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Singleton Reynolds is proud to announce and congratulate our newest partners: Warren Godfrey, Cheryl Labiris, Robert Moore, and Evan Rankin.
“We are excited to promote these talented members of our firm to partnership. They each provide valuable legal advice to our clients helping them to achieve success. Congratulations to Cheryl, Evan, Rob and Warren on this well-deserved accomplishment,” said Co-Managing Partners, Mark Stacey and Bruce Reynolds.
Warren Godfrey focuses primarily on general business, real estate and entertainment disputes. Warren is a passionate advocate for his clients’ rights and has experience with diverse contractual and other general commercial disputes, corporate governance, shareholder disputes, injunctions, leaseholder disputes, employment agreements and wrongful dismissal disputes across a wide range of industries. He also has a focus in entertainment law and has worked on a variety of disputes in this area, including acting for production companies, individual artists, and media companies.
Warren has been involved in the successful resolution of many business disputes, either by way of dispute resolution or litigation and has appeared before the Federal Court, the Court of Appeal, the Supreme Court of British Columbia and the Provincial Court of British Columbia. He has also successfully represented clients who have matters at the Labour Relations Board, the Civil Resolution Tribunal and the Residential Tenancy Branch.
Cheryl Labiris works exclusively in the Construction and Infrastructure Practice Group and has a very broad and diverse practice acting for all members in the construction pyramid including owners, general contractors, subcontractors/suppliers, sureties, architects, engineers, designers, and consultants on a vast range of construction claims including claims for delay, disruption, prolongation, breach of contract, breach of trust, geotechnical claims, permits, licenses, and approvals, access to lands, COVID-19, negligent/fraudulent misrepresentation, and surety bond claims.
She has significant experience working on a variety of projects including large-scale public infrastructure projects including multi-billion-dollar light rail transit projects, mine remediations, power plants, and wind farms. Cheryl also has experience in complex construction litigation proceedings, arbitration proceedings, and mediation and negotiation processes.
Robert Moore‘s practice involves all aspects of construction litigation. He has also litigated diverse commercial, professional liability, and personal injury matters.
His varied experience allows him to assist in all manner of disputes. Rob’s familiarity with the Rules of Court and alternative dispute resolution options permit him to develop a unique litigation strategy for every client no matter how big or small the dispute. He is known for pragmatic problem solving in challenging situations while keeping his clients’ best interests and objectives top of mind.
Evan Rankin regularly acts for lawyers, directors, officers, and their companies in professional liability claims and shareholder disputes. As an experienced freedom of expression advocate, Evan has worked on human rights claims in both domestic and international forums.
A thorough, tough, and responsive litigator, Evan has appeared before all levels of court in Ontario, as well as before the College of Physicians and Surgeons of Ontario and the Ontario Securities Commission. Before joining the firm, Evan articled at the Enforcement Branch of the Ontario Securities Commission, giving him special insight into a complex and growing area of litigation. He has since advised clients on the potential impact of securities laws to their businesses.
About Singleton Urquhart Reynolds Vogel LLP
Singleton Urquhart Reynolds Vogel LLP is a Canadian national law firm that specializes in the construction and infrastructure, insurance, and real estate sectors.
The firm consistently ranks first among Canadian construction and infrastructure firms and features prominently in the delivery of commercial litigation, corporate-commercial and employment law services.
In Davis v. Amazon Canada Fulfillment Services, ULC, 2023 ONSC 3665, the Ontario Superior Court of Justice partially stayed a proposed class action as the dispute fell under the subject matter of an arbitration agreement. The Court emphasized that there is a high threshold for an arbitration agreement to be found invalid, and, interestingly, observed that there is (generally speaking) no bar to an arbitration agreement precluding class arbitration. Below, we review the case and consider the implications of this high threshold for invalidity, as well as the ability to bar class arbitration.
Factual Background
The plaintiff, Denver Davis (“Davis”), commenced a proposed class action against Amazon.Com, Inc., Amazon.Com.Ca, Inc., and Amazon Canada Fulfillment Services, ULC (collectively “Amazon”). Within the proposed class action, there were approximately 73,000 putative class members.
The putative class members could be broken up into the following categories:
In response to the proposed class action, Amazon moved to have the court proceeding stayed in favour of arbitration for all 16,000 DPs and for at least 21,000 of the 57,000 DAs who had arbitration provisions in their work contracts. Davis opposed this motion and argued that the arbitration agreements were invalid as they are unconscionable and/or contrary to public policy as they allegedly constituted an illegal contracting out of the employment law statutes and included a class action waiver.
All of the arbitration provisions were similar and precluded resorting to court proceedings for resolving disputes. Interestingly, the arbitration provisions also provided that the arbitrator would be precluded from deciding disputes on a class, collective, consolidated or representative basis, such that each individual claim would have to be arbitrated separately.
The Superior Court’s Decision
While the Court considered a number of issues, this article focuses only on Amazon’s motion to stay the litigation in favour of arbitration.
Legal Background
Pursuant to Section 7 of the Arbitration Act, 1991, S.O. 1991, c. 17, when a party brings a court action, their opponents may bring an application to have the civil action stayed on the ground that the parties have agreed that their dispute be arbitrated.
The Court referred to the five-part analytical test set out in Haas v Gunasekaram, 2016 ONCA 744,[1] for determining whether an action should be stayed for arbitration:
(1) Is there an arbitration agreement? (2) What is the subject matter of the dispute? (3) What is the scope of the arbitration agreement? (4) Does the dispute arguably fall within the scope of the arbitration agreement? (5) Are there grounds on which the court should refuse to stay the action?
The Court found that the first four elements of the test had been met, as Davis did not provide any arguments to dispute that Amazon had satisfied its onus in demonstrating that they were met. Accordingly, the only real question was whether there were any ground(s) on which the Court should refuse to stay the litigation.
In that regard, the Court referred to s. 7(2) of the Arbitration Act, 1991, for the exceptions to granting a stay: (1) if a party entered into the arbitration agreement while under a legal incapacity; (2) if the arbitration agreement is invalid; (3) if the subject matter of the dispute is not capable of being the subject of arbitration under Ontario law; (4) if the motion was brought with undue delay; or (5) if the matter is a proper one for default or summary judgment.
In this case, the Court considered whether the second exception was met, based on the argument that the arbitration agreements were invalid on the grounds of unconscionability and public policy.
Unconscionability and Public Policy
The test for unconscionability was laid out by the Supreme Court of Canada in Uber Technologies Inc. v. Heller, 2020 SCC 16:
(a) there was an inequality of bargaining power when the parties entered into the agreement and (b) the agreement was an improvident bargain i.e., that the weaker party was unduly disadvantaged by terms they did not understand or appreciate.
The Court stated that the Uber v. Heller case did not retract or qualify the fundamental principle that absent legislative language to the contrary, courts must enforce arbitration agreements.
As a preliminary point, the Court rejected Davis’ argument that the arbitration agreements were invalid on the purported basis that they constituted an illegal contracting out of applicable employment law statutes. The Court found that none of the relevant employment statutes across Canada rule out arbitration for employment law claims, and in addition, the present case did not involve contracting out of any of the employment standards or remedies prescribed by any of the statutes.
The Court then found that the arbitration provisions were not unconscionable. They were “not exceptional or abnormal and they [did] not have the features of time, place, cost, and procedure that were unacceptable [as] in the [Uber v. Heller] case.” The Court emphasized that “there is nothing unconscionable about the mandatory nature of an arbitration provision or that an arbitration provision precludes access to the courts” as those aspects are inherent to all agreements to arbitrate.
In addition, the careful articulation of the desire to avoid a class action in an arbitration provision was not only not unconscionable, but was also redundant insofar as the arbitration provision would require all court proceedings, including class actions, to be stayed for arbitration subject to exceptions in the legislation.
For the sake of argument, the Court assumed that the class members had weaker bargaining power and focused on whether the class members were unduly disadvantaged by terms they did not understand or appreciate. In accordance with the second part of the test, the Court found that “the terms of the contract are understandable and unless arbitration or resort to the administrative proceedings for statutory remedies is per se disadvantageous, which is not the case, the arbitration agreements in the immediate case are not unconscionable.” The Court emphasized that arbitration is a fair and efficient dispute resolution mechanism for all disputes, including employment disputes. In addition, the Court found that there was nothing in the Uber v. Heller case which suggested that arbitration agreements in the employment sector are per se disadvantageous and therefore per se unconscionable.
The Court then considered Davis’ public policy argument, and found that is not against public policy to preclude access to class actions when arbitration is provided as an alternative dispute resolution mechanism. Interestingly, the Court noted that if there was a free-standing waiver or preclusion of class proceedings that was not attached to an arbitration provision, there would be a strong argument that the provision would be contrary to public policy as there is a long-standing principle that contracts that interfere with the administration of justice are illegal. However, this principle does not apply to arbitration agreements.
The Court found that the parties agreeing to arbitrate disputes whereby the arbitrator is precluded from dealing with individual disputes on a class basis is a “pure matter of contracting and does not interfere with access to the court, which has already been legally precluded by the submission to arbitration.” Assuming that the arbitration agreement was not unenforceable on grounds of unconscionability, the Court stated that “there is no general principle that would make a contract term in an arbitration agreement specifying the procedures available or not available to the arbitrator illegal on the grounds of public policy, which public policy rather favours the freedom of contract.”
The Court ultimately held that all requirements for staying a proceeding in favour of an arbitration agreement were met, and that the arbitration provision was neither unconscionable nor contrary to public policy. Therefore, the Court stayed the action on behalf of all the DPs and DAs subject to arbitration agreements.[2]
Analysis
Davis is a further reminder that Canadian courts continue to favour arbitration as a form of a dispute resolution and will seek to enforce arbitration agreements. Beyond the general principle of holding parties to their agreements, the judiciary has ample incentive to funnel parties away from litigation to arbitration as it frees up both time and resources, particular at a time when the already-over-worked court system in under intense strain. In that regard, the Superior Court continued the judicial trend of stressing that “absent legislative language to the contrary, courts must enforce arbitration agreements” [emphasis added].
In this respect, the Court provided clarity as to the threshold of unconscionability in two respects: (1) the employment relationship alone is not enough for an arbitration agreement to be unconscionable; and (2) the harshness of an arbitration provision is not per se disadvantageous. The Court’s first point suggests that a party’s category of relationship is not enough in and of itself to satisfy both aspects of the unconscionability test. While a party may be in an unequal bargaining position, the agreement itself must also be unduly disadvantageous to the weaker party. When considering whether the agreement was disadvantageous, the Court found that the harsh aspects of an arbitration agreement are not enough to meet the high threshold. If an arbitration agreement itself is inherently unfavourable for one party, there must be something more disadvantageous than the aspects inherent to the arbitration agreement to prove that the agreement was unconscionable.
This high threshold for unconscionability in an arbitration agreement will make it much harder for parties to prove that the agreement is invalid. In that regard, this conclusion is a sensible one, given that many significant categories of legal relationships fundamentally entail inherent power imbalances – including employment, insurance, and leasing. If such relationships were inherently incapable of arbitration on this basis, this would eliminate a significant portion of those disputes normally resolved via arbitration.
Perhaps the most interesting aspect of the Court’s decision, however, was its finding that parties can structure their arbitration agreements in a way that would avoid class proceedings both in litigation and arbitration. As the Court observed, a waiver of class proceedings alone would be illegal, but when tied with an arbitration agreement, this rendered it a pure matter of contracting insofar as all court proceedings had already been waived. However, this finding raises interesting questions, insofar as a prohibition against class arbitration could raise significant access to justice issues for those persons who, practically speaking, might be deterred from pursuing an individual claim notwithstanding their ability to do so.
In particular, and as the Court observed, there is a strong argument that a waiver or preclusion of class proceedings detached from an arbitration provision is contrary to public policy because contracts that interfere with the administration of justice are illegal. Put slightly differently, preclusion of class proceedings interferes with the administration of justice. However, this raises the question of why this proposition would not hold equally true in the context of arbitration, insofar as a waiver of class arbitration might interfere with the ability of claimants to pursue their claims – particularly where a claimant is legally unsophisticated, or their claim value is small enough that they might not consider their claim worthwhile. In other words, the same public policy rationale would arguably apply.
In that regard, Davis presents an interesting point of comparison to Uber v. Heller, and particularly with respect to Justice Brown’s finding in Uber that a clause that precludes access to arbitration is unenforceable.[3] Here, it was not the case that access to arbitration was precluded, but more so that it might be uneconomical and unappealing (thus allowing parties to essentially dissuade potential claimants without having to outright prevent them from claiming). This would arguably run contrary to the underlying principles of Ontario’s Class Proceedings Act, the well-known policy objectives of which are to promote access to justice, improve judicial economy, and modify behaviour so as to discourage wrongdoing.[4] Although that legislation applies only to litigation, it is at least arguable that those policy objectives ought to animate class proceedings in the broadest sense of the term (including arbitration).
All of that being said, it is worth considering how this issue fits within the context of other pieces of legislation. As readers will appreciate, the Arbitration Act, 1991 contemplates that the parties can agree to exclude the supervisory court’s ability to consolidate separate arbitrations; similarly, it does not specifically empower the tribunal to order consolidation. Accordingly, there is an argument that, at least generally speaking, the legislative framework for arbitration is consistent with the Court’s finding in Davis.
By contrast, however, readers will also be aware that in the construction context, the Construction Act specifically contemplates that lien matters – which can be resolved through arbitration – are a form of class proceedings. This point was specifically considered by the Superior Court in Carillion v Imara, in which decision Master Albert reiterated the observation that the Construction Lien Act (i.e. the predecessor to the Construction Act) “creates a class action type of proceeding”[5], and refused to stay litigation in favour of arbitration on that basis (as well as a number of other bases).
Bearing that in mind, it therefore raises the question of whether an attempt by an arbitration agreement to preclude the possibility of a class lien arbitration would be invalid (or else deemed to be amended[6]) based on an inconsistency with that statute. Ultimately, the somewhat unhelpful answer may be that the answer to this question will depend on the applicable statute(s).
[1] Notably, the Court did not consider the more recent test in Ontario for staying litigation in favour of arbitration, as set out in Husky Food Importers & Distributors Ltd v. JH Whittaker & Sons Limited, 2023 ONCA 260.
[2] Recently, the Ontario Court of Appeal ordered an extension of time for Davis to deliver his notice of appeal from the stay decision: Davis v. Amazon Canada Fulfillment Services, ULC, 2023 ONCA 634.
[3] This finding was specifically with reference to the general rule that a challenge to an arbitrator’s jurisdiction should first be resolved by the arbitrator.
[4] See, generally, Ontario Law Reform Commission, Report on Class Actions (Toronto: Ministry of the Attorney General, 1982) at 117–46.
[5] Carillion Construction Inc. v Imara (Wynford Drive) Limited, 2015 ONSC 3658 at paras 3, 17, and 54.
[6] Pursuant to s. 5 of the Construction Act.
In Backyard XP Inc v. Cesario-Valela (“Backyard”)[1], the Ontario Superior Court of Justice has provided guidance on parties seeking to issue third party claims in actions that are commenced under the Construction Act [2] (the “Act”). The Court outlined the strict requirements for issuing such a third party claim, and accordingly, has provided important guidance for parties contemplating such a step in respect of their construction project litigation. Below, we review the case and outline our key takeaways for claimants and their counsel.
The factual background to Backyard was relatively sparse. The plaintiff, Backyard XP Inc. (“Backyard”) commenced a lien action against Mirella Cesario-Valela and Vito Valela (the “Owners”). The Owners then brought a motion in the Superior Court to issue a third-party claim against a construction company by the name of Garrison Construction Inc. (“Garrison”), who they alleged was (1) an alter ego and/or agent of Backyard and (2) the de facto plaintiff.[3]
The Court began by noting that since this was a motion pursuant to Section 4 of O. Reg 302/18 under the Act (the “Regulation“), leave of the Court was required to issue a third party notice.[4]
The Court also observed that reviewing the case law on seeking leave to issue a third party claim was unnecessary, as the Regulation had established the following essential requirements:
The Court found that the notice requirement (the first requirement above) had been met by the Owners in this case[6], but ultimately dismissed the motion for failing to meet the second requirement of the Regulation. Specifically, the Court noted that the Owners had failed to tender evidence on the motion that the third-party claim was for contribution and indemnity, and in fact conceded that the proposed third party claim was not for contribution and indemnity.[7][8]
In that regard, previous case law is clear that third party claims under the Act must be for contribution and indemnity, and not merely utilized as a mechanism to seek damages from that third party.[9] There was one existing Superior Court decision that ran contrary to the balance of the relevant case law[10], but the Court declined to follow this alternative case law on a number of grounds – including, interestingly, that the other case law involved a motion for leave for a third party claim after that claim had already been issued. That case also involved the defendants denying the existence of a contract with the plaintiff (which was not the case here, given that the Owners had acknowledged the existence of a contract with Backyard).[11]
In any event, the Court also observed that the Regulation does not include any language that provides the Court with the discretion necessary to grant leave to issue a third party claim other than for contribution and indemnity, nor does it permit a counterclaim against a non-party.[12] In essence, the applicable rules are clear in respect of the Regulation, and the Court could not stray from them.
Based on the foregoing, the Court dismissed the motion and observed that the Owners were required to bring a separate action under the Rules of Civil Procedure (the “Rules”). [13] It would only be at this point that the parties could then consider whether such an action could be tried parallel to, or together with, Backyard’s claim against the Owners. [14]
Although a short decision, Backyard provides important takeaways for lien claimants and their counsel intending to bring third party claims in respect of matters to which the Act applies.
The first is that Section 4 of the Regulation operates similarly to Section 56 of the former Construction Lien Act[15], and in that regard acts as a complete code [16] with respect to the issuance of third party claims. This much was suggested by the Court’s acknowledgement that it lacked discretion to grant leave to issue a third party claim in respect of issues other than strictly related to contribution and indemnity.[17]
Accordingly, construction industry litigants would be well advised to consider the nature of the third party claim prior to bringing a similar motion, as the Court will perform a substantive analysis of the claim itself and will dismiss a motion if it does not accord with the requirement that it be for contribution and indemnity,[18] as well as other requirements of the Regulation.[19] A proper claim of contribution and indemnity will be able to demonstrate that the third party caused or contributed to the lien claim,[20] which may arise in contract or in tort.[21]
On the other hand, however, the Court’s effort to distinguish inconsistent case law from the balance of relevant decisions arguably suggests that it might be possible to bring a motion for a third party claim that does not claim for contribution and indemnity, if such a motion (1) is preceded by the issuance of the third party claim (or if a draft claim is included as part of the motion materials), and (2) the evidence on the motion denies the existence of a contract between the defendant and the plaintiffs. On balance, we are respectfully of the view that the Court reasoning in Backyard is more persuasive, but on the other hand, the contrary case law remains valid law until such time as an appellate court determines otherwise.
The second is that there are limitations on counterclaims under the Act. On this point, the Court made it clear that the Regulation limits the scope of counterclaims to the person who named the party as a defendant.[22] In that regard, the Act is somewhat narrower than the Rules, insofar as the latter is slightly more flexible to the extent that Rule 27.01(2) allows a defendant who counterclaims against a plaintiff to join (as a defendant to the counterclaim) any other person, whether a party to the main action or not, who is a “necessary or proper party” to the counterclaim. Parties would therefore be well-advised to bear this difference in mind when conducting proceedings under the Act.
