TruGrp Inc. v. Karmina Holdings Inc. Re-evaluating Standard Language in Letters of Credit for Lien Security

In the construction industry, letters of credit serve a vital function as project security and as a means of securing lien claims, in both cases facilitating the flow of funds. In the context of lien claims specifically, their longstanding use has led to standard language that is employed by parties vacating liens.

The language used in such instruments is arguably so standard and so commonly understood, that it might even be said to be immune from scrutiny – or, if not immune, highly resistant due to common understanding and use. Notwithstanding one’s expectation, however, they would be wrong. Specifically, and interestingly, the common language utilized in standard form lien security letters of credit has recently come under scrutiny in a Superior Court of Ontario case named TruGrp Inc. v. Karmina Holdings Inc.,[1] (“TruGrp”).

In TruGrp, the plaintiff has raised the issue of whether the standard language used in a relatively basic letter of credit (issued by a well-known banking institution) was, in fact, consistent with the applicable legislative framework governing letters of credit employed for vacating liens. The Court provided a partial decision in TruGrp and below, we consider the implications of this decision and how it may impact the use of letters of credit in this context.

Background

TruGrp Inc. (“TruGrp”) (a subcontractor specializing in building restoration and maintenance) moved to set aside an order obtained by Karmina Holdings Inc. (“Karmina”) that vacated TruGrp’s two claims for lien and certificate of action, which motion was initially decided on an ex parte basis. The order to vacate utilized a letter of credit from the Bank of Montreal (“BMO”) as security for TruGrp’s liens.

On the set-aside motion, TruGrp expressed concerns over the language in the approved security – i.e., a letter of credit – suggesting that the letter might not constitute sufficient security for its liens. This concern was allegedly supported by an email from the Accountant of the Superior Court of Justice (the “Accountant”), in which the Accountant expressed a similar opinion (as detailed below). In the alternative, TruGrp requested direction from the Court in respect of how to address the Accountant’s concerns.[2]

Karmina, the registered owner of the liened property in Hamilton, opposed the motion. It argued that TruGrp misunderstood the nature of irrevocable letters of credit, which have been commonly used as lien security for decades[3] (a point these authors note is relatively uncontroversial).

The core dispute was therefore whether the form of the letter of credit was consistent with certain provisions of the Construction Act,[4] and with the Accountant’s role as “custodian” as specified in O Reg 191/95 under the Public Guardian and Trustee Act.[5]

Specifically, the common form of the letter of credit allows the issuing bank to opt out of renewing the credit, provided that they must (1) notify the Accountant at least thirty days in advance and (2) substitute a bank draft for the amount of the credit minus any payments already made. TruGrp argued that this provision introduced a contingency in the security that conflicted with the Construction Act, and imposed inappropriate duties on the Accountant, contrary to the Public Guardian and Trustee Act. Karmina disagreed, and presented a series of procedural challenges to the motion.

The Superior Court’s Decision

The core of TruGrp’s motion centered on the terms related to expiry and renewal in the letter of credit, previously approved by the Court as adequate security for TruGrp’s lien claims in respect of Karmina’s motion to vacate.

The letter stipulated that it would expire on July 6, 2024, but included provisions for automatic annual renewal unless BMO provided a 30-day prior notice of non-renewal to the Accountant, accompanied by a bank draft for the net remaining amount of the lien, effectively ensuring continuity of security.

The letter of credit’s stipulations included three pertinent factors: (i) its expiry date, (ii) the condition of automatic renewal for successive one-year periods, and (iii) BMO’s prerogative to cease renewal by notifying the Accountant and submitting a substitute bank draft for the remaining balance.[6] However, an email from the Accountant indicated that any replacement bank draft would require a court order pursuant to subrule 72.03(2) of the Rules (which provision governs how funds or securities held by the Accountant are managed and released).[7]

TruGrp argued that this requirement to seek a court order under 72.03(2) created a potential gap in security if BMO opted not to renew the letter of credit and the Accountant subsequently refused to accept the replacement bank draft without a court order, leading to a scenario where there could be no enforceable security for TruGrp’s lien.

This concern was heightened by Karmina’s ongoing efforts to sell the liened property, which could have resulted in TruGrp losing its secured position vis-à-vis the property, a scenario that would undermine the intent of the Construction Act to protect lien holders.[8]

Procedural context of motion

For decades, Ontario courts have accepted either lien bonds or letters of credit as “security” (as that term appears in section 44(1) of the Construction Act), despite that term not being defined in the Construction Act. Lien bonds (which were not the form of security in the present case) are specifically addressed in O Reg 303/18 under the Construction Act, prescribing Form 21 as the bond form, which, although outdated in referring to the “Accountant of the Ontario Court,” still effectively binds the principal and the surety in an obligation to the Accountant to cover any payment deficiencies on liens and associated costs.[9]

Conversely, while no specific form for letters of credit is prescribed under section 44, they are still viewed as acceptable security, especially when such letters of credit adhere to international commercial conventions as outlined in section 44(5.1) of the Act.[10] The Court in TruGrp found that the language in the BMO letter of credit was consistent with the industry standard. In the motion at hand, the Court in fact acknowledged its previous endorsement of that form of letter of credit in Sundance Development Corporation v. Islington Chauncey Residence Corp.[11]

