
In The Owners, Strata Plan BCS 1165 v. National Home Warranty Group Inc., 2015 BCSC 1122, the Plaintiff sought directions from the court concerning the suitability of summary trial to determine whether certain alleged defects in the construction of a condominium complex fell within the warranty coverage for the project. In spite of the court’s expressed concerns over the lack of the entire record in which to base such a preliminary decision, the court proceeded to provide such directions as they had the potential to, and in this case did, prevent a complex and expensive summary trial that was bound to fail. The court found that the proposed application was unlikely to succeed due to the interrelationship between the issue for summary trial and other issues in dispute. Specifically, the court was asked to declare that the waterproofing in the parkade had defects in its materials and labour as well as building envelope defects. As such, directions would require determination of who and/or what caused the water ingress, which would be a central issue in the ongoing tort claims and the court found such a determination would materially affect the tort Defendants and third parties. In summary, the court found that the summary trial amounted to “litigation in slices” and advised that such an application was bound to fail. This decision should be of little surprise to practitioners given a general reluctance by our courts to conduct summary trials in multiparty construction cases.
Note of caution
Practitioners advising construction companies, particularly those considering corporate restructuring, should be aware of the holding in Abstract Developments Inc. v. Margolis, 2015 BCSC 2239, where the court considered a situation where the company contracted to manage the construction of a new home, Abstract Developments, changed its corporate identity to Abstract Construction during the project, without notifying the owners and where Abstract Developments had no right to assign its contract with the owners.
The court cited Lee v. Pointe of View Developments (Encore) Inc., 2010 ABQB 558, for the principle that when an owner relies on the skill, reputation, and ability of the builder to deliver a suitable product in entering into a building contract, that contract is not assignable without the owner’s consent. The court found that this principle applies even in cases where the same individuals are involved in the construction albeit under different corporate entities. On that basis, the court dismissed Abstract Development’s claim and its lien claim based on work performed after the date that it found Abstract Construction took over the project. The court noted that this issue of privity had been flagged for counsel early in the proceedings, but no application to add Abstract Construction as a party had been made.
Looking ahead to 2016
In addition to the case law developments summarized in this chapter, practitioners should also be aware that the parties in the following cases have filed notices of appeal with the Supreme Court of Canada (though leave has not yet been granted):
Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2015 ABCA 121
New Brunswick v. Brad Gould Trucking & Excavating Ltd., 2015 NBCA 47
Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347
Notices of appeal have also been filed with the B.C. Court of Appeal in True Construction and Abstract Developments, and with the Alberta Court of Appeal in Elan and Park Avenue Flooring.
In addition, the authors of this chapter, upon reviewing the body of construction cases decided in 2015, have the following brief observations that will be followed up upon in next year’s chapter:
- After a significant decline in commercial construction cases proceeding to trial in recent years, the case law in 2015 appears to suggest a trend towards more commercial construction cases proceeding to trial.
- As in previous years, tender law continues to be a source of litigation, resulting in an evolution of tendering law principles, and is expected to continue to be so in the upcoming year.
- There have been only a limited number of cases regarding the duty of good faith in construction cases to date, however, given the long-term nature of construction projects and the inherent need to coordinate efforts of multiple parties, more cases should be expected that will further clarify the scope of this duty in construction cases
As a final note, the authors expect to see strong investment in infrastructure over next year, resulting in an active construction industry, and anticipate seeing a corresponding number of disputes emerge over the year.
This chapter was first published in the Annual Review of Law and Practice (Continuing Legal Education Society of British Columbia, March 2016). It is republished here with permission.