Ultimately, the most practical recourse for defendants under the Act who seek to advance claims that are not for contribution and indemnity against third parties in actions, is to issue a separate action against the third party and bring a motion that the two actions be tried together.[23] While this may be financially and administratively cumbersome on the parties and the court, it will remain the proper avenue of seeking recovery in the absence of any modification(s) to the Act and/or the Regulation to permit alternative approaches (including, potentially, those available under the Rules).
[1] 2023 ONSC 6312. [Backyard]
[2] RSO 1990, c C 30
[3] Backyard, supra note 1 at para 1.
[4] Ibid at para 4.
[5] Ibid at para 5.
[6] Ibid at para 7
[7] Ibid at paras 14, 17, 18.
[8] The third requirement of the test was not considered in this case.
[9] Backyard, supra note 1 at para 8.
[10] Art Nouveau Inc. v. Razumenko, 2011 ONSC 420.
[11] Backyard, supra note 1 at paras 9-13.
[12] Ibid para 17.
[13] RRO 1990, Reg 194.
[14] Backyard, supra note 1 at para 19.
[15] RSO 1990, c C 30
[16] Hobbs Miller Maat Inc v Upi Inc, 2009 CanLII 18284 (ONSC) at para 32.
[17] Backyard, supra note 1 at para 17.
[18] Wilson Cartage v Carlisle, et al, 2011 ONSC 1154 at paras 25-28, 37 [Wilson]; Lomax Realty Dev Grp Inc. v New Foundations Dev. Co-op Corp., 2016 ONSC 6276 at paras 9-18 [Lomax].
[19] Dean Construction Co v MJ Dixon Construction Ltd, 2005 CanLII 2954 (ON SC); Wilson, supra note 17 at paras 29-36.
[20] Lomax, supra note 17 at para 13.
[21] Domus Development Corp v York Condominium Corp No 82, [2001] OJ No 1479, 103 ACWS 1089 at para 27.
[22] Backyard, supra note 1 at para 16.
[23] Ibid at para 19.
The Minister of Public Services and Procurement has announced (here) the coming into force of the Federal Prompt Payment for Construction Work Act (the “Act“) as of December 9, 2023.
This is an important conclusion to an effort commenced several years ago involving Singleton Reynolds in respect of its retainer by Public Services and Procurement Canada (“PSPC”). Specifically, Singleton Reynolds was retained to conduct an expert review of prompt payment and adjudication in respect of federal construction projects. This mandate, which was undertaken by Bruce Reynolds, Sharon Vogel, James Little, Jesse Gardner, and Evan Rankin of our Toronto office, involved conducting a total of 55 stakeholder engagement sessions, followed by the delivery of a final report and recommendations package to the federal government.
Notably, the legislation implements several of the most important recommendations included in Singleton Reynolds’ recommendations package with respect to prompt payment and faster dispute resolution, including the following:
The Act also provides the federal government with the ability to “designate” a province or territory if that province or territory has a “reasonably similar” prompt payment and adjudication regime. Such a designation makes federal construction projects within those regions automatically exempt from certain provisions of the Act, including the prompt payment provisions, and instead make those projects subject to the provincial regime.
Currently, only Ontario, Saskatchewan, and Alberta have fully-established prompt payment and adjudication regimes, and as such, have been designated under the Act. A number of provinces – including Nova Scotia, Manitoba, and New Brunswick – all have prompt payment and adjudication legislation that has received assent but has yet to come into force, suggesting that these provinces might similarly be designated in future.
Finally, we note that all existing federal construction contracts must comply with the Act within one year of December 9, 2023. Accordingly, parties on current or future federal construction projects would be well advised to begin taking steps (if they have not already) towards ensuring that their payment procedures are consistent with the timelines contemplated by the Act.
Overall, the coming into force of the Act represents the culmination of a significant effort by a number of stakeholders over a period of years, including a strong and committed team of federal officials. We are encouraged that those efforts have come to fruition and look forward to seeing prompt payment and adjudication develop on federal construction projects in the coming years.
Ontario Dispute Adjudication for Construction Contracts (“ODACC“) recently issued its fourth annual report on construction adjudication in Ontario. Below, we consider its key takeaways.
Background
ODACC, created on October 1, 2019 as part of the adjudication and prompt payment regime of the Construction Act, R.S.O. 1990 c. 30 (the “Act“) and O. Reg. 306/18, is the entity responsible for administering construction-related adjudications and for training and certifying adjudicators who render decisions in these construction-related adjudications.
As many readers will already appreciate, adjudication is intended to be a timely and cost-effective dispute resolution procedure for construction-related disputes, which allows parties to refer its dispute to adjudication for determination by an ODACC-certified adjudicator. The determination (rendered within 30 days, unless otherwise extended) is interim binding on the parties, unless a final decision is made in a subsequent court proceeding or through arbitration. The parties, in conjunction with the adjudicator, can tailor the adjudication procedure in many respects to better fit the nature of the dispute.
2023 marked ODACC’s fourth year of operation, and as noted below, there appears to be an increasing uptick in the number of adjudications for construction matters.
The Report
ODACC’s fourth annual report includes statistics for the 2023 fiscal year, which ran from August 1, 2022 to July 31, 2023.
In the 2023 fiscal year, 269 adjudications were commenced, 161 determinations were delivered (including in respect of 21 adjudications which were commenced during the 2022 fiscal year), and 80 adjudications were terminated. The reasons for termination included: settlement of the dispute, resolution of the dispute through other means, or the lack of jurisdiction to adjudicate the matter.
Interestingly, adjudication was used across a variety of sectors within the construction industry, including residential (34%), commercial (30%), industrial (4%), public buildings (8%) and the transportation and infrastructure sectors (24%).
Based on the total notices of adjudication that were delivered, there was significant growth in the use of adjudication across the entire industry (with especially large increases in the commercial, public buildings, and transportation and infrastructure sectors):
Increase from 2022 to 2023
The number of determinations has also increased in 2023, from 67 in 2022, to 161 in 2023 – an overall 140% increase. In particular, there were 100%+ increases across all sectors except for the residential sector, with a roughly three-fold increase in the commercial and public buildings sectors leading the way:
Perhaps the most interesting question to readers, however, is how many adjudications have actually resulted in a determination being rendered. On that point, ODACC has noted across all sectors, approximately 60% of the notices of adjudication delivered during the 2023 fiscal year resulted in a determination. This ratio is relatively consistent across all sectors, ranging between 57% to 64%:
With respect to the subject matter of adjudications, the largest categories were related to either the valuation of services or materials under the contract (42% of the total adjudications completed), or payment under a contract (39%). Matters related to the payment of a holdback under s. 26.1 or s. 26.2 of the Act, and the non-payment of holdback under s. 27.1 of the Act, experienced a modest uptake in 2023 as compared to 2022, where neither of these matters were addressed in a determination:
In the 2023 fiscal year, the total amount claimed in adjudications was approximately $69 million, with an average amount of $256,000 per determination across all sectors. Given that only 60% of the notices of adjudication resulted in determinations, the total amount required to be paid under determinations was approximately $24 million. In assessing the average amount to be paid under determinations by each sector, the industrial sector had an average of $432,000, then the residential sector at $213,000, and followed by the commercial sector at $106,000.
Takeaways
Overall, ODACC’s fourth annual report reflects an encouraging uptake in adjudication as a method of dispute resolution available to the construction industry. Across the various construction industry sectors identified in the Report, there was steady growth in the use of adjudication, with significant gains in certain of those sectors. In that regard, the report presents a welcome indication that adjudication in Ontario is continuing to see growth in much the same manner as was the case in the United Kingdom – that is, slowly at first, with growing adoption as industry participants come to recognize its value. We wait with interest to see if next year’s report confirms this trend.
In Gay Company Limited v. 962332 Ontario Inc, 2023 ONSC 6023, the Ontario Superior Court of Justice provided guidance as to what constitutes “registration” under the Construction Act (the “Act”).[1] In particular, the case centered on a dispute regarding the registration of a claim for lien under the Act and an Application to Delete a Construction Lien through the Land Registry Office, with the central question being whether “registration” of these documents had occurred under the Act.
As discussed below, Gay emphasizes the tension often present in the interplay (and sometimes, the disconnect) between the Act, on the one hand, and the procedural steps carried out through the Land Registry Office, on the other. Overlooking the intricacies of the Act, even amidst the conveniences of the Land Registry Office’s registration processes, can have substantial ramifications. Gay also provides a timely reminder as to the importance of precise compliance with the Act and the critical role of certification in the registration process. In that regard, Gay is equally important in highlighting the importance of responsibility of lawyers for their staff as it relates to steps taken under the Act.
Below, we review the guidance provided by the Court, which should be of interest to those practitioners who regularly engage with the Land Registry Office on behalf of clients.
Case Background
On June 30, 2023, the defendant hired Edward Spong, a lawyer, to register a claim for lien against title of a property. However, Spong was in the process of winding up his practice and contacted John Montgomery, another lawyer, for assistance. When Montgomery was unavailable, Spong then entrusted his law clerk with the registration of the claim for lien, despite the fact that the clerk’s expertise was limited to real estate matters.[2] Unlike Spong however, the clerk was a registered Teraview user (the relevant software regarding property) and therefore could actually take the practical steps necessary to register a lien on title.[3]
On July 6, 2023, the clerk met with the defendant’s representative and ultimately registered the claim for lien (the “First Claim for Lien“). However, a typographical error was identified in the name of the lien claimant. In an apparent effort to address this error, the clerk prepared an Application to Delete Construction Lien as a draft under Teraview under the incorrect assumption that the document was necessary to rectify the typographical error in the lien claim, (which assumption was based on the fact that such a process is required in real estate transactions).[4]
The next day, the clerk consulted Spong regarding her intention to register a second Claim for Lien in respect of the same matter (the “Second Claim for Lien“) as well as an Application to Delete Construction Lien in order to clear the title of the erroneous First Claim for Lien. However, Spong disagreed with registering the Application to Delete, and advised that another lawyer taking over the matter should handle it. At the time of this discussion, Spong was unaware that the clerk had already prepared the Application to Delete Construction Lien.[5] Spong agreed with the intent to register the Second Claim for Lien.
Pursuant to Spong’s instructions, the clerk did not prepare an Acknowledgment and Direction for the Application to Delete Construction Lien, and did not present such a document for the defendant’s representative’s signature. However, on the same day (July 7, 2023), the clerk did register the Second Claim for Lien with all of the same details and this time with the corrected lien claimant’s name. Notwithstanding instructions to the contrary, the clerk inadvertently also registered the Application to Delete Construction Lien, but as a separate instrument.[6]
On July 11, 2023, the Land Registry Office pointed out an error in the Second Claim for Lien. The clerk entered the Lien Claimant’s name as “962332 Ontario Inc., trading as Liberty Metal Fabricators”, to which the Land Registry Office requested that she remove “trading as” from the lien claimant’s name in order to effect registration under the Land Titles Act. The clerk then informed the Land Registry Office about the typographical error in the First Claim for Lien, and the erroneous registration of the Application to Delete the First Claim for Lien. The clerk then requested the withdrawal of both documents on July 13, 2023.[7]
Through the process, it does not appear that either the clerk or Spong considered the implications under the Act, but rather appeared to be focused squarely on the process requirements under the Land Titles Act.
On July 13, 2023, Spong had a call with the plaintiff’s counsel, who argued that the First Claim for Lien had been discharged and thus the defendant’s lien rights were forfeited. This appears to be the first time that Spong became aware that the Application to Delete the First Claim for Lien was registered on title notwithstanding instructions not to do so. Spong then notified the clerk about this issue, and on July 17, 2023, the clerk corrected the Second Claim for Lien as instructed by the Land Registry Office.
On August 1, 2023, the Land Registry Office confirmed that the clerk emailed the Land Registry Office to confirm the withdrawal of the First Claim for Lien and the Application to Delete the First Claim for Lien. On that same day, the Land Registry Office confirmed the withdrawals, and importantly, confirmed the Second Claim for Lien was certified by the Land Registry Office.[8]
The plaintiff brought a motion to have the defendant’s lien discharged on the basis of the registration of the Application to Delete the First Claim for Lien from July 7, 2023 which had been inadvertently submitted to Teraview by Spong’s clerk. In this regard, the plaintiff argued that the integrity of the land title system would be at risk if users cannot rely on registration of such documents.
Meanwhile, the defendant argued that the Application to Delete Construction Lien had not been validly “registered”, and thus, the lien was not actually discharged (and in fact remained valid).[9]
The Court considered several key issues relevant to the construction industry, (1) the definition of “registration” under the Act and the Land Titles Act, (2) whether the defendants correctly registered the Application to Delete Lien Claim in accordance with the definition of registration, and (3) whether the defendant’s lien was discharged pursuant to the Act.
Applicable Legislation
As noted above, the Act makes a number of references to “registration”, but does not actually define it. Since the Act does not define “registration” or articulate a mechanism for registration, the Court instead turned to the Land Titles Act (LTA) and the Land Registry Reform Act (LRRA) to ground its analysis. These statutes specify the criteria, procedures and forms involved in registration on title within Ontario.[10]
Section 78 of the LTA provides detailed information on the process of registering an instrument. Subsection 78(3) reads:
(3) Registration of an instrument is complete when the instrument and its entry in the proper register are certified in the prescribed manner by the land registrar, deputy or assistant deputy land registrar, and the time of receipt of the instrument shall be deemed to be the time of its registration.[11] [emphasis added]
Thus, under s. 78(3) of the LTA, an instrument’s registration is only complete when it has been received and certified. Further, s. 78(2) of the LTA allows for an instrument to be withdrawn before certification is granted.[12]
In addition, s. 23 of the LRRA explicitly prohibits direct electronic registration of documents in the electronic land registration database until the Land Registrar registers the document.[13] In other words, the simple fact that an electronic document is delivered is not sufficient in and of itself to qualify as registration; rather, the Land Registrar must be the party that fulfills this step.
The Court’s Analysis
In this case, the Court examined the relevant legislation with a view to the principles of statutory interpretation, particularly focusing on the meaning of “registration” within the context of the LTA.
The Court reiterated that modern statutory interpretation involves examining the words of an Act and are to be read within their complete context and in their grammatical and ordinary sense harmoniously with the legislative scheme, purpose, and parliamentary intent of the Act.[14]
On this point, the Court relied on the presumption of consistent expression[15] to find that, since the Act did not provide a definition of “registration”, the definition stipulated in the LTA would apply in order to avoid inconsistencies and absurd outcomes. Thus, consistent with the LTA, registration of an instrument under the Act is only complete when that instrument has been certified by the Land Registrar, such that, the Land Registrar has confirmed and accepted the accuracy and compliance of a document or registration process, and importantly, the registration may be withdrawn prior to certification.[16]
In this case, since registration under the LTA required the receipt and certification of the instrument, withdrawal before certification meant that registration was never completed. On this basis, the Court found that the First Claim for Lien and the Application to Delete the First Claim for Lien were withdrawn before certification, and therefore were never registered.[17]
With respect to concerns regarding the integrity of the land title system and potential complications for owners and contractors due to withdrawal of claims for lien, the Court maintained that the registration process was specifically included to ensure the system’s integrity, and emphasized that the Land Registrar plays a gatekeeping role which prevents improper use of the land registry system.[18]
Ultimately, the Court dismissed the motion to discharge the lien, finding that there was no registration of the First Claim for Lien or the Application to Delete of the First Claim for Lien, such that the lien itself could not be discharged as a result.[19] The Court therefore noted that the proper registration of the claim for lien was the registration (which included the step of certification) of the Second Claim for Lien.[20]
Commentary
The case at hand serves as a reminder of several critical lessons with broader applications.
First, it highlights the importance of accuracy in the context of lien registration. It goes without saying that accuracy is of paramount importance in the context of legal documents, but this concern is even more heightened in the context of registering a lien. However, an important consideration which Gay did not consider is section 6 of the Act. This provision allows for the correction of minor defects in a lien claim:
6 (1) No certificate, declaration or claim for lien is invalidated by reason only of a failure to comply strictly with subsection 32 (2), 33 (1) or 34 (5) unless[21], in the opinion of the court, a person has been prejudiced as a result, and then only to the extent of the prejudice suffered; 6 (2) Minor errors or irregularities to which subsection (1) applies include, (a) a minor error or irregularity in (i) the name of an owner, a person for whom services or materials were supplied or a payment certifier, (ii) the legal description of a premises, or (iii) the address for service; and (b) including an owner’s name in the wrong portion of a claim for lien
6 (1) No certificate, declaration or claim for lien is invalidated by reason only of a failure to comply strictly with subsection 32 (2), 33 (1) or 34 (5) unless[21], in the opinion of the court, a person has been prejudiced as a result, and then only to the extent of the prejudice suffered;
6 (2) Minor errors or irregularities to which subsection (1) applies include,
(a) a minor error or irregularity in
(i) the name of an owner, a person for whom services or materials were supplied or a payment certifier,
(ii) the legal description of a premises, or
(iii) the address for service; and
(b) including an owner’s name in the wrong portion of a claim for lien
It is unclear why the Court did not discuss this section, as it seemingly encompasses both the first and second errors in registering a lien, both of which arguably constitute a “minor error” under s. 6(2) of the Act.
Second, in light of the legislative gap in defining “registration”, this decision provides parties with a clearer understanding of what constitutes registration of a lien under the Act, and a succinct roadmap for how to effect registration, as well as the critical role of certification in the registration process. The Court’s application of the presumption of consistent expression ensures clarity and consistency, enabling parties to make informed assessments in pursuit of their objectives. As well, parties can better assure themselves of compliance with the correct processes when registering or withdrawing claims for lien under the Act.
Lastly, this case highlights the responsibility of lawyers with respect to the actions of their non-lawyer staff members under the Law Society of Ontario’s Rules of Professional Conduct (“LSO Rules”).[22] A lawyer may delegate routine administrative tasks and the preparation of certain legal documents to non-lawyer staff, such as law clerks or paralegals, so long as these tasks fall within their skill set and expertise.[23] However, the lawyer retains ultimate responsibility, and is required to review the non-lawyer’s work at frequent intervals to ensure the work is completed properly.[24]
In this case, Spong’s responsibilities included assessing the clerk’s competency with respect to drafting a lien. Further, Spong was required to consistently check in with the clerk to ensure the lien registration was done correctly. Considering the clerk’s lack of prior experience in this specific task, and the fact that her experience was limited to real estate, it is arguable in retrospect that this matter ought to have raised some doubt regarding the appropriateness of delegating such a task to the clerk. Additionally, the registration of the lien occurred without Spong’s prior verification of its accuracy, which was inconsistent with a lawyer’s duties under the LSO Rules.
Thus, Gay ultimately emphasizes the crucial balance between delegation and oversight in legal practice, underscoring the lawyer’s paramount responsibility for the actions of their staff.
[1] Gay Company Limited v. 962332 Ontario Inc 2023 ONSC 6023 [Gay]. This case occurred under the Construction Act, rather than its predecessor legislation, the Construction Lien Act.
[2] Ibid at paras 4-7.
[3] By way of further context, Teraview is a portal used to access data in the Government of Ontario’s land records database. It is used by parties to perform searches, create and submit title documents for registration, view and print several instruments, plans, parcel registers and also search for writs of executions, without the need to visit a ServiceOntario office.
< https://www.teraview.ca/en/about-teraview/>
[4] Ibid at paras 7-10.