During Karmina’s initial ex parte motion to vacate, the Court expressed reservations about the letter of credit proposed by Karmina, with respect to (1) the vagueness of its requirements regarding the Accountant’s actions in drawing on the letter and (2) its failure to append the international commercial convention to which it referred. These issues were resolved with an amended letter from BMO, leading to its approval and the subsequent vacatur of the two TruGrp liens.[12]

Following receipt of the order to vacate, Karmina took the necessary steps to clear the lien claims from the property title, and TruGrp was duly informed through delivery of the Court’s issued and entered order, and the Accountant’s receipt of the posted letter of credit.

Despite this, TruGrp took steps to contest the sufficiency of the letter as security before and after the order (which resulted, for example, in the email from the Accountant). Their subsequent direct communications with the Accountant confirmed the need for a court order to modify or release the letter of credit, prompting the motion at issue in this case.[13]

As of the date of the motion, TruGrp’s liens were attached to the BMO letter of credit maintained by the Accountant, consistent with section 44(6) of the Construction Act.

Procedural challenges to motion

Karmina raised five procedural challenges against TruGrp’s motion: (1) the motion’s issues were res judicata and an abuse of process; (2) TruGrp failed to present any new evidence that could have altered the initial ruling; (3) TruGrp did not file the motion promptly, causing prejudice to Karmina; (4) the motion’s request to reinstate the lien claims could disrupt public policy by creating turmoil in the construction bar; and (5) the issue was moot, such that the Court should not hear the motion.[14]

Addressing the first challenge, the Court found that the motion’s issues were neither res judicata nor an abuse of process. The decision to vacate TruGrp’s lien claims was not based on a contested hearing but on an ex parte motion, making the case law cited by Karmina distinguishable. TruGrp directly challenged the vacating order under specific procedural rules, and did not make a collateral attack.[15]

With respect to the second challenge, while TruGrp’s evidence regarding the Accountant’s position on the letter of credit may have been ambiguous and hearsay, TruGrp’s arguments about the inconsistencies between the letter of credit’s language and statutory obligations were new and relevant, not presented during the original motion, such that this challenge was also dismissed by the Court.[16]

Regarding the third challenge, despite Karmina’s delay claim, the Court concluded the motion was filed in a reasonably timely manner, considering TruGrp had signaled its intention to challenge in a timely manner and had been actively communicating with the Accountant and Karmina about the issue.[17]

Interestingly, on the fourth challenge, i.e., public policy concerns, the Court found that the potential public policy concerns of overturning the vacating order were outweighed by the need to review whether the approved form of security (1) complied with the Construction Act and (2) did not improperly burden the Accountant.[18]

Regarding the fifth and final challenge concerning mootness, the Court did not find the motion moot. Rather, it found that the dispute over the letter of credit’s renewal conditions remained relevant and tangible, affecting ongoing security practices under the Construction Act.[19]

Accordingly, considering the totality of the circumstances – including the adversarial nature of the ongoing dispute over lien security, judicial economy, and the court’s role in ensuring legal compliance – the Court decided to hear the motion. This decision aligned with the Court’s responsibility to address significant legal issues when they arise, ensuring that relevant practices adhere to statutory frameworks and the underlying intent of the Construction Act. Thus, the Court dismissed Karmina’s procedural objections and allowed the motion to proceed on its merits, focusing on the sufficiency and legality of the form of the letter of credit.

Sufficiency of Letters of Credit

The core issue was whether BMO’s letter of credit provided sufficient security under section 44 of the Construction Act, and whether the Court’s approval of this security conflicted with the Accountant’s statutory role as set out in the Public Guardian and Trustee Act.

Both parties acknowledged the absence of case law specifically addressing the form of letter of credit commonly used as lien security, with only two cases being partially relevant, but neither addressing of them the standard renewal and expiry provisions directly.

TruGrp contended that the typical form of the letter of credit, used by BMO in the letter of credit at issue in this motion, was an uncertain security form contrary to the intent of the Construction Act, which aims for consistent and reliable security until a lien is finally resolved. TruGrp argued that the renewal terms introduced uncertainties harmful to lien claimants, potentially leaving them without continuous security. Further, TruGrp argued that the obligations imposed on the Accountant by the letter of credit conflicted with the statutory definition of the Accountant’s role as merely a “custodian,” which term assumed that the Accountant would not assume any active duties unless specified by a court order.[20]

Karmina, on the other hand, defended the Court’s approval of the letter of credit, emphasizing decades of precedent without any issue arising, and arguing for a broader interpretation of “custodian” that would include managing the securities actively, not just passively holding them.

Given the implications for the Accountant’s role and the novelty of the legal issues presented, the Court found it inappropriate to decide the motion at hand without the Accountant’s input. The Accountant was not initially notified of the motion, with its absence becoming notable given its central role in the dispute. Further, BMO was also to be given notice of the motion, due to its direct involvement as the issuer of the letter of credit.[21]

Karmina suggested dismissing the motion to allow for a re-filing with proper notices, but the Court concluded that approach would be inefficient given the existing proceedings and submissions. Instead, the Court elected to adjourn the motion indefinitely until the Accountant and BMO could provide their positions, and a further hearing could be scheduled if necessary.

