Construction Case Law Update – Canada

Introduction

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.

Construction contracts

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., [1988] 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...