[5] Ibid at paras 11-13.
[6] Ibid at paras 14-17.
[7] Ibid at paras 18-20.
[8] Ibid at paras 21-24.
[9] Ibid at paras 1-3.
[10] Construction Act, RSO 1990, C 30; Land Titles Act, RSO 1990, c L.5; Land Registry Reform Act, RSO 1990, c. L.4.
[11] Land Titles Act, RSO 1990, c L.5, s 78(3).
[12] Land Titles Act, RSO 1990, c L.5, ss 78(2) and 78(3).
[13] Land Registry Reform Act, RSO 1990, c. L.4, s 23.
[14] Gay, supra note 1 at paras 37 and 38.
[15] The presumption of consistent expression stipulates that legislative language is drafted in such a manner that identical words are intended to hold the same meaning both within a statute and across different statutes (Vavilov, para 44).
[16] Ibid at paras 46-5; the term “certification” is not defined under either piece of legislation; however, in practice, it refers to the process of the Registrar verifying that the lien is compliant with statutory and regulatory requirements.
[17] Ibid at paras 59-60.
[18] Ibid at para 61.
[19] Ibid at para 59.
[20] Ibid at paras 57-60.
[21] Section 32(3) discusses liability for refusal to certify, s. 33(1) discusses certification of a subcontract, and s. 34(5) deals with the content of claim for every lien.
[22] Rules of Professional Conduct [LSO Rules].
[23] LSO Rules, s 6.1, commentary [1].
[24] LSO Rules, s 6.1, commentary [1].
A recent decision from Belgium’s Cour de Cassation raises an interesting question about the extent to which arbitrators are permitted to delegate tasks to their secretaries – namely, at what point has a tribunal delegated too much responsibility? While this issue – aptly named as the “fourth arbitrator” problem – has received a great deal of scrutiny in international arbitration circles over recent years, it has received little discussion in Canada despite the increased use of tribunal secretaries.
In the Belgian case, stylized for our purposes as Emek Insaat Sti Ltd v European Union (“Emek”),[1] the Court found that an ICC tribunal could allow the Administrative Secretary to draft the award, so long as the tribunal reviews the file and reviews, corrects and validates the award.[2] The Court’s decision echoes the Court of Appeal of the Hague’s decision in 2020 to reinstate three awards against the Russian Federation in international investor-state arbitration proceedings started by shareholders in the now defunct Yukos Oil Company (“Yukos”)[3], and provides food for thought for Canadian practitioners as to the proper boundaries of a tribunal secretary’s authority.
The Decision
In Emek, the Court upheld a lower court’s interpretation of the “Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration”, dated January 1, 2019 (the “ICC Note”),[4] which bound the tribunal and which stated at paragraphs 184 and 187 as follows:
The tasks entrusted to an Administrative Secretary shall in no circumstances release the arbitral tribunal from its duty to personally review the file. Under no circumstances may the arbitral tribunal delegate its decision-making functions to an Administrative Secretary. Nor shall the arbitral tribunal rely on an Administrative Secretary to perform on its behalf any of the essential duties of an arbitrator.
[…]
A request by an arbitral tribunal to an Administrative Secretary to prepare written notes or memoranda shall in no circumstances release the arbitral tribunal from its duty personally to review the file and/or to draft any decision of the arbitral tribunal. [emphasis added]
The lower court concluded that paragraph 184 required the tribunal to personally review the file, and that therefore the “and/or” in paragraph 187 must permit the Administrative Secretary to draft any decision (i.e., award) of the tribunal, so long as the tribunal corrects and validates the decision. If paragraph 187 did not permit the Administrative Secretary to draft a decision, the lower court reasoned, then the ICC Note would not have used the phrase “and/or”.[5]
The Cour de Cassation also held effectively that because the Administrative Secretary is explicitly permitted under paragraph 187 to prepare notes and memoranda, which could form the basis of the award or even form part of the award, the secretary’s drafting of the award itself would not amount to an improper delegation, by the tribunal, of its jurisdiction.[6]
To Canadian readers, the lower court’s interpretation of paragraph 187 of the ICC Note, adopted by the Cour de Cassation, seems somewhat artificial in its construction, and is arguably inconsistent with other provisions of the ICC Note. If the “and/or” in paragraph 187 were meant to allow the tribunal either to review the file or to draft the award, then that would conflict with paragraph 184, which requires the tribunal to review the file.
Since, in light of paragraph 184, paragraph 187 cannot “release the arbitral tribunal from its duty personally to review the file”, the “and/or” in paragraph 187 does not appear in fact to be disjunctive in nature. It is arguable that paragraph 187 should not be read as releasing the tribunal from its duty personally to “draft any decision” on the basis simply that the tribunal reviewed the file.
As well, if the word “and” or the word “or” had been used alone, paragraph 187 would likely be interpreted to mean that the tribunal is required to both review the file and draft the award. While “and/or” typically means “both or either,” the slash between “and” and “or” in this case may have indicated that the author(s) of the ICC Note did not feel compelled to commit to either word, given that each word, used alone, would have imported the same meaning. It is not unheard of for synonyms to be separated by a slash – indeed, legal doublets, such as “null and void,” “over and above,” “covenant and agree,” “from now and henceforth” are pairs of synonyms that are used today in legal writing essentially for the sake of emphasis rather than to express different concepts.
Further it should be noted that paragraph 185 of the ICC Note enumerates the tasks that an Administrative Secretary can perform, none of which suggest the authority to draft an award (except for the undisputed factual portions):
Notwithstanding the above, an Administrative Secretary may perform organisational and administrative tasks such as:
It could be argued that paragraph 185 of the ICC Note would permit the Administrative Secretary to attend a hearing in an arbitrator’s stead, because it states that the Administrative Secretary’s responsibilities can include “attending hearings, meetings and deliberations; taking notes or minutes or keeping time”. Of the same token the ICC Note does not state explicitly that arbitrators must attend hearings. Accordingly, if the Cour de Cassation’s logic were extended, it would be arguable that that an arbitrator could meet the requirements of the ICC Note simply by reviewing the notes or minutes kept by the Administrative Secretary. This would seem to be an insupportable outcome, though, insofar as the fundamental principle of a the right to a fair hearing would logically include the right to be heard by the person(s) adjudicating the matter.
In light of the above, it may therefore be that the Cour de Cassation’s interpretation of “and/or” in the ICC Notes will have limited persuasive value outside of Belgium.
Even so, it is worth noting that a revised “Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration” came into effect on January 1, 2021 (the “Revised ICC Note”), and contains the following language to replace paragraph 187 of the 2019 version:
Under no circumstances may the arbitral tribunal delegate its decision-making functions to an administrative secretary or rely on an administrative secretary to perform on its behalf any of the essential duties of an arbitrator. Likewise, the tasks entrusted to an administrative secretary, such as the preparation of written notes or memoranda, will not release the arbitral tribunal from its duty to personally review the file and/or draft itself any arbitral tribunal’s decision.
The content of paragraph 184 has been removed in the Revised ICC Note. While the “and/or” language remains, the provision that the Belgian lower court relied on in its decision is no longer part of the Revised ICC Note.
While, in our view, the Cour de Cassation’s interpretation of “and/or” would arguably not be adopted by a Canadian court, and despite the fact that Belgian law is of limited persuasive value in Canada, Emek nevertheless highlights a key issue as to the proper role of tribunal secretaries and the perils of over-delegation. This is particularly true where there is no case law in Canada that provides guidance as to the boundaries of delegation, where the ICC Note is only applicable to ICC proceedings, and where the role of tribunal secretaries has been a live issue in the arbitration community for several years, generating commentary from both practitioners and institutions.
As a practical matter, readers will appreciate that tribunals often delegate tasks to the secretary as a means of reducing costs to the parties, making proceedings more efficient, and otherwise freeing up the tribunal’s time for its adjudicative responsibilities. Indeed, this aligns with the proposition (expressed in many institutional rules) that an arbitration should be economical and proportion to the dispute at hand. In that regard, paragraph 185 of the ICC Note provides a helpful enumeration of various activities that fall within the bounds of permissible delegation, all of which could broadly be described as administrative, organizational, or clerical in nature rather than adjudicative.
However, as noted in the Revised ICC Note, tribunals should not delegate their decision-making functions or allow staff to perform “essential duties” of an arbitrator. In that regard, it is not always clear where to draw the line, particularly where there has also been no judicial consideration in Canada as to what constitutes an “essential duty” of an arbitrator. Arguably, a secretary drafting an award might not constitute an abdication of responsibility by the tribunal, if the arbitrator were to then scrutinize the draft award and independently reach their own conclusions as to the disputed issues. In that regard, the secretary’s draft award would simply be “for consideration” by the tribunal. On the other hand, however, it could credibly be argued that the delivery of a draft award naturally frames the manner in which the tribunal will assess the disputed issues, and might therefore predispose them to some form of unconscious bias. Ultimately, the key consideration is likely that the tribunal has preserved its exercise of independent judgment.[7]
As a result, it unsurprising that many institutions (such as the LCIA, SIAC, HKIAC, ICCA, and the IBA under its Guidelines on Conflict Interest) have either incorporated sections within their arbitral rules concerning the scope of a secretary’s duties, or else have published freestanding commentary or guidelines in respect of the issue. Given that practitioners’ perception of the practice is critical to bolstering its legitimacy – i.e., the adage that justice must be seen to be done – such consideration by leading institutions is welcome. Generally, those institutions have taken a more conservative approach, explicitly prohibiting the delegation of decision-making and otherwise mandating strict scrutiny by the tribunal of the secretary’s performance, as well as mandating that the tribunal’s duties of independence and impartiality apply with equal force to the secretary.[8]
Practically speaking, however, the act of drafting is rarely a solitary task even in the litigation context. Indeed, in North America, it is common in many fields (including legal practice) for subordinates to draft documents under the direction, supervision and/or guidance of the individual(s) engaged to do so. What is ultimately important is that the final author assumes responsibility for its content, with the implicit understanding that they have scrutinized and approved of the document’s specific contents, even if they themselves did not draft every word. As such, the line between appropriate and inappropriate delegation might rest at least partly in the eye of the beholder.
Finally, the Cour de Cassation’s decision also echoes the Court of Appeal of the Hague’s decision in the Yukos cases. In that decision, the Court of Appeal rejected the Russian Federation’s argument that the tribunal’s assistant was effectively an unacknowledged “fourth arbitrator”. The Court of Appeal found no evidence that he had participated in decision-making, even if he may have played a significant role in drafting the awards. The Court of Appeal rejected the idea that only the drafting of memoranda and factual portions of an award would be permissible, while the drafting of the “decisive” portions would not be under any circumstances.
While these two decisions are, as noted, unlikely to be of persuasive authority under Canadian law due to a lack of historical reliance by Canadian courts on Belgian decisions (to say nothing of the differing legal systems), Emek nevertheless raises the interesting question of how a Canadian court might resolve this issue should it present itself in future.
On the one hand, Emek is consistent with Yukos and the practical realities of legal practice; on the other hand, however, the balance of institutional and critical commentary arguably suggests a more conservative approach. Between these two positions, the England & Wales High Court’s decision in P v Q and Ors – which would be of greater persuasive authority to a Canadian court, given its provenance – strikes a middle ground, suggesting that the ultimate consideration remains whether the tribunal has or has not abrogated or impaired its non-delegable and personal decision-making function (in other words, its independent judgment).[9]
Ultimately, the answer will depend on the circumstances of each case, including the applicable institutional rules and guidelines agree to by the parties. While it is difficult to reach a definitive conclusion as to the appropriate boundaries of delegation in the absence of Canadian case law, the safest practice for arbitrators remains for them to delegate judiciously and to carefully scrutinize those tasks that have been delegated, applying their own personal judgement throughout.
[1] Court file number C.21.0548.F (European Case-Law Identifier: ECLI:BE:CASS:2023:ARR.20230424.3F.1).
[2] C.21.0548.F/5 (i.e., page 5 of the decision).
[3] European Case-Law Identifier: ECLI:NL:GHDHA:2020:234.
[4] The ICC Note can be accessed at https://iccwbo.be/icc-issues-updated-note-providing-guidance-to-parties/.
[5] C.21.0548.F/5 (i.e., page 5 of the decision).
[6] C.21.0548.F/5 (i.e., page 5 of the decision).
[7] In that regard, see the England & Wales High Court’s decision in P v. Q and Ors [2017] EWHC 194 (Comm) at para 65.
[8] On the other hand, the ICCA’s Young ICCA Guide on Arbitral Secretaries at Article 3 suggests that “the role of an administrative secretary ‘may legitimately go beyond the purely administrative’” with appropriate direction and supervision by the tribunal. Ultimately, that Article provides rather generally that in such circumstances, a secretary could be involved in drafting “appropriate” parts of the award.
[9] P v Q and Ors [2017] EWHC 194 (Comm) at paras 65-66.
In Praxy Cladding Corp. v. Stone Lamina Inc., 2023 ONSC 5288, the Ontario Superior Court reviewed the process for amending pleadings in proceedings under the Construction Act, and in doing so, provided important clarity as to what constitutes an admission, as well as the distinction between (and implications of) an admission from a pleading versus an admission arising out of an examination for discovery.
Below, we consider the key takeaways from this decision with respect to pleadings and conducting examinations for discovery.
Praxy Cladding Corp. (“Praxy“), contracted with Stone Lamina Inc. and GCAT Group Inc. (collectively, “Stone Lamina“) for Stone Lamina to supply and install– among other things panels, aluminum rails and clips for the project that was the subject matter of this case.
Praxy commenced an action against Stone Lamina under the Construction Act. Praxy’s Statement of Claim pleaded, in relevant part, that the parties “executed a Purchase Order”, referring to the fact that the parties had executed a purchase order for the supply and installation of the materials mentioned above.
After the close of pleadings, the parties conducted examinations for discovery (pursuant to the order for Trial Directions, as required under the process set out in the Construction Act). During the examination of the representative for Praxy, counsel for Stone Lamina showed the purchase order and asked expressly if Praxy agreed that the purchase order formed the parties’ contract. The witness agreed, although the question was then the subject of on-the-record disagreement between counsel as to whether it was proper for a legal question to be put to the deponent.
After examinations for discovery concluded, Praxy sought to amend its Statement of Claim by adding two paragraphs describing Praxy’s quote for its scope of work, and a third paragraph stating that the quote was expressly or implied incorporated into the purchase order and that the quote formed a contract document.
The original paragraph in the Praxy Statement of Claim read as follows:
“On or about February 1, 2019, Praxy and Stone Lamina executed a Purchase Order for the installation of Stone Lamina panels, aluminum rails and clips, Rockwool insulation and Blueskin membrane and the supply and installation of galvanized angles and brackets (the “PO”) in respect of the Project.”[1]
Stone Lamina consented to certain other amendments proposed by Praxy, but resisted the amendment to the foregoing paragraph on the basis that the existing Statement of Claim admitted that only the purchase order comprised the contract. Stone Lamina also took the position that a binding admission to that same effect was made during examinations for discovery.
Praxy brought a motion for leave of the Court to include the disputed amendments, which was granted.
The Court’s Decision
Before the Court, Praxy took the position that since the Construction Act is silent on the process for amending a pleading, leave to amend should be granted under Rule 26.01 . Conversely, Stone Lamina took the position that leave is required under Rule 51.05, since the proposed amendments would constitute a withdrawal of an admission.
The Court found that Praxy did not make a binding admission in its pleadings, nor during its examination for discovery, and that even if Praxy had made an admission in the Statement of Claim (which it did not), it would still met the test for withdrawal of an admission.
The Court began its analysis by noting as follows:
With these points in mind, the Court turned to its consideration of whether Praxy should be permitted to withdraw the purported admission.
First, the Court reiterated that an admission in a pleading must be an unambiguous and deliberate, generally being admissions of fact that assist the opposing side in proving its claim or defence. In this case, the purported admission was ambiguous at best in that it was unclear whether the Statement of Claim stated unequivocally and deliberately that the purchase order was the only contract document.
Further, even if the statement in question was an admission in the Statement of Claim, the Court referred to the test for withdrawal of an admission[4] as set out in the case law (which is distinct from Rule 51.05):
As a preliminary point, the Court considered whether the impugned phrase from the original Statement of Claim – that the parties “executed a Purchase Order” – constituted an allegation of fact (which could be withdrawn), or whether it was a legal conclusion (which could not be withdrawn, insofar as it would have amounted to an admission). In that regard, the Court noted that under subrule 25.6(2) of the Rules, parties can raise a point of law in a pleading, provided that the conclusions of law may be pleaded, only if the material facts supporting them are pleaded. In the Court’s view, the impugned phrase was not a legal conclusion, but rather was a statement of material fact (1) that the purchase order was signed, and (2) the scope of work was contemplated by it. As such, it was a factual statement, and not a legal conclusion.
Therefore, it was appropriate to consider whether the impugned phrase could be withdrawn according to the common law test for withdrawal of an admission. The Court found as follows:
The Court also rejected a number of additional arguments raised by Stone Lamina including arguments to the effect that (1) the motion was an “ambush after the fact”, (2) there would further prejudice from “unjust delays” in the matter proceeding to trial, such delays arising from the need to revisit the pleadings stage, and (3) permitting the withdrawal would allow Praxy to change its litigation strategy.
Key Takeaways
Overall, and although Praxy is a relatively short decision, it nevertheless provides useful reminders with respect to pleadings and conducting examinations for discovery.
First, Praxy offers an important reminder to parties and their counsel to plead precisely with respect to the nature of a purchase order or a quote when drafting their pleadings, and to ensure that all contract documents are properly pleaded. This is of course particularly relevant in the construction context, where many (if not most) contractual relationships with subtrades and suppliers involve the delivery of a quote and the subsequent execution of a purchase order. Careful pleading will avoid the risk – and just as importantly, the cost – of needing to bring a motion to amend a pleading down the road because key facts were initially omitted.
Second, Praxy also provides a number of helpful clarifications and reminders in respect of issues that can be overlooked by practitioners and which, although they may be small or subtle, can nevertheless be impactful. Most obviously, this includes the proposition that different rules apply to the withdrawal of admissions made during an examination for discovery than those rules that apply to admissions in respect of pleadings, requests to admit, and deemed admissions.
Finally, Praxy suggests that the difference between an allegation of fact in a pleading versus a legal conclusion is a fine line, and that a mere handful of words can make the difference between a successful motion to amend and a failure. In this particular case, Praxy only pleaded that the parties had executed a purchase order – such statement was insufficient to qualify as a legal conclusion by Praxy that the purchase order constituted the parties’ agreement. If, however, Praxy had pleaded to the effect that the parties executed a purchase order in order to enter into an agreement as to the supply and installation of materials, then one wonders whether such language may have been sufficient to tip the balance from allegation of fact into legal conclusion.
As always, careful pleading is a necessity and alleviates the need to “take back” what is alleged.
[1] Praxy Cladding Corp. v. Stone Lamina Inc., 2023 ONSC 5288 at para 7.
[2] Ontario v. Rothmans Inc., 2011 ONSC 2504 at para. 120.
[3] Praxy Cladding Corp. v. Stone Lamina Inc., 2023 ONSC 5288 at para. 17.
[4] PBW High Voltage Ltd. v. Metrolinx, 2021 ONSC 6715 at para. 27.
