Construction disputes in Alberta, like all other personal or commercial disputes arising in the province, are subject to the Alberta Limitations Act, which limits the time within which a plaintiff can commence litigation or arbitration proceedings to enforce a claim. The Act provides that a claimant must commence proceedings within two years of the time that it first knew, or ought to have known, that (1) it had suffered an injury, (2) the injury was attributable to the conduct of the defendant, and (3) the injury warranted bringing a proceeding. Limitation periods for construction claims are calculated based on when these three requirements are met. However, this calculation process, and the determination that arises out of it, is rarely straightforward and can be complicated in the construction context depending on how the plaintiff frames its cause of action and whether there is anything in the contract between the parties to the claim that impacts how and when the claimed injury is discoverable.

The recent Alberta decision of Penhold (Town) v. Boulder Contracting Ltd.12, although a lower-level authority, provides an important analysis of a limitations issue that is rarely discussed in construction law jurisprudence but that could potentially have a significant effect on the interpretation and impact of contracts throughout the industry: the calculation of limitation periods for claims based on contractual indemnity provisions. The plaintiff municipality in this case attempted to extend its time for commencing a proceeding in a construction deficiency dispute with the defendant contractor by characterizing its cause of action as a claim in indemnity and arguing that its indemnifiable loss did not arise for limitations purposes until it had actually paid funds out of pocket to remedy the deficiencies. The Court ultimately refused to allow the owner’s limitation period to be extended in this fashion.

The Town of Penhold had entered into a contract with Boulder Contracting, the defendant contractor, in July 2001 for the installation of water and sewer mains in a new subdivision. The contractor completed work in the fall of 2001, but in the spring of 2002, the pavement in the subdivision began to crack and settle in locations where the contractor’s work had been performed. The Town and its engineer immediately attributed this settlement to deficiencies in the contractor’s work and demanded that the defendant remedy these defects and the resultant damage pursuant to its contractual warranty obligations, which required it to perform such remedial work for a two-year period after substantial completion. The contractor denied that it was responsible for the pavement settlement, and after years of further demands, the Town arranged for its engineer to conduct an on-site inspection of the damage in June 2005. The engineer issued a written report specifically outlining all observed deficiencies and the remedial work required to fix them, again concluding that all such defects were attributable to the contractor. The defendant took no steps to repair the deficiencies, and as a result, Penhold retained and paid another contractor to complete remedial work in September 2007. Penhold then commenced litigation and arbitration 12 2009 ABOB 550 (Alta. Master). proceedings against Boulder for the cost of this remedial work in December 2007.

Boulder immediately took the position that Penhold’s proceedings were statute-barred by the Limitations Act, as Penhold had first discovered the deficiencies over five years before it commenced proceedings and its engineer had formally described and attributed the defects to Boulder two and a half years before Penhold brought its claim. The contractor therefore argued, and the Court agreed, that the Town’s warranty claim was commenced more than two years after Penhold knew it had suffered an injury, had attributed it to Boulder and knew that it was sufficiently serious to warrant bringing proceedings, which took it beyond the two-year limitation period. However, the contract between Boulder and Penhold also contained an indemnity provision which stated that the contractor would indemnify the Town from and against “all claims…losses, costs, damages…payments, recoveries or judgments of every nature and description arising out of or which may be attributable to the contractor’s performance of the contract.” Penhold argued that the defendant’s defective performance of its contractual obligations resulted in the Town having to incur repair costs to a third party contractor and that the payment of these costs triggered the indemnity provision and gave rise to an obligation on the part of the defendant to reimburse the Town for such costs. It further argued that this obligation did not arise for limitations purposes until the remedial costs had actually been physically paid out by Penhold in September 2007, which was only three months before it commenced proceedings, well before the expiry of the limitation period. In support of this argument, Penhold relied on the 1988 Alberta Court of Appeal decision of Fidelity Trust Co. v. 98956 Investments Ltd.13, which stood for the proposition that, “[b]ecause the very nature of a contract of indemnity is that it is a reimbursement obligation for an amount of damages that has actually been suffered…no cause of action can even arise until the extent of the loss has been quantified.”14

Master Laycock rejected Penhold’s indemnity limitations arguments for two reasons. First, he held that the nature and extent of any claim by Penhold for indemnity for Boulder’s deficient work had been sufficiently ascertained and determined by the June 2005 engineer’s report, which specified all of the defects present at the subdivision and the work required to fix them. From this information, “[t]he cost to remediate was easy to determine by putting the work out to tender. This process could have been completed shortly after the completion of the report.”4 The Town could not obtain the benefit of an extended limitation period simply because it unilaterally decided to wait over two years after the report was issued before actually incurring any remedial expenses. The Master refused to find that Penhold’s limitation period started anytime later than June 2005, as such a finding “would permit the plaintiff, with full knowledge of its cause of action, to hold its limitation period in abeyance while it waited for the most opportune time to incur indemnity costs, thereby controlling the timing of its own limitation period.”5 Fundamental to limitations regimes like Alberta’s, which are based around the principles of discoverability, is the idea that a limitation period should be objectively calculable and should be beyond the ability of the plaintiff to manipulate once its claim is reasonably knowable.

In addition, the Master also held that the indemnity provision in the parties’ contract was only intended to apply to liability claims by third parties and was not meant to apply to direct warranty claims for deficiencies. There was no express language in the indemnity clause to this effect, but the contract had established a separate framework to handle first party warranty claims: the warranty provision that set out a two-year warranty period within which the contractor was obligated to repair defective work. If warranty claims could also be advanced using the indemnity provision, which did not have a similar two-year expiry date, it would have made it possible for Penhold to claim for warrantable losses arising after the expiry of the contractual warranty period, which would render meaningless the warranty provision. The Court concluded that such an interpretation of the indemnity provisions would be “illogical” and that the only consistent interpretation of the contract was that the contractual indemnity was not meant to apply to warranty work. As a result, the indemnity clause in the contract did not allow Penhold to extend its limitation period for commencing proceedings beyond the standard two-year discoverability period provided in the Limitations Act.

The Penhold case is important for what the Court did not decide. If the Master had held that the indemnity provision in the parties’ contract gave rise to a separate, independent limitation period that began to run, not when the Town’s indemnifiable loss was first discoverable, but when the act of paying out indemnifiable expenses occurred, it would have created a significant loophole in Alberta’s statutory limitations regime that would have enabled parties to contracts with indemnity clauses to sit on stale claims until it was most beneficial for them to trigger their own limitation period. As it stands, parties considering making first-party indemnity claims should endeavour to do so based on the initial discoverability date of the injuries giving rise to an indemnifiable payment, regardless of when that payment was ultimately made.