Lexology announced the winners of their annual Client Choice Awards, and we are pleased to announce that named partner, Sharon Vogel has been exclusively named the top Construction Projects Lawyer in Ontario. James Little has been exclusively named the top Construction Lawyer in Ontario. Special thanks to our clients and peers for their feedback: www.clientchoice.com
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Singleton Urquhart Reynolds Vogel LLP is pleased to announce that Partner James Little has been recognized by the Canadian Legal Lexpert Directory as a Rising Star in the 2023 edition. This award is given to an elite group of leading lawyers under 40 who have made outstanding contributions in their careers.
James Little is a Partner in the Construction and Infrastructure Practice Group at Singleton Urquhart Reynolds Vogel LLP. For his expertise and reputation in construction law, James has been ranked by Lexpert, Chambers Global, Who’s Who Legal, Legal 500, Benchmark Litigation and Best Lawyers. These rankings are based on comments from his clients recognizing his “keen mind”, his “innovative” strategies, “impeccable” preparedness and “unmatched” work ethic.
As a leading practitioner in his field, James has developed a growing practice where he advises on domestic and international construction disputes, including court proceedings, negotiation, arbitration and other dispute resolution alternatives for a wide variety of construction industry clients. He regularly advises clients on a variety of different types of projects including major national and international infrastructure projects, mining projects, hospitals and commercial construction. James is often called upon to advise on construction projects during the pre-construction, design and construction phases, including advice in respect of risk mitigation, dispute avoidance and claims management. His focus is on providing a high level of service through effective and timely advice and advocacy while managing and resolving disputes.
James is also a committed contributor within the construction bar. He is the current Vice-Chair of the Society of Construction Law of North America and a member of the Ontario Bar Association Construction and Infrastructure Executive. James is focused on developing himself as a thought leader by providing perspectives in respect of construction law in Canada through his work on case notes, papers and journal articles.
In his spare time, James enjoys exploring Ontario with his two primary-age boys.
About the Lexpert Rising Stars Awards
The Lexpert Rising Stars Awards honour leading lawyers under 40 from law firms, in-house departments, and other legal practices. Members of the legal profession in Canada are invited to nominate qualified lawyers who have made outstanding contributions in their careers thus far, with an advisory board voting on winning candidates. The winners were honoured at a celebratory dinner in their honour on November 23, 2023 in Toronto.
We are known for delivering exceptional legal services. From conversation to persuasion, from contracts to the courtroom, we are driven to meet our clients’ objectives.
On November 10, 2023 the Supreme Court of Canada (“SCC”) released its decision in R v. Greater Sudbury (City) (“Greater Sudbury”)[1] finding that an “owner” of a construction project can be considered an “employer” under the Occupational Health and Safety Act (the “OHSA” or the “Act”) of Ontario.[2] This decision showcases a paradigm shift in how project owners, constructors, and employers perceive and undertake their health and safety obligations under the OHSA. It underscores the importance of a collective approach to workplace safety and mandates a higher level of vigilance and compliance from all parties involved in a construction project. Below, we consider some of the key takeaways of this decision.
The City of Greater Sudbury (the “City”) hired Interpaving Limited (“Interpaving”) to repair a downtown water main (the “Project”). The contract between the City and Interpaving stipulated that Interpaving would oversee the entire Project. This included acting as the “constructor” as defined by the OHSA, and guaranteeing compliance with the standards set forth in the Act. During the project, an Interpaving employee, driving a road grader in reverse, fatally struck a pedestrian while she crossed an intersection within the construction zone. It was determined that the project site lacked necessary safety measures, such as a fence and signaller, as mandated by regulations, leading to the Ministry of Labour (the “Ministry”) charging the City and Interpaving with violations of Construction Projects, O. Reg. 213/91, contrary to section 25(1)(c) of the OHSA. The Ministry charged the City on the basis that the City was a “constructor” and an “employer” under the OHSA.[3]
Procedural History
The Ontario Court of Justice acquitted the City, finding that Interpaving exercised direct control over the workers and the Site, thus excluding the city from the definition of an employer. The trial judge also noted that if the City was an employer, it had acted with due diligence, thus acquitting the City of all charges.[4]
The Crown appealed to the Ontario Superior Court of Justice (“ONSC”), arguing that the City was a “constructor” on the Project due its level of control, however, this argument was rejected. The ONSC found that the City’s contract with Interpaving was typical for municipal maintenance work, and the City’s involvement, including quality control, did not make it a “constructor” or “employer” under the OHSA, leading to a dismissal of the Crown’s appeal.[5]
Following this, the Ontario Court of Appeal (ONCA) granted the Crown leave to appeal to determine if the City was an employer under the OHSA, based on the definition of employer as one who employs workers. The ONCA found that the City was an employer, as it had employed inspectors at the project site for tasks such as quality assurance, irrespective of its control over the project. The issue of the City’s due diligence defense was referred back to the ONSC for further consideration.[6]
The Decision of the Supreme Court of Canada
In a split decision, four justices agreed (with the other four judges in dissent, given that Justice Brown did not participate in the judgment) with the Court of Appeal that the City was indeed an employer and had breached its duty under section 25(1)(c) of the OHSA. Because a majority is required to overturn a lower court decision, the fact that the court was evenly split meant that there was no majority and that the appeal was therefore dismissed.
The SCC found that the Act is designed to offer a reasonable level of protection for worker health and safety at the workplace and is recognized as a remedial public welfare statute, aimed at ensuring a minimum level of worker protection. Citing to Ontario (Ministry of Labour) v Hamilton (2002), the SCC emphasized that the Act should be interpreted generously to promote public health and safety, avoiding narrow or technical interpretations that could hinder its public welfare objectives.[7]
Further, the SCC found that the Act achieves its public welfare purpose by allocating health and safety duties among various workplace parties, including constructors, employers, and owners, emphasizing that these duties are often concurrent and overlapping, ensuring multiple parties are responsible for the same safety measures. This approach is described as the “belt and braces” strategy in occupational health and safety, ensuring worker protection through multiple safeguards. If one system fails, another might compensate, rendering the protection of workers a collective responsibility.[8] Following this approach, the SCC held that multiple workplace entities are accountable for health and safety breaches, and they cannot use others’ failures as an excuse for their own negligence. Every workplace participant must ensure a safe working environment.[9]
Since a breach of s. 25(1)(c) is a strict liability offence, the Ministry only needed to prove the actus reus beyond a reasonable doubt to ground a conviction, which, according to the SCC, had been done. Importantly, the Ministry was not required to demonstrate that the City had exercised control over the workers or workplace to establish a breach. The Court determined that the Act’s text and context indicated a legislative intent to deliberately focus on the employer’s connection to the workplace rather than control over individual workers.[10] This broad interpretation of “employer” and their duties should be viewed as complementary within the Act’s framework. Furthermore, the presence of a due diligence defense under section 66(3)(b) is significant. This defense acts as a safeguard, allowing employers who breach section 25(1)(c) to avoid penalties if they can prove they took all reasonable steps to prevent the breach. The SCC found that imposing a control requirement in this context could undermine the Act’s public welfare objective of establishing shared responsibility.[11]
In considering whether the City had successfully demonstrated due diligence under section 66(3)(b) on a balance of probabilities, the SCC opined that here, control was a relevant factor. An employer can argue that its lack of control over the workplace or workers indicates it took all reasonable steps under the circumstances. This approach addresses fairness concerns about imposing liability for breaches caused by others. Factors for consideration include the accused’s degree of control, whether control was delegated to a constructor, the evaluation of the constructor’s compliance abilities, and the monitoring and supervision of the constructor’s work.[12]
In the case at hand, the City was deemed an employer of both the quality control inspectors it directly employed and dispatched to the construction project, and of Interpaving. As such, the City was obligated under section 25(1)(c) to ensure prescribed measures and procedures were implemented at the worksite. The failure to implement required safety measures, such as fencing and signallers, on the accident date meant that the City, as an employer, committed an offence under section 25(1)(c).
The Supreme Court of Canada’s decision in Greater Sudbury carries significant implications for the construction industry, particularly with respect to how project ownership and health and safety responsibilities are viewed under the OHSA. The following takeaways highlight these impacts.
Expanded Scope of ‘Employer’ Under OHSA: The ruling establishes a broad interpretation of what constitutes an ’employer’ under the OHSA. By finding that the City, as the project owner who employed inspectors for quality assurance, was an ’employer’, the SCC effectively expanded the scope of this definition. This implies that any project owner, irrespective of their direct control over the project or workers, can be deemed an employer if they have a contractual relationship with employees or contractors at the project site. This expansion is pivotal for project owners who may not be directly involved in day-to-day operations but have a contractual nexus to the project. They must now be more vigilant about health and safety compliance, understanding that their connection to the workplace, not control over it, determines their responsibility under the Act.
‘Belt and Braces’ Strategy in Workplace Safety: The decision emphasizes the ‘belt and braces’ approach to occupational health and safety. The SCC’s interpretation reinforces the idea that multiple parties can be concurrently responsible for the same safety measures, ensuring a collective responsibility for worker protection. This approach indicates that failures by one party cannot be used to absolve others from their safety obligations. For the construction industry, this translates to a more collaborative approach to safety, where constructors, employers, and owners must work in tandem to ensure compliance with safety regulations. This landmark ruling may encourage a culture of shared responsibility, potentially leading to more rigorous safety protocols and collaboration in the industry.
Due Diligence Defence and its Implications: The SCC’s decision also sheds light on the due diligence defence under section 66(3)(b) of the Act. While this defence acts as a safeguard for employers who can prove they took all reasonable steps to prevent a breach, the ruling clarifies that control is a relevant factor in this context. In cases where an employer lacks direct control over the workplace or workers, demonstrating due diligence becomes crucial. Project owners and employers in the construction industry should be mindful of this aspect and should consider adopting more proactive and comprehensive safety measures and oversight mechanisms. They will need to ensure that not only are safety measures in place, but that they are actively monitoring and evaluating the compliance abilities of contractors and constructors to reinforce their due diligence obligations.
It is likely that this decision extends beyond the borders of Ontario and has potential implications for similar workplace health and safety legislation in other Canadian provinces. In British Columbia, for example, the Occupational Health and Safety Regulation (the “Regulation“)[13] states that its purpose is aimed at promoting occupational health and safety and protecting workers and others from work-related risks. The Regulation also expressly stipulates that compliance with its requirements is not just an end in itself but serves as a foundational aspect of building an effective health and safety program. It emphasizes cooperation between workers and employers to resolve workplace health and safety issues. The SCC’s decision in Greater Sudbury highlights the necessity of interpreting such regulations to advance public welfare and health and safety goals. This approach aligns with the Regulation’s objective in British Columbia, where the focus is on creating a collaborative and comprehensive safety culture rather than merely adhering to technical compliance.
Similarly, the definition of ’employer’ under the OHSA shares parallels with that in Alberta’s Occupational Health and Safety (OHS) Act[14]. Both Acts encompass a range of relationships, including those involving contractors and subcontractors, and do not depend on direct control over workers. This similarity suggests that the principles set out in Greater Sudbury are likely to be pertinent in interpreting the scope of ’employer’ in Alberta and potentially in other provinces as well. These interpretations imply a broader understanding of employer responsibilities, emphasizing the collective role in ensuring workplace safety.
[1] 2023 SCC 28 [“Greater Sudbury“].
[2] R.S.O. 1990, c. O.1.
[3] R. v. Greater Sudbury (City), 2019 ONSC 3285 [Sudbury].
[4] Greater Sudbury, supra note 1 at para 3.
[5] Sudbury, supra note 3 at paras 28-37.
[6] Ontario (Labour) v. Sudbury (City), 2021 ONCA 252.
[7] Greater Sudbury, supra note 1 at para 8.
[8] Ibid at paras 10-11, citing Ontario (Ministry of Labour) v Enbridge Gas Distribution Inc., 2010).
[9] Ibid.
[10] Ibid at paras 17-22.
[11] Ibid at para 37.
[12] Ibid at paras 49-60.
[13] BC Reg 296/97.
[14] SA 2020, c O-2.2
Singleton Urquhart Reynolds Vogel LLP has been ranked in the top tier for construction law (Band 1) by Legal 500.
Bruce Reynolds and Sharon Vogel were listed in the Hall of Fame, recognizing the top lawyers in Canadian construction law. Stuart B. Hankinson K.C. was listed as a Leading Individual, with Jesse Gardner and James Little named as Next Generation Partners.
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Singleton Reynolds was recognized in the areas of ‘Construction’ and ‘Infrastructure Projects’.
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In FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation (“FamilyMart”),[1] the Judicial Committee of the United Kingdom’s Privy Council (“JCPC”) held that when a party to an arbitration agreement seeks a remedy that is only available in court, the arbitration agreement still applies to the extent that the matters in dispute are arbitrable. In short, a court may bifurcate the dispute, and order a stay of the court proceeding pending the outcome of the arbitrable matters.
The JCPC also confirmed that effect should be given to an arbitration agreement unless (1) the agreement is contrary to the public policy of the court or (2) there is a rule of law or statutory provision that renders the matters within the scope of the arbitration agreement incapable of resolution by arbitration.[2]
The Facts
FamilyMart involved a dispute between two holding companies that together controlled a convenience store business in mainland China, which was a going concern (i.e., was solvent). The minority shareholder (“FMCH”) was a Japanese company with considerable experience in the convenience store business across Asia through one of its subsidiaries. The majority shareholder (“Ting Chuan”) was part of a group of companies owned by the Taiwanese Wei family.
Believing that Ting Chuan was diverting profits from the joint venture to members of its corporate group, FMCH sought to have the joint venture wound up under the Companies Act[3] of the Cayman Islands, where the joint venture convenience store business was incorporated, on the basis that it would be “just and equitable” for a court to do so.[4] In the JCPC’s view, “the real aim” of FMCH’s petition to court was to have the Grand Court of the Cayman Islands require Ting Chuan to sell its majority stake in the business to FMCH.[5]
A shareholder agreement between the two parties contained an arbitration agreement, and it was conceded by FMCH at the Court of Appeal that the dispute fell within the scope of the arbitration agreement. The question for the JCPC therefore was whether FMCH’s petition to court “has made the matters raised in that petition not susceptible to arbitration.”[6]
Those matters were identified as the following:
(1) Whether FMCH has lost trust and confidence in Ting Chuan and in the conduct and management of the Company’s affairs. Ting Chuan particularises this matter into three sub-headings: (i) whether the majority directors owe various duties to the Company, (ii) whether the majority directors have breached those duties or engaged in misconduct, and (iii) whether Ting Chuan caused, permitted or procured the majority directors to act in breach of their duties or to engage in the alleged misconduct (2) Whether the fundamental relationship between FMCH and Ting Chuan has irretrievably broken down. In particular: (i) whether an understanding was reached between the shareholders by 2003 and, if so, what were the terms of that understanding, (ii) was the understanding superseded at any point in time after 2003, for example by reason of the conclusion of the SHA, and (iii) whether Ting Chuan acted contrary to that understanding after 2012. (3) Whether it is just and equitable that the Company should be wound up. (4) Whether FMCH should be granted the alternative relief, which it prefers, under section 95(3)(d) of the Companies Act, namely an order requiring Ting Chuan to sell its shares in the Company to FMCH, and, if so, what is the value of those shares. (5) Whether, if such alternative relief is not appropriate, an order winding up the Company should be made and whether the persons identified by FMCH should be appointed as joint official liquidators.[7]
(1) Whether FMCH has lost trust and confidence in Ting Chuan and in the conduct and management of the Company’s affairs. Ting Chuan particularises this matter into three sub-headings: (i) whether the majority directors owe various duties to the Company, (ii) whether the majority directors have breached those duties or engaged in misconduct, and (iii) whether Ting Chuan caused, permitted or procured the majority directors to act in breach of their duties or to engage in the alleged misconduct
(2) Whether the fundamental relationship between FMCH and Ting Chuan has irretrievably broken down. In particular: (i) whether an understanding was reached between the shareholders by 2003 and, if so, what were the terms of that understanding, (ii) was the understanding superseded at any point in time after 2003, for example by reason of the conclusion of the SHA, and (iii) whether Ting Chuan acted contrary to that understanding after 2012.
(3) Whether it is just and equitable that the Company should be wound up.
(4) Whether FMCH should be granted the alternative relief, which it prefers, under section 95(3)(d) of the Companies Act, namely an order requiring Ting Chuan to sell its shares in the Company to FMCH, and, if so, what is the value of those shares.
(5) Whether, if such alternative relief is not appropriate, an order winding up the Company should be made and whether the persons identified by FMCH should be appointed as joint official liquidators.[7]
The JCPC concluded that matters (1) and (2) “are substantive disputes between FMCH and Ting Chuan which provide the factual basis for the winding up petition on the just and equitable ground”, and therefore must be determined by an arbitral tribunal (unless the parties were to jointly waive their right to arbitration).[8] This required a mandatory stay of the winding up petition in relation to matters (1) and (2) under the Foreign Arbitral Awards Enforcement Act of the Cayman Islands (the “FAAEA”),[9] and, accordingly, a discretionary stay in respect of matters (3) to (5) on the basis that matters (1) and (2) are the precursor to any determination on those matters.
Reasoning
The JCPC considered the New York Convention in detail recognizing that it quite successfully fulfilled its aim “to establish a single uniform set of international legal standards for the recognition and enforcement of arbitration agreements and awards.”[10] Specifically, the JCPC interpreted Article II(3) of the New York Convention, which is implemented in the FAAEA. Article II(3) provides:
The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.[11] [emphasis added]
In particular, the JCPC considered the meaning of “a matter” and of “inoperative.” The JCPC found it appropriate to consider “the jurisprudence of several countries as guides”, given that their statutes – unsurprisingly – contain similar provisions.[12] Therefore, the JCPC’s interpretation of Article II(3) might be considered persuasive, though not binding, on Canadian courts, when interpreting that provision, as enacted through Canadian statutes such as Ontario’s International Commercial Arbitration Act, 2017.[13]
With respect to “a matter,” the JCPC relied on the Court of Appeal of Singapore’s decision in Tomolugen Holdings Ltd v Silica Investors Ltd,[14] to conclude as follows:
[A] “matter” is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. If the “matter” is not an essential element of the claim or of a relevant defence, it is not a matter in respect of which the legal proceedings are brought. … [A] “matter” is something more than a mere issue or question that might fall for decision in the court proceedings or in the arbitral proceedings.[15]
Based on this understanding of the term, the JCPC divided the matters in dispute into the five listed above.
The JCPC considered an arbitration agreement “inoperative” when there is either (1) “subject matter non-arbitrability”, i.e. the matters at issue between the parties are incapable of being settled by arbitration (for example, a criminal law matter), or (2) remedial non-arbitrability, i.e., the remedies sought are unavailable to an arbitral tribunal.[16]
In FamilyMart, the issue was one of remedial non-arbitrability, because it was common ground between the parties that a company could only be wound up by a court rather than an arbitral tribunal. However, the JCPC described the “underlying concept” of subject-matter non-arbitrability, which is “that there are certain matters which in the public interest should be reserved to the courts or other public tribunals for determination.”[17] Certain types of disputes are “excluded by statute or public policy from determination by an arbitral tribunal.”[18]
FMCH argued that bifurcation between an arbitral proceeding and a court proceeding was a public policy question, on the grounds that it would cause undue delay. This was rejected by the JCPC, which found that unnecessary delay could be avoided by proper case management. The JCPC also found case law to support the proposition that courts will grant a stay while arbitral matters are first addressed.[19]
The JCPC also found that a court would effectively be bound by the findings of fact at arbitration, much in the same way that a court would be bound by an agreed statement of facts between the parties.
FamilyMart is a further reminder that courts will seek to enforce arbitration agreements to the extent possible. The JCPC cites the pithy statement of Lord Dunedin in A Sanderson & Son v Armour & Co Ltd: “If the parties have contracted to arbitrate, to arbitration they must go.”[20]
In FamilyMart, bifurcation was required because the arbitration agreement between the parties was inoperative with respect to matters (3) to (5) due to the non-arbitrable nature of the remedies being sought. Accordingly, the JCPC required the dispute to be arbitrated up to the point at which a court determination was necessary, i.e., the dispute required arbitration for matters (1) and (2).
It should also be observed that the JCPC found no contractual prohibition on initiating a petition.[21] FMCH did not breach the arbitration agreement by doing so. At the same time, in the JCPC’s view, the arbitration agreement required the petition to be stayed. Thus, as a procedural question, it may be open to a party to initiate a court proceeding even while recognizing that it will likely be stayed pending the outcome of an arbitration. Indeed, it may even be advisable to do so, particularly when a remedy sought cannot be granted by an arbitral tribunal; for example, in Ontario, where a party must commence an action in order to perfect their lien rights, it is necessary to commence a lien action in order to “perfect” the lien and advisable to thereafter agree to a stay in favour of mandatory arbitration. Broadly speaking, by initiating a court proceeding, a party can demonstrate that it is not seeking an impermissible remedy from the tribunal, but rather is laying the groundwork for a properly bifurcated process.
Finally, the JCPC’s affirmation as to what constitutes a “matter” under Article II(3) of the New York Convention provides helpful guidance for Canadian practitioners in determining whether a legal issue has risen to the level that necessitates referral to arbitration (assuming an arbitration agreement is in place and is operative). As the JCPC observed, there is considerable jurisprudence on this topic in several countries; however, this is less so in Canada. While the devil remains in the details as to whether an issue will meet the threshold of “relevance” on the facts of a given case, the general principle is clear that the issue must be essential – rather than secondary or peripheral – to the claim or defence, in order for it to constitute a “matter” in respect of which legal proceedings are brought.
Fundamentally, as noted above, FamilyMart confirms that effect should be given to an arbitration agreement unless (1) the agreement is contrary to the public policy of the court or (2) there is a rule of law or statutory provision that renders the matters within the scope of the arbitration agreement incapable of resolution by arbitration.
[1] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33.
[2] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 29.
[3] Companies Act (2022 Revision).
[4] Companies Act (2022 Revision), Section 92(e).
[5] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 8.
[6] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 13.
[7] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 23.
[8] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 105.
[9] Foreign Arbitral Awards Enforcement Act (1997 Revision).
[10] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 31, citing Enka Insaat ve Sanayi AS v OOO “Insurance Co Chubb”, [2020] UKSC 38 at para 126.
[11] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958), available at https://www.newyorkconvention.org/english.
[12] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 31.
[13] International Commercial Arbitration Act, 2017, SO 2017, c 2, Sch 5. See also, e.g., United Nations Foreign Arbitral Awards Convention Act, RSC 1985, c 16 (2nd Supp).
[14] Tomolugen Holdings Ltd v Silica Investors Ltd, [2015] SGCA 57.
[15] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 61.
[16] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 70.
[17] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 72.
[18] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 70.
[19] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 101.
[20] A Sanderson & Son v Armour & Co Ltd, [1922] UKHL 268, 1922 SC (HL) 117 (Scot) at 126.
[21] FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation, [2023] UKPC 33 at para 91.
In Symtech Innovations Ltd. v Siemens Canada Limited (“Symtech”),[1] the Ontario Superior Court of Justice considered a series of arguments advanced by a party advancing a delay claim (Symtech Innovations Ltd. (“Symtech“)) in the context of a responding party (Siemens Canada Limited (“Siemens“)) seeking to resist based on strict notice provisions under standard-form contracts.
In construction claims, contractual notice provisions are sometimes overlooked, but can in certain circumstances prove fatal to the success of a claim. Symtech provides important reaffirmations with respect to compliance with contractual notice provisions, and the requisite precision in presenting evidence and articulating claims. Below, we discuss some of the key takeaways of this decision in the Ontario context (noting that notice provisions need to be considered carefully, as they vary from province to province and contract to contract).
This matter arose due to a dispute between Symtech and Siemens over the performance of contractual obligations related to a Toronto Transit Commission (“TTC“) project, the Duncan Shop Ventilation Upgrade, Supply and Install Monorail Crane, and Bus Hoist Replacement Phase 1 (the “Duncan Shop Project” or the “Project“). This Project entailed, among other things, upgrading HVAC systems and the integration of a crane at the W.E.P. Duncan Building bus maintenance site in Toronto (the “Project Site”).
Black & McDonald Limited (“B&M“) was awarded the main contract for the Project. As general contractor, B&M subsequently retained Siemens (by way of subcontract) to furnish and integrate the building automation system.[2] Siemens then sub-subcontracted Symtech for the installation certain works related to the building automation system (the “Symtech Subcontract”). Siemens delivered the system components and issued a fixed-price purchase order to Symtech for installation of same. The base price agreed upon by the parties for the Symtech Subcontract was $583,059, plus HST, which was later increased to $664,981.89, plus HST (with Siemens’ approval).
Although the Project faced numerous delays, Symtech was not alleged to be responsible for any such delays. Symtech took the position that it was seriously impacted in its work by the delays to the Project and the ongoing disruptions. As a result of these delays and disruptions, and Siemens’ unwillingness to pay Symtech for any related costs, Symtech preserved a lien in the amount of $915,934.28.
Symtech commenced an action seeking to perfect and enforce that lien (the “Lien Action”), and claimed against Siemens for breach of contract. Siemens vacated Symtech’s lien by posting a security of $965,934.28, and then brought a third-party claim seeking contribution and indemnity from B&M for Symtech’s claim. Based on Symtech’s Scott Schedule, the lien was later reduced by Symtech to $859,942.49, which included a prolongation claim for alleged disruptions.[3]
Symtech also commenced a parallel breach of trust claim. However, the Court refused to grant any judgment on that matter due to the differences in the cause of action, the additional parties, and variances in jurisdiction.[4]
While Siemens acknowledged some liability in the matter, it asserted that such liability was restricted to an unpaid statutory holdback of $66,315.01 in respect of the base contract scope as increased by approval. Siemens did not agree that Symtech was entitled to the additional delay and disruption damages it claimed in the Lien Action. Siemens further claimed that the holdback funds were thereafter subject to set-off for Siemens’ costs of defending the action.[5]
Siemens moved for summary judgment within the Lien Action, claiming that there was no genuine issue for trial regarding its liability for Symtech’s prolongation claim as, among other things, there was no breach of contract by Siemens and Symtech failed to provide contractually required notices.
The ONSC’s Decision
Siemens submitted that there was no genuine issue requiring trial based on a number of different arguments:
The Court began by reviewing the applicable framework for summary judgment, then turning to two preliminary challenges to Siemens’ evidence, before ultimately reviewing each of the five arguments above.
Preliminary Challenges to Siemens’ Evidence
Symtech challenged the admissibility of two aspects of Siemens’ evidence: namely, the affidavit of a lawyer, and Siemens’ reliance on the transcript from the examination for discovery of Siemen’s own representative.
Symtech challenged the admissibility of the lawyer’s affidavit on the basis of rule 20.02(1) of the Rules, which states that an affidavit used on a motion may be based on information and belief, but on the hearing of the motion, the court may draw an adverse inference if the evidence was not provided by someone with personal knowledge of the contested facts. Symtech alleged that the lawyer’s affidavit fell within the ambit of this subrule since she lacked personal knowledge of the dispute.
The Court rejected this argument, finding that the lawyer’s affidavit was factual in nature, confirmed procedural history, summarized the claims raised in the Scott Schedule, and summarized transcripts from examinations for discovery.[7]
Symtech also challenged Siemens’ reliance on the transcript of its own deponent’s examination for discovery on the basis of subrules 39.04(1)-(2) and 31.11(1), which generally preclude a party from using, in evidence on a motion, its own examination for discovery as evidence. The Court rejected this challenge as well, finding that the manner in which it was done was not a violation of subrule 39.04(2), as it was not tendered to avoid cross-examination. Symtech was free to cross-examine the representative, which they did.[8]
With these challenges addressed, the Court turned to Siemens’ submissions for summary judgment.
Issue 1: The Notice Issue
In assessing the notice issue, the Court was required to consider a number of different sub-issues:
Sub Issue 1: The Court determined that there was no genuine issue for trial that the parties’ agreement – as set out in two relevant contract documents, being a purchase order and Siemens subcontract with B&M (the latter being incorporated by reference into the purchase order) – outlined Symtech’s obligations to notify Siemens of delays and of its intentions to claim compensation. In that regard, the Symtech Subcontract required not only that Symtech notify Siemens “forthwith” of any delay, but also to notify of Symtech’s intention to seek relief in relation to that delay (whether that be compensation or schedule relief).
Sub Issue 2: The Court determined that there was a genuine issue requiring trial. Specifically, it found that although there was ambiguity surrounding the “schedule of Siemens”, given that the Symtech Subcontract did not include a schedule for the performance of the work. It was therefore unclear what comprised the “schedule” that was meant to contractually govern Symtech’s work.
Sub Issue 3: The Court determined that there was no genuine issue requiring trial. The critical concern was whether Symtech had provided timely notice of its prolongation claim which, if Symtech had failed to do so, would make the previous issue of notice as to delay moot.[9] Here, the Court re-affirmed a number of key points on the law of notice including the following:
With these principles in mind, the Court undertook a detailed review of the record before it.
Siemens claimed that it was not informed of Symtech’s potential claim for additional delay-related compensation until January 17, 2019. However, Symtech claimed that it was unaware of its losses until December 2018. Further, Symtech presented evidence of project delays, expert evidence, and details of disruptions such as delayed roof reinforcing work and late deliveries. Siemens, for its part, highlighted a lack of formal written notice from Symtech regarding these delays.
The core of this analysis concerned when Symtech was aware of its losses, and if it duly notified Siemens of its claim based on the date it knew or ought to have of those losses. In that regard, the Court accepted that there would arguably be a genuine issue on when Symtech knew it was suffering losses for which it was entitled to make a claim and when it ought to have given notice; however, this issue could be resolved on the record before the Court rather than requiring a trial, which is what the Court proceeded to do.
In that regard, the Court concluded that project delay was clear by July 2018, when Siemens provided Symtech with an updated schedule which showed significant delay as compared to the baseline schedule. There were notices from October 2018 onward, but these were notices in respect of claims for changes (i.e. extra work) rather than delay-related claims. Similarly, the Court rejected the argument that B&M giving general notice to TTC of project cost impacts on behalf of itself and its subcontractors satisfied Symtech’s notice obligations.
Ultimately, and although Siemens did not tender any evidence supporting that Symtech knew it was suffering losses before December 2018, the Court found on the totality of the evidence that Symtech ought to have been aware of its losses – including loss of productivity and additional labour hours, as a direct result of the ongoing delays and disruptions to its work – well before January 2019, when it actually delivered what could be construed as a formal notice.
Furthermore, the Court rejected Symtech’s argument that nothing in the Symtech Subcontract stipulated that failure to provide timely notice of a claim meant that a claim could not still be advanced. This argument was contrary to the relevant case law, which rejected this proposition on the basis that it would deprive the notice recipient of the benefits of the notice provision (i.e. the opportunity to consider its position and choose a course of action).
Accordingly, and as noted above, the Court concluded that there was no genuine issue for trial that Symtech had failed to provide timely notice of its prolongation claim.
Sub Issue 4: The Court determined that there was no genuine issue requiring trial. Here, the Court similarly rejected the argument that Siemens had waived the notice requirement.
Waiver, as the Court explained, will be found only where the evidence demonstrates that the party waiving had (i) a full knowledge of the right or of the other party’s deficient performance of an obligation, and (ii) an unequivocal and conscious intention to abandon the right to rely on it. The intention to relinquish the right must be communicated; communication can be formal or informal, and it may be inferred from conduct.[11]
In this case, Siemens had expressed challenged Symtech’s January 17, 2019 letter on the basis of a lack of prior, timely notice. Similarly, the fact that Siemens had advanced a claim to B&M on behalf of itself and Symtech for compensation (including Symtech’s prolongation claim) was not sufficient to prove waiver of the notice requirement; in that regard, agreeing to assist Symtech in recovering against B&M was not the same as acknowledging the timeliness of Symtech’s claim.
Finally, the Court concluded that the fact Siemens did not reply to Symtech’s claim within the time required by the Symtech Subcontract was not proof of waiver. To the contrary, the Court observed that this argument essentially amounted to the proposition that failing to expressly deny a claim somehow validates it. This proposition had no supporting case law, and commercially unreasonable insofar as it would substantially weaken (if not vitiate) the express requirement for timely notice.
Accordingly, the Court concluded that there was no genuine issue for trial and on the basis of the record before it, concluded that Siemens had not waived the notice requirement.
Issue 2: Is there a viable claim against Siemens if it did not cause Symtech’s delay?
Siemens acknowledged that Symtech worked on a portion of its scope of work, and that Symtech was on-site before Siemens. However, Siemens argued that it was not responsible for the delays alleged by Symtech and as such, there could be no triable issue that Siemens was liable for the prolongation claim.
The Court was not convinced of Siemens’ argument on this issue, but declined to address the argument given its finding on Issue 1.[12]
Issues 3-4: Is there a genuine issue for trial on Symtech’s prolongation claim quantification?
Siemens challenged the prolongation claim on the basis that (i) it failed to connect the losses and damages to any specific events of delay, and (ii) it was based on a global claim for costs incurred by Symtech divorced from the fixed price nature of the Symtech Subcontract relationship. The Court found that these were both essentially challenges to the methodology behind Symtech’s claim quantification.
However, similar to issue 2, the Court did not address these arguments given its findings on Issue 1 regarding notice.
Issue 5: Is there a genuine issue requiring a trial on whether Siemens breached the Symtech Subcontract and the quantum of unpaid amounts owing under the Symtech Subcontract ?
Symtech claimed that Siemens breached the Symtech Subcontract by not managing the project effectively, and by not paying the holdback that Symtech believed it was owed. However, Siemens claimed that there was no evidence of such breaches. The Court found that the core issue revolved around Siemens’ responsibility to supervise Symtech’s work, and whether Siemens was in breach for non-payment of the holdback.
Further, Symtech referenced specific clauses in the Symtech Subcontract which mandated that Siemens supervise and manage the project. They provided evidence through emails and testimonies that Siemens was aware of project issues but failed to address them. Siemens disagreed, emphasizing Symtech’s status as an independent contractor, thus bearing the responsibility to supervise its own work.
On this issue, the Court found a lack of clarity on the supervisory obligations and the unpaid amount under the Symtech Subcontract, both being genuine issues necessitating a trial.
Issue 6: Is partial summary judgment appropriate?
In view of all the foregoing (i.e., a mix of issues and sub-issues where some were and were are not appropriate for summary judgment), the Court granted partial summary judgment. In this regard, genuine issues requiring a trial were found to exist, especially concerning Siemens’ purported breach of contract and the quantification of Symtech’s claims; however, the Court found no merit to Symtech’s prolongation claim, finding that Symtech failed to provide timely notice.
As such, the Court dismissed the prolongation claim and directed the remaining issues to proceed to trial.[13]
Given that Symtech essentially ran the gamut of notice arguments typically advanced by a claiming party in circumstances. where their contracting party resists on the basis of a notice defence, Symtech therefore offers a comprehensive articulation of many of the relevant principles that apply in such a scenario.
First and most obviously, this case emphasizes the importance of adhering diligently to notice requirements and otherwise ensuring timely and comprehensive communication. Proper communication (including by following information requirements of contractual notices, aside from timing) ensures that all parties are aligned and aware of potential or actual claims, reducing the potential for unexpected legal challenges.
Second, Symtech reaffirms the importance of providing timely notice in the proper form and substance. The Court notably rejected Symtech’s argument that its notice(s) of change-related claims were sufficient notice of its delay claim, which conclusion makes good sense insofar as these types of claims are fundamentally different in nature. Similarly, a general contractor giving notice to an owner on behalf of itself and its subcontractors does not satisfy the subcontractor’s notice obligation; that onus rests with subcontractor, and cannot be satisfied by another party (unless, presumably, the applicable subcontract suggests otherwise). Again, the best practice is the most obvious – provide timely, clear notice that is formally and substantively rigorous.
Third, and although again not a novel proposition, the threshold remains high for demonstrating waiver of a party’s right to rely on a notice provision. It is common in the construction industry for a contractor to pass through a subcontractor’s claim even in circumstances where the contractor is relying on a notice defence against the subcontractor; this makes good sense insofar as the notice defence applies as between the contractor and subcontractor, not the contractor and the owner. Accordingly, and although it would presumably not be impossible to prove waiver in such circumstances, it remains a steep hill to climb absent very clear facts.
Fourth and finally, in the post-Hyrniak era, parties involved in construction disputes seeking summary judgment need to be particularly attentive to several principles under the Rules as it relates to the admissibility of evidence. Use of an affidavit from a lawyer on a summary judgment motion may be permissible, but parties will wish to be careful of the evidence it presents lest a court draw an adverse inference from a failure to provide the evidence of any person having personal knowledge of contested facts. Similarly, the Court’s affirmation that a party can use its own discovery evidence on a motion, assuming the deponent is available for cross-examination, is a welcome clarification for parties in determining who should be their affiant on a motion.
Importantly, if you are a contractor working in Ontario, consider seeking legal advice early in respect of claims and notice requirements. Some notice requirements are incredibly tight (e.g., within 24-48 hours) and need to be taken seriously. Waiting for a claim to “crystalize” may prejudice you in future efforts to collect. Similarly, despite best intentions not to “rock the boat”, it may be the case that your claim is invalid if you do not provide owners with clear update information on claims and potential claims – which is a key reason for the notice provisions themselves. Every party to a construction project should work collaboratively through claim processes and processing to ensure that claims are properly presented, and that opportunities to mitigate such claims are available early and often.
For owners, encouraging open dialogue of claims and working with contractors on notices may prevent end-of-project claims from arising, and thereby mitigate against significant litigation risk. There are plenty of opportunities to work with contractors early to ensure that mitigation opportunities are available and appropriate resources can be engaged earlier. That said, owners should also engage legal services early and often to ensure that any communications are fair, reasonable and in accordance with the contract and the law. In particulars, owners need to be cautious in promoting any extra-contractual claims processes that may, for example, waive existing notice requirements which may have been carefully negotiated for good reason.
Notice of claims remains a tricky part of construction projects. All parties should therefore take care to ensure that they are aware of specific contractual requirements and understand the manner in which the courts treat these requirements, such as how the court in Symtech has done here in Ontario.
As a final reminder, notice requirements differ depending on the contract in question, and their treatment differs in various jurisdictions (i.e., by province and certainly internationally). Feel free to reach out to the authors if you have any questions about the notice provisions in your contract.
[1] 2023 ONSC 5795
[2] Ibid at paras 1-3.
[3] Ibid at paras 4-6.
[4] Ibid at paras 129-132.
[5] Ibid at paras 6-7.
[6] Ibid at para 11.
[7] Ibid at para 26.
[8] Ibid at para 28.
[9] Ibid at paras 45-46.
[10] Ibid at paras 47 and 78.
[11] Ibid at para 87.
[12] Ibid at paras 104-109.
[13] Ibid at paras 125-128.
In its recent decision, Ponce v. Société d’investissements Rhéaume ltée., 2023 SCC 25 (“Ponce”), the Supreme Court of Canada rendered a decision in the civil law context regarding duties of loyalty, good faith obligations, and the availability of disgorgement of profits as a remedy, which provides an intriguing point of comparison for common law practitioners regarding the obligation to perform one’s contractual obligations in good faith.
The Appellants were presidents of a group of insurance companies known as “Groupe Excellence”. The Respondents were the majority shareholders of each of the companies comprising Groupe Excellence.
The Appellants and Respondents entered into an “incentive pay agreement” (the “Agreement”), which was based on the parties’ commitment to the common goal of ensuring the ongoing success of Groupe Excellence, with a view to a potential sale.
In April 2005, Industrial Alliance Insurance and Financial Services Inc. (“IA”) informed the Appellants of its interest in acquiring Groupe Excellence. The Appellants and IA entered into an “Undertaking of Confidentiality” and a series of discussions occurred between IA and the Appellants. In addition, and at the Appellants’ request, an exclusivity clause was also included in the undertaking, the purpose of which was to prevent IA from dealing directly with the Respondents. This materialized when one of the Respondents asked the Appellants whether IA would be interested in buying his shares, and the Appellants, despite directly knowledge to the contrary, advised that IA was not interested.
As such, the Respondents – unaware of IA’s interest – agreed to sell their interests to the Appellants, who in turn resold to IA the interests they had acquired from the Respondents, for a significant profit (the “Excess Profits”). The Respondents only learned of IA’s acquisition of Groupe Excellence via IA subsequently publishing a press release. In response, the Respondents commenced proceedings in the Quebec Superior Court.
Decisions of the Courts Below
Before the Quebec Superior Court, the Respondents (at the time, the plaintiffs) alleged that the Appellants breached (1) their contractual and legal obligations, (2) their fiduciary obligations, and (3) their obligations to act in good faith, with loyalty and transparency, by intentionally failing to inform them of IA’s interest.
The Superior Court ruled in the Respondents’ favour, finding that under both the Civil Code of Québec (the “CCQ”) and the Canada Business Corporations Act, the Appellants (in their capacity as directors) owed duties of honesty, loyalty, prudence and diligence to Groupe Excellence. By extension, these duties could be extended to the Respondents, where there was an “independent relationship between the directors . . . and the shareholders”, which independent relationship existed due to the Agreement.
The trial judge concluded that the Agreement entailed three implied obligations: (1) to maximize the profits and value of Groupe Excellence; (2) to report to the Shareholders, in a full and transparent manner, all information that might enable them to assess the value of Groupe Excellence or make a decision to sell their shares and to determine a sale price; and (3) not to use information for personal benefit without obtaining the Shareholders’ consent.
The trial judge accordingly found that the negotiations with IA constituted intentional concealment, and that the Appellants had consequently breached their duties of good faith and loyalty as well as their duty to inform.
With respect to damages, the trial judge found that the injury corresponded to the lost business opportunity. The loss was therefore equivalent to the profits made by the Appellants when they resold the shares to IA.
On appeal, the Court of Appeal affirmed the lower court’s decision, although it noted that the trial judge erred in finding that the duties of honesty and loyalty provided for in the CCQ could be extended to the Respondents as shareholders. In any event, this error was moot insofar as the Agreement was the source of the obligations in question.
With respect to the duty to inform, the Court of Appeal held that the Appellants’ conduct fell within the three criteria set out in Bank of Montreal v. Bail Ltée, [1992] 2 S.C.R. 554. The Court of Appeal focused on the fact that it had been impossible for the Respondents to inform themselves of IA’s interest, as well as on the atmosphere of trust that had existed between the parties. On these bases, the Court concluded that the Appellants breached the obligation of contractual good faith and the obligation to inform.
The Presidents then sought, and were granted, leave to appeal to the Supreme Court of Canada.
The Supreme Court’s Decision
On appeal, the parties’ arguments – and the Court’s analysis – focused on two key issues:
Kasirer J, for the unanimous Court, addressed each of these issues in turn.
Whether the Failure to Inform Constituted a Breach of a Contractual or Legal Duty
On the first issue, the Court considered four possible bases for the proposition that the Appellants held a duty to inform the Respondents of IA’s interest:
The Court considered each of these issues separately.
Obligation of Loyalty
The Court quickly rejected the proposition that any duty to inform could be a fiduciary-related obligation of loyalty, which would have required the Appellants to subordinate their interests to those of the Respondents. Put another way, no duty of loyalty could be extended to the Respondents as shareholders of the companies making up Groupe Excellence.
Here the Court distinguished between two types of loyalty: a contractual loyalty arising from good faith, which requires a contracting party to take the other party’s interests into account; and a loyalty in the exercise of a power, which must be exercised only in the beneficiary’s interest or to achieve the goal that led that power to be conferred.
In this case, the Appellants did not have the latter type of loyalty, which the Court termed a “maximalist” loyalty (similar to a fiduciary obligation at common law). It bears noting that the Court confirmed that under both the civil law and the common law, duties associated with the general principle of good faith in contractual performance have “strong conceptual differences from the much higher obligations of a fiduciary”.
In this case the Appellants were not required to exercise their powers for the benefit of the Respondents, and thus, there was no obligation of “maximalist” loyalty owed.
That being said, the Court clarified that in Quebec civil law, the concept of loyalty does not refer solely to “maximalist” loyalty, but also encompasses duties of good faith which, although they do not require a party to subordinate their interests below others’, nevertheless affect the way in which that party can exercise certain of its legal rights, as detailed further below.
Extracontractual Duty to Inform in the Course of the Share Sale by the Shareholders
The Appellants argued that because the allegations against them related to the formation of the contracts by which the Respondents sold their interests to the Appellant, the Agreement therefore did not apply because it did not govern buy-out negotiations. Accordingly, the Appellants argued that liability could not arise from the Agreement and must instead be extracontractual.
On this point, the Appellants acknowledged that at the stage of contract formation, the requirements of good faith give rise to a duty to inform (unlike at common law); however, on the facts, they maintained that this duty did not require them to disclose IA’s interest.
Interestingly, the Court declined to consider this issue in detail – despite the fact that it recognized that the topic would have been the subject of “meaningful debate” – because no argument based on pre-contractual liability had been raised.
Implied Obligation to Inform under the Agreement
On this issue, the Appellants argued that the Agreement did not contain an implied obligation to inform as it was simply a “remuneration agreement”, as a result of which the non‑disclosure of IA’s interest could not be a contractual fault.
In rejecting this argument, the Court observed that the nature of the Agreement led to the conclusion that it necessarily contained an implied obligation to inform. The Agreement was the cornerstone of the relationship between the parties, and clearly defined their roles. Furthermore, the “general scheme” of the Agreement indicated that it was intended to formalize a mutually beneficial business relationship. In this sense, the Court concluded that the Agreement reflected a high level of trust on which the entire enterprise rested. The sharing of Groupe Excellence’s profits and increase in value was the centrepiece of the Agreement, because this mechanism encouraged the Appellants to increase their efforts to ensure its success, which would ultimately benefit all parties.
In that regard, the CCQ bound the parties not only to what was specifically expressed in the Agreement, but also “as to what is incident to it according to its nature and in conformity with usage, equity or law”. This was a long-term agreement that formalized a business relationship in which the parties played different roles in order to maximize the value of Group Excellence; regardless of whether the Agreement was characterized as a relational contract, the Court confirmed that it required reciprocal contractual loyalty.
Having regard to the nature of the Agreement, the Court concluded that the Appellants had an implied obligation to maximize the value of Groupe Excellence, including with a view to a sale, as well as an implied obligation to inform the Respondents of any fact that might enable them to assess the companies’ profits and value and decide whether to sell their shares and, if so, at what price. These implied obligations served to “ensure the Agreement’s internal coherence”.
In addition, the Court confirmed that the Appellants breached not only their duty to inform, but also their duty under the CCQ to perform the Agreement in a manner consistent with requirements of god faith. The Court concluded that regardless of the duty to inform under the Agreement, the requirements of good faith imposed a separate duty to inform as an “obligation of public order” (i.e. a duty that does not arise from the contract itself).
On this point, the Court observed that there is a fundamental difference between non‑performance of a contractual obligation and performance of the obligation in a manner contrary to the requirements of good faith. While the former relates to the implementation of the content of the obligation, the latter relates instead to the manner in which the obligation is performed. In this regard, where the Appellants worked to maximize the value of Groupe Excellence but secretly took action to prevent the Respondents from reaping the benefits in the event of a sale, the Appellants would have performed their obligation but would have done so in a manner contrary to the requirements of good faith. Although this point was somewhat academic insofar as the facts of this case led to the conclusion that there was a wrongful act by the Appellants in any case, evidence of an additional breach of the requirements of good faith could have an impact at the remedy stage, as discussed below.
Obligation to Perform the Agreement in Good Faith
The Appellants argued that they were not bound to disclose IA’s interest because such disclosure did not meet the criteria set in Bank of Montreal v. Bail Ltée, [1992] 2 S.C.R. 554 (“Bail”) regarding a duty to inform arising from good faith; rather, IA’s interest was simply an indication of market value, or information that the Respondents could and should have obtained for themselves.
The Court rejected this argument, observing first that good faith, in Quebec civil law, is an “enacted standard of public order” – that is, it infuses every contract as if a clause provided for it, and through the combined effect of certain articles of the CCQ, good faith performance is an obligation that must be included in every contract. Put differently, the justification for such an implied obligation is an idea of contractual fairness grounded in public order rather than the parties’ autonomy, and its implementation varies depending on the circumstances.
As a result, although the Appellants did not have a maximalist obligation of loyalty to the Respondents in the exercise of their powers, they did have an obligation of contractual loyalty towards them – in other words, a “minimalist” loyalty. This did not require the Appellants to act in the sole interest of the Respondents, but did require them to consider their interests when performing the Agreement.
In that regard, the Court observed that loyalty has both prohibitive and proactive dimensions – that is, entails certain negative obligations (refraining from a course of action) and positive obligations (being compelled to take a course of action).
The prohibitive dimension requires that parties to a contract not act dishonestly in performing it; that they conduct themselves loyally by not unduly increasing the burden on the other party or behaving in an excessive or unreasonable manner; and not jeopardize the existence or equilibrium of the contractual relationship.
In this case, the Appellants conducted themselves in a disloyal manner when they failed to disclose IA’s interest. Conversely, the Respondents were entitled to expect the Appellants refrain from scheming in any way to enrich themselves at the Respondents’ expense. The Appellants therefore engaged in dishonest conduct that thwarted the legitimate expectations of the Respondents, which was for all parties to maximize the profits and value of the Groupe Excellence.
The proactive dimension requires that parties engage in active behaviour that is intended to assist their contracting partner but that still remains compatible with the party’s own interests. This requires a contracting party to provide the other party with the information that is relevant to the performance of their obligations, in order to facilitate it or avoid making it more onerous. In the context of this case, the proactive dimension entailed a duty to inform.
Accordingly, the final point for determination in this case was the precise extent of the duty to inform. Relying on Bail, which set out the criteria for when information falls within the scope of this duty, the Court concluded that IA’s interest in Groupe Excellence met all of the criteria, and that as a result, the Appellants’ duty to inform included this information.
What was the Appropriate Remedy?
With respect to the appropriate remedy, the Court was left to determine whether the Respondents were entitled to the profits made by the Appellants in reselling their shares to IA – that is, disgorgement of profits.
The Court observed that disgorgement is, in principle, available only where a person is charged with exercising powers in the interest of another (i.e. in the case of maximalist loyalty). In that regard, disgorgement is meant to ensure compliance with such loyalty, whereas damages are intended to compensate the victim for the injury they have sustained.
The Court furthermore concluded that the relevant case law did not support extending disgorgement to situations in which there was simply a breach of the obligation of good faith, and similarly concluded that an amount equivalent to disgorgement could not be award as damages without proof of injury.
Moreover, the Court found that where a breach of good faith obligations prevents the injured party from proving the injury sustained, it should be presumed that the injury is equivalent to the profits made by the party at fault. However, this presumption is rebuttable, as it can be displaced by evidence to the contrary showing that the quantum of damages differs from the amount of the profits.
In this case, the Appellants were unable to rebut this presumption; as a result, the Respondents were entitled to the difference between (1) the sale price received by the Respondents when initially selling their shares to the Appellants, and (2) the sale price received by the Appellants on the resale of those shares to IA.
Key Take-Aways
Ponce is of course a Quebec case based in the civil law, and therefore fundamentally different in many respects from analogous concepts in the common law; for example, it has been well-established many times that at common law, good faith does not entail a duty of disclosure. That being said, Ponce nevertheless offers many points of comparison that elucidate their corresponding common law analogues.
First, the Court’s discussion of relational contracts affirms the characteristics necessary to constitute such a contract, and how it impacts the parties’ obligations. As readers will recall from Churchill Falls (Labrador) Corp. v. Hydro-Québec, 2018 SCC 46, the fact that a contract is long-term and interdependent in nature does not, in and of itself, result in a relational contract, which imports heightened obligations on the parties. Rather, a relational contract requires close cooperation over the long term, with an emphasis on the parties’ relationship and achievement of a common goal. Although relational contracts are not a well-developed topic at common law, their brief reference in Bhasin v Hrynew suggests that the Court’s discussion in Ponce may be relevant to some extent in the common law context and it will be interesting to see how the Court further considers this question.
Second, the distinction between the prohibitory and proactive dimensions of loyalty provides a useful reference point for understanding the different aspects of good faith at common law. The Supreme Court’s holdings in recent cases like Bhasin, Wastech, and Callow have almost unanimously been framed in prohibitory terms, insofar as parties cannot (i.e. must refrain from) lying, and cannot (i.e. must refrain from) exercising a contractual discretion unreasonably. That being said, these cases also admit some degree of proactive obligation, insofar as Callow found that a party must correct a misrepresentation that it thought was true at the time of the representation, but later learned was false. Accordingly, Ponce serves as a reminder to common law parties that good faith duties do not exclusively entail negative obligations.
Third, the Court’s discussion of the appropriate form of relief and measure of damages calls to mind a number of parallels with, and distinctions from, the common law. With respect to the availability of disgorgement, the Court’s discussion recalls its recent judgment in Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19 – whereas the Court in Ponce clarified that disgorgement “straddles restitution and compensation” at civil law, the Court in Babstock confirmed that disgorgement is distinct from restitution at common law because only the latter requires that a defendant’s gain correspond to the plaintiff’s loss. Conversely, the Court in both instances was in agreement that disgorgement is available in situations of fiduciary (or analogous) relationships, with only the dissent in Babstock finding that it was an arguable issue as to whether “quasi-fiduciary” relationships could justify disgorgement.
Similarly, the discussion of the measure of damages calls to mind Ontario courts clarifying this point at common law. Ponce confirms that at civil law, where a breach of good faith prevents a party from proving their injury, it is presumed that the injury is equivalent to wrongdoer’s gain. Kasirer J in Callow similarly concluded that it could be presumed that the plaintiff lost an opportunity, because the defendant’s dishonesty prevented him from conclusively proving that the opportunity was lost. This latter point, was further discussed by the Court of Appeal for Ontario in Bhatnagar v. Cresco Labs Inc., 2023 ONCA 401 (which we discuss here), where the Court observed that it may make such a presumption, and that the claimant must show some evidence that it lost an opportunity. Accordingly, Bhatnagar raises the question of whether at civil law, a court has the discretion to make such a presumption, or whether it is mandatory.
It is notable that regardless of whether this case arose at civil law or common law, it is possible that the result would have been similar. As the Court observed, the Respondents specifically asked if IA had an interest in Group Excellence and were lied to. This accordingly would have likely qualified at common law as a breach of the duty of honest performance. Similarly, it is entirely possible that the measure of damages would have been similar, given the Appellants’ failure to rebut the presumption of damages.
Ultimately, Ponce emphasizes the point illustrated by the Supreme Court in recent years that although the civil law and common law traditions have fundamentally different bases, they can nevertheless serve as useful points of comparison in the understanding various areas of law.
We await with interest to see whether Ponce may be applied to common law good faith in future.
The “right to be heard” is often associated with a litigant’s access to the courts, but in Song Lihua v Lee Chee Hon (Former Name Que Wenbin) (“Song”),[1] Hong Kong’s Court of First Instance confirmed that it also requires a court – or an arbitral panel for that matter – to actually hear the parties.
Song suggests that this right requires arbitrators attending by video-conference to provide their undivided attention to a hearing, particularly while parties are adducing and challenging evidence, making submissions, or responding to questions from the tribunal. Below, we review certain key considerations for Canadian arbitration practitioners.
In Song, two individuals were in a contract dispute in mainland China with respect to a share purchase agreement, which dispute was referred to arbitration. At an arbitral hearing, one member of the tribunal (referred to in the Court’s decision as “Q”) participated by video-conference, as a result of which the hearing was recorded.
Song was successful in the arbitration, and subsequently sought (and was granted) an order by a court in Mainland China – the Chengdu Intermediate People’s Court (the “Mainland Court”) – to enforce the award. In that proceeding, the Mainland Court dismissed Lee’s application to set aside the award on the basis of the manner in which the arbitration was conducted, finding that although Q’s conduct in the hearing amounted to a procedural defect, it did not have any impact on the hearing.
After the issuance of the enforcement order, however, Lee applied to set aside the enforcement order in Hong Kong on a number of grounds, including (1) that he was unable to present his case in the Arbitration, (2) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the parties’ agreement, and/or (3) that it would be contrary to public policy to enforce the Award in Hong Kong. For the purpose of this article, the most relevant of these grounds was based on the allegation that Q’s conduct had deprived Lee of the opportunity to present his case, and of the right to a fair hearing, which was contrary to public policy.
As part of the Hong Kong Court of First Instance’s review, the Court reviewed the video recording of the hearing. After reviewing the footage, the Court found that Q was “not properly focused” [2] on the hearing, as follows (the details are worth repeating in the Court’s own words):
For at least the second half of the hearing, Q was moving from one location to another, indoors and outdoors, and had eventually left his premises, and traveled in a car, without giving his undivided attention to the hearing. He was off-line for periods of time from the second half, and obviously could not hear what was being said by the parties’ lawyers or by the other members of the tribunal. […] [I]t is quite obvious that essentially for the second half of the hearing…Q had scarcely been stationary for more than 1 minute (apart from the last part of the Video when he was inside a car). The Video clearly showed the background of Q’s various locations, and it could be observed that he had moved from one room of the premises to another, at times talking to and/or gesturing to others in the room. Q could also be seen to be looking into the distance frequently, instead of watching the screen and the video of the proceedings. […] Approximately 6 minutes from the commencement of the Excerpt of the Video, Q could be seen walking out of the main door of the premises into an open public area. He remained standing there for a short period of time, and then went off-line at around 7:50 minutes after the commencement of the Excerpt. Q went online again at approximately 8:20 minutes, before going off-line again at around 8:28, and again at 9:14. When Q appeared online again at 9:56 minutes, he was seen inside a vehicle which appeared to be a private car as he was sitting in the front seat and adjusting his seatbelt. The video image froze again at 10:35 minutes of the Excerpt, and when Q appeared online at 10:58, the chairman of the tribunal could be heard asking if Q could hear him but there was no response whatsoever from Q for some time. At 11:25 minutes of the Excerpt, Q spoke for the first time to state that he had no reception as he was on or proceeding to the high-speed railway.[3]
For at least the second half of the hearing, Q was moving from one location to another, indoors and outdoors, and had eventually left his premises, and traveled in a car, without giving his undivided attention to the hearing. He was off-line for periods of time from the second half, and obviously could not hear what was being said by the parties’ lawyers or by the other members of the tribunal.
[I]t is quite obvious that essentially for the second half of the hearing…Q had scarcely been stationary for more than 1 minute (apart from the last part of the Video when he was inside a car). The Video clearly showed the background of Q’s various locations, and it could be observed that he had moved from one room of the premises to another, at times talking to and/or gesturing to others in the room. Q could also be seen to be looking into the distance frequently, instead of watching the screen and the video of the proceedings.
Approximately 6 minutes from the commencement of the Excerpt of the Video, Q could be seen walking out of the main door of the premises into an open public area. He remained standing there for a short period of time, and then went off-line at around 7:50 minutes after the commencement of the Excerpt. Q went online again at approximately 8:20 minutes, before going off-line again at around 8:28, and again at 9:14. When Q appeared online again at 9:56 minutes, he was seen inside a vehicle which appeared to be a private car as he was sitting in the front seat and adjusting his seatbelt. The video image froze again at 10:35 minutes of the Excerpt, and when Q appeared online at 10:58, the chairman of the tribunal could be heard asking if Q could hear him but there was no response whatsoever from Q for some time. At 11:25 minutes of the Excerpt, Q spoke for the first time to state that he had no reception as he was on or proceeding to the high-speed railway.[3]
The Court concluded, perhaps not surprisingly, that, the “manner of Q’s attendance…, by going outdoors where reception was poor, was obviously disruptive of the proceedings, to say the least.”[4] Importantly, the Court also noted that on at least two occasions, Q was addressed by other members of the tribunal or the secretary of the tribunal, and “made no answer at all, nor… made any indication or gesture” that he heard them.[5] This led the Court to conclude that Q did not appear to have heard the case.
In the Court’s view, this raised several issues touching on fundamental principles of adversarial proceedings.
For one, it jeopardized the appearance of impartiality: “an objective observer would have reasonable doubts as to firstly, whether Q had already made up his mind as to the dispute before or without hearing the parties, and was not interested in what the parties had to say on the evidence or on the law.”[6] In that regard, it need hardly be said that impartiality – including the appearance of impartiality – is a bedrock principle of essentially any adjudication proceeding, including arbitration.
For another, this impinged the right to be heard, which is “an important procedural right under the rules of natural justice going directly to the question of fairness”.[7] While that right is generally associated with access to the courts, the Court here provided an important reminder that this principle applies with equal force in the context of arbitration.
On the latter point, the Court relied on the English Court of Appeal decision in Stansbury v Datapulse plc & Anor,[8] which involved a “more extreme case of…improper conduct” by a member of an employment tribunal who fell asleep during a hearing.[9] In that case, the Court of Appeal concluded that it is “axiomatic” that a tribunal must hear all the evidence,[10] and that a hearing may be found to be unfair if an arbitrator does not appear to be alert as to what is being said, or seems unable to give their full attention to the hearing.[11]
Because “there is no apparent justice and fairness, when a member of the decision-making tribunal was not hearing and focused on hearing the parties in the course of the trial”, the Court in Song found as a matter of public policy that enforcement of the award would “violate the most basic notions of justice”.[12]
Notably, the Court also held that counsel for the party that lost the arbitration need not have raised an objection during the hearing itself, because the Court has jurisdiction to raise and rely on public policy grounds irrespective of the parties. The Court also noted that counsel could not be expected to notice when an arbitrator on-screen is distracted, given that counsel may be focused on present the client’s case, and challenging the opponent’s case.
While the result in Song is perhaps unsurprising, it nevertheless provides a welcome reminder that key principles of natural justice apply with equal force in arbitration just as they do in court. This is precisely why, as readers will appreciate, these principles are enshrined in virtually all arbitral rules, as well as governing legislation.[13] Conversely, the fact that the arbitral award was upheld in Mainland China suggests that different jurisdictions’ respective public policies may result in differing conclusions, particularly depending on whether parties advance the same or different arguments in set-aside proceedings.
In that regard, the Court notably observed – by reference to the decision of the Appellate Committee of the House of Lords in Lawal v Northern Spirit Ltd – that “[w]hat the public was content to accept many years ago is not necessarily acceptable in the world of today. The indispensable requirement of public confidence in the administration of justice requires higher standards today than was the case even a decade or two ago”.[14] Quite rightly, the standard for these principles continues to be raised over time.
Accordingly, although Song is a Hong Kong case, it may nevertheless be useful in the Canadian context as well.
In any event, it may seem self-evident that an arbitrator cannot hop in a car in the middle of a hearing to head to the train station. Even so, Song articulates how exactly this offends the rules of justice and fairness: it jeopardizes the appearance of impartiality, and it impugns the right to be heard. Song effectively confirms that those principles – at least in of Hong Kong – include the right to have the full attention of the decision-maker, rather than simply the right to appear before them.
However, Song also provides a potentially important insight – or at least raises an interesting question – regarding the distinction between a right afforded to the parties and a principle that transcends the parties’ rights. In that regard, it is notable that the Court concluded that counsel’s failure to raise the issue during the hearing – and indeed, his express confirmation at the end of hearing that he had no objection to the procedure of the arbitration – was not sufficient to bar this ground of set-aside.
As readers will appreciate, virtually all institutional rules and arbitration legislation provide parties with the right to challenge the appointment of an arbitrator, and will establish a time limit within which such a challenge must be brought. If such a challenge is not raised in a timely manner, it is barred, and furthermore, the issue cannot be raised or relied upon by a tribunal or supervisory court. In other words, if a party fails to raise the issue, such failure is fatal to its position.
By contrast, the Court in Song suggests that the right to be heard, and the tribunal’s impartiality, transcend this limitation, which may create a logical tension insofar as a lack of partiality is itself a basis for to challenge an arbitrator’s appointment. Accordingly, it would be interesting to consider whether a party could avoid a time bar associated with an arbitrator challenge by relying on the public policy exception.
Ultimately, it has yet to be seen when the reasoning in Song will be adopted elsewhere—but of course, that may require circumstances similar to those in Song, which would seem to be rare.
[1] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540.
[2] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 51.
[3] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at paras 38, 40, 42.
[4] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 42.
[5] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 43.
[6] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 51.
[7] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 45.
[8] Stansbury v Datapulse plc & Anor, [2003] EWCA Civ 1951.
[9] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 46. Parenthetically, it is worth noting that, if Song had been an entirely in-person hearing, the Court would not have been required to consider the matter at issue.
[10] Stansbury v Datapulse plc & Anor, [2003] EWCA Civ 1951 at para 27, citing Whitehart v Raymond Thomson Ltd, an unreported decision of the Employment Appeal Tribunal from September 11, 1984.
[11] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at para 46
[12] Song Lihua v Lee Chee Hon (Former Name Que Wenbin), [2023] HKCFI 2540 at paras 52, 56.
[13] See s 46(3)(b) of Hong Kong’s Arbitration Ordinance, Cap 609, as of December 16, 2022; see also, Ontario’s Arbitration Act, 1991, SO 1991, c 17, s 19(2).
[14] Lawal v Northern Spirit Ltd, [2003] ICR 856 (HL).
In Sjostrom Sheet Metal Ltd v Geo A Kelson Company Limited,[1] the Ontario Superior Court of Justice provided a timely reminder regarding the significance of careful pleading, clear and transparent change order processes, precise record-keeping, adherence to contractual obligations, and effective communication amongst contractual counter-parties in the context of a construction project with subcontractors and sub-subcontractors performing overlapping scopes of work. Below, we discuss some of the key takeaways.
This matter arose as a result of issues in respect of the construction of the University Health Network (“UHN“) Centre for Cell & Vector Production (“CCVP“). UHN hired Canadian Turner Construction Company (“Turner“) as the general contractor for this project. In this case, UHN and Turner were not parties to the action, nor were they relevant to the Court’s analysis.
Turner subcontracted with Geo A Kelson Company Limited (“Kelson“) to perform the mechanical work on the Project. Kelson then sub-subcontracted with A Amar and Associates Ltd (“Amar“) for Amar to perform certain sheet metal work for a fixed price. After being retained by Kelson, Amar subsequently faced labour issues which resulted in it hiring labourers from Sjostrom Sheet Metal Ltd (“Sjostrom“) to assist with its scope of work. Kelson was not aware of the hiring of Sjostrom at the time.
Ultimately, Sjostrom abandoned the Project as a result of non-payment by Amar.[2] Per the Court, Kelson and Sjostrom then reached an arrangement whereby Sjostrom would return to site and continue working, with Kelson being responsible for direct payments to Sjostrom on a go-forward basis. Consequently, Kelson issued a change order which reduced the total amount of Amar’s subcontract due to the work performed (and to be performed) by Sjostrom (the “Change Order”).[3] Although not explicitly stated, this Change Order was presumably agreed to by Amar, given that the change was implemented via change order rather than change directive.
Amar subsequently brought a claim against Kelson for unpaid services and materials under its sub-subcontract. In addition, Amar argued that it was relieved of its remaining sheet metal responsibilities due to the Change Order issued by Kelson and thus no longer had any obligations to Sjostrom.
In parallel with Amar’s action against Kelson, Sjostrom brought a lien action against Kelson for unpaid amounts allegedly owing pursuant to the aforementioned arrangement between Kelson and Sjostrom, which Sjostrom alleged to be a contract between the two. In response, Kelson argued that it had no contract with Sjostrom, and that as result, it had no liability for Sjostrom’s claim and that Amar was in fact required to pay any amounts proven by Sjostrom’s claim. Kelson also counterclaimed against Amar for damages, contribution, and indemnity if Kelson were found liable to Sjostrom.[4]
Given the somewhat unusual (and more importantly, disputed) contractual arrangement amongst the parties, the Court’s analysis touched in relevant part on a number of issues that are broadly relevant to the construction industry.
In particular, the Court considered the following:
Broadly speaking, Amar argued that its responsibility for sheet metal labour performed on the Project (whether by Sjostrom or otherwise) ceased after the issuance of the Change Order, and Sjostrom’s work was subsequently governed by a separate, direct sub-subcontract with Kelson. Sjostrom held the same position as Amar. Conversely, Kelson alleged that it had no direct contract with Sjostrom, alleging any responsibility for any owed amounts to Sjostrom rested with Amar.
The Agreement Between Kelson and Sjostrom
A key issue was of course whether a direct contract was established between Kelson and Sjostrom; in that regard, and despite the absence of a written agreement Sjostrom alleged that the parties entered into an oral agreement. In determining whether Kelson and Sjostrom entered into a contract, the Court considered first principles of contract formation including (1) offer, acceptance, consideration, certainty of terms and intention, (2) the factual matrix between the parties, (3) an examination based on an objective standard, and (4) the presence of a meeting of the minds.[5]
Ultimately, the Court found that it was unnecessary to rely on these contractual principles, given that Kelson’s pleadings were sufficient to establish the existence of an agreement.[6] In particular, the Court observed that subrule 25.07(3) of the Rules of Civil Procedure requires a party who intends to prove a version of facts that is different from the facts pleaded by the opposing party must plead the party’s own version of the facts in their defence.[7] However, Kelson’s statement of defence failed to dispute Sjostrom’s claim of the existence of a direct contract between Kelson and Sjostrom. Rather, the Court found that Kelson unintentionally acknowledged the existence of a direct contract with Sjostrom.
Further, in its pleadings, Kelson relied on s. 17(3) of the Construction Lien Act, which permits a party that is liable for payment to another to claim a set-off against such payment. This subsection contemplates that a payee’s outstanding debts, claims, or damages related to their payer can be set off against the amount of the payee’s lien. However, Kelson could only rely on s. 17(3) if it qualified as the “payer” of Sjostrom, which was defined under the CLA as “the owner, contractor, or subcontractor who is liable to pay for the services or materials supplied to an improvement under a contract or subcontract” (emphasis added). The Court found that Kelson’s reliance on this provision logically required privity of contract between Sjostrom and Kelson. Thus, relying on this section was effectively an admission of a direct contractual relationship by Kelson.[8]
Moreover, even in the event that Kelson’s statement of defence did not admit a direct contract, the Court would have found that the objective evidence supported the existence of a contract between Sjostrom and Kelson,[9] referring to communications between the parties, negotiations, as well as email correspondence suggesting an agreement on terms and pricing.[10] Indeed, the examination of whether a contract has been formed entails assessment based on an objective standard – in which the parties’ conduct is assessed based on how it would be construed by a reasonable, disinterested third party (i.e., a reasonable person) – rather than a subjective standard, based on the subjective understanding of each party. In applying this standard, the Court therefore found that a reasonable person would conclude that both parties intended to enter into a direct contractual relationship.
Claimed Amount of Work Performed by Sjostrom
The next issue considered by the Court was whether Sjostrom had proven the amount claimed in respect of the work it allegedly performed.
The agreement between Sjostrom and Kelson (now found to exist) was based on hours spent on sheet metal labour at a set rate, which the Court considered sufficiently similar to a cost-plus contract such that the case law on cost-plus contracts applied in this case. In that regard, the Court identified several distinct principles that applied to the assessment of a damages claim including the need for the parties to practice diligence in managing costs, prevention of wasteful or uneconomic use of labour and materials, reasonableness of estimates, examination of the context to an estimate, and the sophistication and knowledge of the parties.[11]
The Court found that Sjostrom failed to provide sufficient evidence that the time summaries it had provided were an accurate reflection of the hours worked by Sjostrom. Specifically, Sjostrom combined its overtime hours with its regular hours, leading to a distorted picture. Further, Sjostrom provided weekly summaries that were not signed by the labourers themselves, and which lacked details of the actual work undertaken.[12] Timesheets were not accurately kept, and often consisted of notes on scrap paper, pieces of drywall, cardboard and napkins.[13]
Moreover, the Court found that time summaries were not provided to Kelson on a weekly basis.[14] Rather, they were only provided with Sjostrom’s invoices, which made it such that there was “no evidence tendered at trial supporting that Kelson could reasonably have known how many hours Sjostrom was spending on site until receiving the invoices”.[15] The Court also found that there was a discrepancy between the actual hours worked and estimates, as evidence suggested that the sheet metal labour was substantially completed earlier than Sjostrom’s estimate.[16]
The Court emphasized the principle that “time spent by labourers must be strictly proven due to the difficulty in verifying them after the fact”.[17] The Court found that Sjostrom did not meet its evidentiary burden to demonstrate actual hours, how the hours were incurred, why they varied significantly from estimates, and why no notice was provided regarding the fact that actual labour hours were significantly exceeding the estimate. Thus, the Court dismissed Sjostrom’s claim for payments made exceeding the sum already remitted by Kelson due to insufficient evidence.[18]
The Change Order’s Impact on Amar’s Scope of Work
Kelson and Amar also disagreed with respect to the contractual impact of Kelson’s Change Order which reduced the amount of Amar’s sub-subcontract, but also arguably the scope – depending on the view of each party considering it. In this regard, Kelson asserted that the Change Order merely credited the cost of Sjostrom’s labour against the price of the sub-subcontract between Kelson and Amar, but did not remove sheet metal labour from Amar’s scope of work, while Amar argued that it fully removed sheet metal labour from Amar’s scope of work.[19]
In this case, the Court noted that the Change Order was ambiguous, only referring to a price reduction and a description of “work performed by others.” As a result, an analysis of the surrounding circumstances was required in order to assess the intentions of the parties.[20]
In examining the factual background, the Court observed that the labour rate as agreed upon between Kelson and Sjostrom was not discussed with Amar. The Court found this “curious” given Kelson’s assertion that, despite Sjostrom not being included in their discussions, Sjostrom continued to be Amar’s sub-subcontractor, and that Amar was liable to pay the labour rate agreed upon by Kelson and Sjostrom in their agreement.[21]
Moreover, Sjostrom sent an email to Amar stating, “going forward Sjostrom will have to follow instruction as directed by [Kelson], exclusively. This includes but not limited to, time sheet [submittal] etc.”[22]The Court found that this email was consistent with the understanding that Kelson assumed responsibility for Sjostrom, especially given the fact that there was no response from Kelson or Amar to indicate otherwise.[23]
In another e-mail exchange in response to an e-mail from Sjostrom to which Kelson was copied regarding labour required for installation of control dampers, Amar responded ” [Kelson] has received and deducted costs from my contract for the entirety for ‘cost to complete'”[24]. While Kelson responded to the e-mail, it did not dispute Amar’s characterization that the “cost to complete” was deducted from Amar’s sub-subcontract. Thus, the Court found that the Change Order had the effect of removing sheet metal labour from Amar’s scope of work. [25]
Breach of Kelson and Amar’s Subcontract
The Court then considered who breached the subcontract between Kelson and Amar. Amar claimed that Kelson breached the subcontract through non-payment, while Kelson claimed that Amar breached the subcontract due to its failure to provide sheet metal labour. The Court observed that the subcontract required a notice of default to be delivered in order for Amar to be in breach, and since no notice was provided until after the parties completed their work, “Amar was not formally in breach… at any material time”. Thus, without having issued a notice of default, Kelson had no right to back charge Amar for costs beyond the figure agreed upon in the Change Order. [26]
In addition, the Court found that Kelson breached the subcontract by failing to pay Amar the remaining holdback due upon final payment after substantial completion and found Kelson had separate holdback obligations under the Construction Lien Act for its subcontracts with both Amar and Sjostrom. Thus, Kelson breached its subcontract with Amar by not making the payments.[27]
Further, in determining the earned and unpaid amount owing to Amar, Kelson argued that Amar underbid the labour portion of the sheet metal work. However, the Court emphasized that whether Amar underbid was immaterial, as Amar’s subcontract was a fixed price contract, not a cost-plus contract. On this basis, Kelson would not have to pay anything more than the fixed subcontract price agreed by parties.[28]
Moreover, the Court found that since the sheet metal labour was removed from Amar’s sub-subcontract scope of work through the Change Order, and since they were called back to the project site in order to perform work outside of their revised scope, Amar’s invoice constituted a valid extra.[29] Lastly, the evidence did not support a finding that Amar intended or agreed to be indemnified for expenses associated with the completion of sheet metal labour.[30]
The Court’s Determination
Based on all of the above, the Court concluded overall that Sjostrom and Kelson did enter into a separate sub-subcontract for Sjostrom to complete the remaining sheet metal labour in Amar’s scope of work, but that Sjostrom has failed to prove its claimed damages, as a result of which the Court dismissed Sjostrom’s action and discharged its lien. With respect to Amar, the Court concluded that the Change Order had removed all of Amar’s remaining scope of work, and Kelson breached its subcontract with Amar due to non-payment, such that Amar was entitled to judgment against Kelson.
Notwithstanding that the fact pattern of this case was not especially unusual, Sjostrom nevertheless offers several takeaways with respect to how a party can best protect or advance its position in a construction dispute.
First, and as it relates to pleadings, it is crucial that parties take care when drafting such documents in order to ensure their pleadings align with the theory of their case. Here, the Court found inconsistencies between Kelson’s statement of defence and its subsequent submissions, which led to a finding that a direct contract existed between Kelson and Sjostrom. Such inconsistencies, as seen in this case, can lead to unexpected outcomes.
Second, it is imperative that parties understand their rights under their contract(s) and any particular actions required to enforce them. In this case, the subcontract between Kelson and Amar required a notice of default in order to ground a finding of breach of contract, and since Kelson did not provide such notice, the Court found that Amar was not in breach and that Kelson was not entitled to exercise any associated remedies. While this may be a somewhat unusual precondition depending on the form of contract used (whether it be a standard form or a bespoke contract), it nevertheless emphasizes the importance of ascertaining all relevant preconditions to taking a given position, and then complying with those preconditions.
Third, the Court provided helpful guidance in its discussion of the judicial assessment that applies in making claims for payment under certain forms of construction contract. A cost-plus basis for payment in particular – as well as time and materials basis – is inherently uncertain, and can vary quite significantly from any estimate given before the start of work. A court will consider whether the claiming party exercised diligence and was economical in the use of its labour and materials, and the claiming party will have to meet a high evidentiary burden (among other things).
In that regard, contractors operating on a cost-plus or time and materials basis would be well advised to be cautious and comprehensive in considering the basis for any estimate they give to a client, in order to have confidence that the work can be completed for an amount roughly equivalent to that stated in the estimate. The alternative, as Sjostrom shows, entails significant scrutiny by a court or other decision-maker (e.g. an arbitrator).
In that regard, parties must ensure that their time is tracked in a reliable and accurate manner. The reliability of time sheets, and other timekeeping methods, is crucial to establishing their validity as admissible evidence – not to mention the practical and relationship benefits of doing so. As the Court observed, time spent by labourers must be proven to a strict evidentiary standard, given the difficulty in verifying hours after the fact. In this case, the Court found that Sjostrom failed to provide sufficient evidence to prove that their time summaries were an accurate reflection of their work. This lack of reliable evidence left Sjostrom with no evidentiary foundation for any additional amount claimed. Similarly, it is important to ensure that change orders or side agreements are clearly documented and agreed upon, as well as disseminated to all relevant parties.
In any event, however, construction industry participants would be well advised to be candid with counterparties if and when the cost estimate will be exceeded (or when it is anticipated to be exceeded), so as to avoid unpleasant surprises and acrimony. Successful projects are often those which operate on the basis of a cooperative and collaborative relationship, and in that regard, financial candor is arguably no different.
[1] Sjostrom Sheet Metal Ltd v Geo A Kelson Company Limited 2023 ONSC 4959.
[2] Sjostrom at paras 1-3.
[3] Sjostrom at para 3.
[4] Sjostrom at paras 4-6.
[5] Sjostrom at paras 10-11.
[6] Sjostrom at para 14.
[7] Sjostrom at para 17.
[8] Sjostrom at para 21.
[9] Sjostrom at para 24.
[10] Sjostrom at paras 25-39.
[11] Sjostrom at paras 40-41.
[12] Sjostrom at paras 42, 44-46.
[13] Sjostrom at para 62.
[14] Sjostrom at para 63.
[15] Ibid.
[16] Sjostrom at paras 53 and 59.
[17] Sjostrom at para 74, Citing Infinity Construction Inc. v. Skyline Executive Acquisitions Inc., 2020 ONSC 77 at para. 114.
[18] Sjostrom at paras 74 and 75.
[19] Sjostrom at paras 80 and 81.
[20] Sjostrom at paras 82 – 84.
[21] Sjostrom at para 94.
[22] Sjostrom at para 96.
[23] Sjostrom at para 97.
[24] Sjostrom at para 102.
[25] Sjostrom at paras 104 -105, 117.
[26] Sjostrom at para 123.
[27] Sjostrom at paras 127-130.
[28] Sjostrom at para 135.
[29] Sjostrom at para 137.
[30] Sjostrom at para 143.
Singleton Urquhart Reynolds Vogel LLP is proud to announce that Cheryl Labiris has been selected as one of the top 40 young professionals in the construction sector in Canada, as part of On-Site Magazine’s 40 Under 40 in Canadian Construction awards, presented in partnership with SitePartners.
This award celebrates the accomplishments of young construction professionals who are making an immediate impact by helping to advance the industry as a whole.
Cheryl works exclusively in the Construction and Infrastructure Practice Group and has a very broad and diverse practice acting for all members in the construction pyramid including owners, general contractors, subcontractors/suppliers, sureties, architects, engineers, designers, and consultants on a vast range of construction claims including claims for delay, disruption, prolongation, breach of contract, breach of trust, geotechnical claims, permits, licenses, and approvals, access to lands, COVID-19, negligent/fraudulent misrepresentation, and surety bond claims.
Cheryl has significant experience working on a variety of projects including large-scale public infrastructure projects including multi-billion-dollar light rail transit projects, mine remediations, power plants, and wind farms. Cheryl also has experience in complex construction litigation proceedings, arbitration proceedings, and mediation and negotiation processes.
About On-Site Magazine’s Top 40 Under 40
On-Site’s 2023 Top 40 Under 40 in Canadian Construction have been selected by a panel of judges based on professional achievements, innovation, leadership, and community involvement. The listing features individuals both on and off-site who are helping advance complex infrastructure projects, implementing, or launching powerful software tools to increase on-site safety, and building communities for families to thrive in, and are a promising reflection of where the Canadian construction industry is heading.
In Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239, the Ontario Superior Court of Justice considered repudiation (broadly, the law applicable in cases where a contractual party abandons or refuses to perform its contract) in respect of a construction contract in the context of a troubled townhouse development project. Here, the Court reaffirmed that repudiation is an exceptional remedy and that there is a high bar to proving that a party has repudiated its contract.
As discussed in more detail below, unless there is sufficient evidence to prove repudiation on an objective basis, parties should be cautious when deciding whether to stop work in acceptance of an alleged repudiation. In particular, we consider the case and the implications of failing to prove repudiation in a construction project where so alleged.
Islington Chauncey Residences Corp. (“Islington”) (the developer) hired Sundance Development Corporation (“Sundance”) to act as construction manager for a townhouse development project (the “Project”) under a services agreement (the “Agreement”).
Sundance commenced its work in July 2019; however, the construction phase of the project was delayed (notably related to the early days of the COVID-19 pandemic). By late summer 2020, Islington was pushing for Sundance to complete two model units for the development.
In September 2020, the model units were still not ready, and the overall construction was far from complete. At this time, for extraneous reasons, the site superintendent (a Sundance employee) advised of his intention to leave the job at the end of October 2020. Although Sundance proposed that Sue Capobianco, another one of its personnel, be the replacement site superintendent, Sundance did not have the unilateral right to appoint the site superintendent and Islington did not agree with Sundance’s recommendation. No other proposals were made, and the replacement site superintendent was not agreed to or appointed.
Sometime after the site superintendent’s announcement, Islington’s principal engaged a project manager, Tony Murdocca (who himself was recommended by the father of the Islington principal), to help assist in getting the Project finished. Mr. Murdocca arrived on site on October 15, 2020, and began directly coordinating with trades to complete the model units.
In a telephone conversation on October 15, 2020, representatives from Islington and Sundance discussed the possibility of terminating the Agreement. By the end of the call, the parties had agreed to try to work out an agreement to end their contractual relationship effective October 31, 2020.
In the last two weeks of October 2020, the parties made efforts to negotiate the terms of the termination/settlement agreement. While the concept of a mutual agreement was agreed to in principle and most terms were agreeable to both parties, no mutual termination agreement was ultimately reached as a result of an inability to agree on the scope of the release (specifically, Islington would not agree to release Sundance from future claims). Throughout this period, Mr. Murdocca took the lead on coordinating the finishing of the two model units.
On October 30, 2020, and absent an executed termination/settlement agreement, Islington sent a memorandum to Sundance which provided a list of alleged damages arising from Sundance’s mismanagement and project delays and noted their position that Sundance had breached the Agreement. The memorandum confirmed that Islington “agreed in principle with terminating the contract, but would not agree to releasing Sundance from future claims” and that Islington intended to back charge Sundance for “costs incurred from delays and Sundance’s alleged ‘negligent mismanagement.’”
In response to the memorandum, Sundance sent a letter on the same day, taking the position that Islington had repudiated the Agreement, and that Sundance therefore accepted that repudiation. The letter included a demand for payment of three invoices (which were attached to the letter) as a precondition for delivering remaining materials and accounting records in Sundance’s possession. Sundance alleged that Islington’s collective conduct repudiated the contract and specifically referred to Islington’s decision to use Islington personnel (including Mr. Murdocca) to take over Sundance’s construction management function on the project and Islington’s conduct during the termination agreement negotiations.
Sundance withdrew from site on the next day October 31, 2020, and ceased supplying all services to the Project. After Sundance ceased services, and given that Islington did not believe that Sundance had earned the fees and had claims against them in negligence and for failing to complete the work under the Agreement, Islington made no further payments to Sundance.
Although the Court had four issues before it, for the purposes of this article we will only be focusing on the first issue: “Was Sundance justified in ceasing all services effective October 31, 2020? Specifically:
Did Islington repudiate the contract?
Broadly speaking, in Canadian Law repudiation means: “the conduct of one of the parties to a contract which demonstrates to the other that it will not fulfill the terms of the contract.”[1] Repudiation “entitles the other party not to perform its obligations under the contract and claim damages.”[2]
Looking at the totality of the evidence, the Court held that Islington did not repudiate the Agreement. The Court found that Islington’s conduct was not repudiatory for three main reasons: (i) Islington had a contractual right to direct Sundance to cooperate or coordinate with it in supervising and managing the construction; (ii) Sundance was never excluded from full and free access to the site or materially impeded in its role as construction manager (including with respect to the hiring of Mr. Murdocca); and (iii) Islington’s “hard bargaining” with Sundance in respect of the termination/settlement agreement did not rise to the level of repudiatory conduct.
The Court began its analysis by reviewing the relevant law of repudiation. The Court noted that repudiation is assessed on an objective standard, and that the court must ask “whether a reasonable person would conclude that the breaching party no longer intends to be bound by the contract, which requires considering the surrounding circumstances”. To establish repudiation, more than an ordinary, non-repudiatory breach of the contract is required. The breach must be serious and “[i]t must deprive the innocent party of substantially the whole benefit of the contract.” In this regard, the Court had to consider whether Islington breached the Agreement and whether such breach was serious and deprived Sundance of substantially the whole benefit of the Agreement.
The Court considered the Agreement and found that Islington had a “contractual right to deploy its own forces and … to require that Sundance cooperate and coordinate with those forces in supervising and managing the construction.” Pursuant to Section 3.1 of the Agreement specifically, “Sundance expressly agreed ‘to do all such acts and things as [Islington] considers necessary or desirable, whether independently or in cooperation or coordination with [Islington], to supervise and manage the accounting, financing and construction […] of the Units’”. In addition, Section 3.1 specifically enumerated several matters which captured the scope of work performed by Mr. Murdocca.
By utilizing this contractual right, Sundance argued that “Islington obstructed its free and full access to the model units by taking over the coordination of their construction”. On that point, Sundance referred to Section 7.1(d) of the Agreement, which entitled Sundance to “full and free access” to all units.
The Court found that “the fact that Islington assigned personnel to take a primary role in directing construction of the model units did not result in Sundance being excluded from ‘full and free access’ to the units to complete its work.” First, although there was a trade meeting invitation without Sundance’s inclusion, the Court found that there was no evidence supporting that “trade contractors were directed to or did cease communicating with Sundance or were directed to coordinate with Tony Murdocca to the exclusion of Sundance.” Second, the only Sundance personnel with a regular on-site presence, Ms. Capobianco, was not impeded in executing her duties. While she subjectively felt that she was being excluded from site operations, objectively there was no convincing evidence to show that Sundance’s on-site work was materially impeded. Ms. Capobianco continued to have involvement with the model units and continued to perform the same kinds of things she had done for the prior Sundance site superintendent that was leaving. Third, the site superintendent and Ms. Capobianco continued to have the controlling access to the site. Mr. Murdocca did not have the keys or codes for the electronic locks to the site, and had to be let in by either Sundance’s site superintendent or Ms. Capobianco.
On a balance of probabilities, the Court therefore found that Islington did not breach the Agreement by deploying personnel to site as the evidence did not support “that Sundance’s construction management function was genuinely impeded or superseded by the presence of Tony Murdocca or other Islington personnel.” In any event, managing the construction work was only one of Sundance’s many duties, and having its full and free access impeded would not be sufficient in itself to ground repudiation of the entire contract.
Lastly, the Court found that “what transpired in late October was hard bargaining, not repudiatory conduct.” When the parties could not agree to the terms of termination, Islington eventually offered an ultimatum: “agree to the release being proposed or face back charges for all the costs that Islington said were incurred solely by Sundance’s mismanagement of the project.” There was no language in Islington’s memorandum that treated the Agreement as being at an end. In addition, the Court found that “nothing in the evidence support[ed] a finding that, objectively, Sundance had any genuine intention or willingness to take steps to investigate and respond to the alleged breaches of contract.”
In this regard, the court found that there was no breach of the Agreement, let alone a repudiatory breach.
If the contract was not repudiated, was Sundance entitled to withdraw its services?
The Court held that Sundance was not entitled to withdraw its services, and therefore breached the Agreement by doing so.
The relevant law states that if “an owner ceases to make payments under the contract or by other conduct makes it impossible for the contractor to complete, the contractor is justified in abandoning the work and may enforce a claim in quantum meruit to the extent of the actual value of the work performed and material supplied to that time”.[3] The Court also noted that “a party cannot rely on its own breach of contract to be relieved of its contractual obligations”.
Sundance argued that because Islington was in breach of the Agreement, it was entitled to cease work. In its response letter to Islington, Sundance demanded payment of accounts and ceding control of the model units to Sundance’s forces as pre-conditions for its return. The Court ultimately held that those demands were unsupported by the terms of the Agreement, and that there was no opportunity provided to Islington to remedy the alleged defaults as Sundance walked off the job the next day.
The Court found that Sundance lacked a contractual basis to demand that Islington cede control of the model units. First, pursuant to Section 3.1, Islington was entitled to take over primary responsibility for coordinating and construction of the model units and Sundance was required to cooperate or coordinate with Islington on the construction of the units. Therefore, Islington deploying its own forces (i.e., Mr. Murdocca) was not a breach of contract under the Agreement. Second, as Sundance was factually not obstructed from “full and free access” to the units, there was no breach of Section 7.1(d) of the Agreement.
With respect to payment of accounts, the Court found that “Sundance had not met its burden of proving that Islington was in breach of the Agreement when Sundance advised it would be withdrawing all services and made demand for payment.” On the contrary, the Court found that there was no contractual basis for the three invoices that Sundance had attached (the invoices were for fees not yet due or payable or for its own materials that it left on site), and stated that “[d]emanding payment to which a contractor is not entitled or refusing to proceed unless paid is a breach of contract”.
As Islington had not repudiated the Agreement nor ceased to make payments to which Sundance was entitled, the Court found that “Sundance breached the contract by demobilizing from site with no legitimate basis and by making demand for payment of amounts to which it was not contractually entitled at the time of the demand.”
The Court ultimately ordered that Sundance repay Islington for the partial costs of the replacement construction management and the costs of extra work and work redone.
The Court in Sundance has reaffirmed the high bar for repudiation, and that courts are reluctant to grant it as an exceptional remedy. As stated by the Court, repudiation is “only available in circumstances where the entire foundation of the contract has been undermined, namely where the very thing bargained for has not been provided”.[4]
Further, this decision confirms just how necessary objective evidence is when showing repudiation. Although a party may feel impeded or that the other party intends to not be bound by the contract, those subjective impressions are not relevant to the analysis. A party proving that there was repudiation must, on an objective basis, establish that: (1) there was a breach of the contract; (2) the breach deprived it of substantially the whole benefit of the contract; and (3) the other party evinced an intention to no longer be bound by the contract.
When considering repudiation as a remedy, it is crucial that a party carefully reread its contract with a neutral lens and ensure that there is sufficient factual evidence to prove repudiation on an objective basis, before acting on the alleged repudiation. Given the drastic outcome of such a scenario, due diligence is therefore imperative. Caution is particularly warranted given a failed repudiation allegation likely, as was the case here, gives rise to a breach of contract by the alleging party – which can result in damages being awarded against the claimant.
Sundance also raises an interesting question as to whether there is a material distinction between the legal concepts of repudiation and fundamental breach, notwithstanding some case law suggesting they are two separate things.[5] Whereas proving fundamental breach ostensibly requires only that the non-breaching party is deprived of substantially the whole benefit of the agreement, repudiation also requires proving that, by words or conduct, a party has evinced an intention not to be bound by the contract. While proving intent might arguably constitute a higher evidentiary threshold, the Court’s observation that “intent” is measured on an objective standard – in other words, a party can repudiate a contract without subjectively intending to do so – suggests that the reference to intent may be somewhat illusory.
In any event, this case also demonstrates the importance of providing contractual counterparties sufficient time to respond to allegations of breaches of contract. The Court noted at a few points in its analysis that no objections had been raised by Sundance during the time when Mr. Murdocca took over the management and coordination of the model units until after negotiations had failed and Islington provided its memorandum regarding expected costs. In addition, the Court found that Sundance breached the Agreement later when it accepted the alleged repudiation and immediately demobilized from the site. If a party does not raise issues while they are occurring and does not give the other party an opportunity to resolve those issues, this could be a breach of the contract in and of itself and/or negatively affect any legal argument it may later want to raise regarding the other party’s breach of contract.
Indeed, readers will recognize this exact rationale as the underlying principle of contractual notice provisions, breach of which is often fatal to a claiming party’s position.
To conclude, we note that construction parties specifically should consider this case to be a cautionary tale. If a party intends to allege repudiation and accept such alleged repudiation, where no repudiation exists, and begins to act as if the contract has been terminated, that party will then be potentially liable for a breach of contract. Such a course of action is, to put it simply, a high-risk maneuver. While the other party on a construction project may take subjectively extreme steps that may harm the parties’ professional and personal relationship, a party should be careful to take note of exactly what obligations and entitlements exist within the contract – indeed, in circumstances where the contractual relationship has become highly acrimonious, parties would be best served by confirming their rights and obligations under the relevant agreement(s) and, if necessary, consulting a lawyer.
[1] Barron’s Canadian Law Dictionary, 6th ed (Barron’s Educational Series, Inc, 2009), sub verbo “repudiation”.
[2] Ibid.
[3] Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239 at para 82 citing D&M Steel Ltd. v. 51 Construction Ltd., 2018 ONSC 2171 at para 49, and Summers v. Harrower, 2005 CanLII 50261 (ONSC) at para 13.
[4] Sundance Development Corporation v. Islington Chauncery Residences Corp., 2023 ONSC 5239 at para 18 citing Remedy Drug Store Co. Inc. v. Farnham, 2015 ONCA 576 at paras 50-51, and Spirent Communications of Ottawa Limited v. Quake Technologies (Canada) Inc., 2008 ONCA 92 at para 37.
[5] Spirent Communications of Ottawa Limited v. Quake Technologies (Canada) Inc., 2008 ONCA 92 at para 37.