The Court therefore ordered that both the Accountant and BMO be served with motion records and the motion reasons within fourteen days, with instructions for arranging a case conference if they chose to engage. This was to ensure a comprehensive review and fair opportunity for all affected parties to contribute to the resolution of this matter.

If neither the Accountant nor BMO take a position, the Court noted that it would proceed to decide based on the existing submissions.

Commentary

TruGrp v. Karmina presents an interesting and somewhat atypical issue regarding the use of relatively standard form letters of credit as lien security. This dispute accentuates the critical nature of understanding the legal and procedural frameworks that govern financial securities in construction projects by highlighting the complexities involved when traditional financial instruments such as letters of credit intersect with specific statutory roles and requirements, such as those of the Accountant in lien matters under the Public Guardian and Trustee Act.

For industry stakeholders, this case is also a reminder of the importance of ensuring that financial securities are drafted to meet the specific requirements of governing legislation, as well as its underlying policy rationale(s). The potential for a letter of credit to fail in providing sufficient security due to its terms not aligning with statutory duties (even in circumstances where already accepted by the Court in one sense) could lead to significant financial exposure and operational risks.

The consequences of such a failure are potentially severe. Financially, if a letter of credit is deemed insufficient, the party relying on it for security (typically the subcontractor or supplier) faces the risk of non-payment and a lack of collateral on which to rely (e.g., the original liened property). This scenario can escalate into cash flow problems, delayed project timelines, and, in a worst-case scenario, insolvency if the funds tied to the project are significant relative to the claimant’s operational capacity.

TruGrp also underlines a predicament for intermediate parties, such as general contractors, who depend on the reliability of these financial instruments to fulfill their contractual duties to vacate liens. As readers will appreciate, general contractors often rely on letters of credit to vacate liens and satisfy their obligations to project owners. If these instruments are found to be unenforceable due to non-compliance with statutory requirements, general contractors may find themselves without reliable security – – particularly some contractors who cannot, for example, access a lien bond for one reason or another. This exposure could leave them vulnerable to subsequent claims from subcontractors for non-payment, and breach of contract claims from property owners due to unvacated liens.

Moreover, there is a broader industry impact to consider. Repeated instances where letters of credit fail to align with statutory requirements could lead to a loss of trust in these instruments as reliable forms of financial security in construction projects altogether. This may force industry participants to favour alternative forms of security and could prompt regulatory changes to better define the use of such financial tools.

We await with interest to see if the Accountant and/or BMO participate in the motion in question, and what its ultimate outcome will be with respect to the appropriate language for use in letters of credit as lien security.

[1] 2024 ONSC 2165 (CanLII) (“TruGrp v Karmina”).

[2]TruGrp v Karmina at para 1.

[3] TruGrp v Karmina at para 2.

[4] RSO 1990, c C.30.

[5] RSO 1990, c P.51.

[6] TruGrp v Karmina at para 11.

[7] TruGrp v Karmina at para 12.

[8] TruGrp v Karmina at para 13.

[9] TruGrp v Karmina at paras 15-16.

[10] Typically, letters of credit in Ontario will refer to the ICC Uniform Customs and Practice for Documentary Credits (known as “UCP 600”). In that regard, Bruce Reynolds’ and Sharon Vogel’s seminal report on the Construction Lien Act, as it then was (Striking the Balance – available here) recommended that letters of credit that reference international commercial conventions should be accepted, provided that (among other things) the letter is unconditional and that the applicable convention is written into the terms of the letter of credit (see pg. 280).

[11] 2021 ONSC 241.

[12] TruGrp v Karmina at para 20.

[13] TruGrp v Karmina at para 23.

[14] TruGrp v Karmina at para 25.

[15] TruGrp v Karmina at paras 26-27.

[16] TruGrp v Karmina at paras 28-29.

[17] TruGrp v Karmina at para 30-32.

[18] Ibid at para 33.

[19] Ibid at paras 34-36.

[20] Ibid at paras 45-48.

[21] Ibid at paras 56-58.

Campbell v. Toronto Standard Condominium Corporation No. 2600: Constructive Fraud is Not Fraud for the Purpose of Set-Aside Applications

In Campbell v. Toronto Standard Condominium Corporation No. 2600, 2024 ONCA 218, (“Campbell“) the Court of Appeal for Ontario considered the proper interpretation of the term “fraud” as it appears in the appeals and set-aside provisions of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”), finding that the term – which is undefined in that legislation – does not encompass constructive fraud. Below, we review the takeaways from Campbell with respect to the meaning of fraud and the circumstances that permit an application to set aside an arbitral award.

Factual Background

From December 2018 to February 2021, a dispute arose between the owners of a condominium unit in a particular building (identified as the “Respondents” in this matter) and the condominium corporation for that building, Toronto Standard Condominium Corporation No. 2600 (the “Condo Corporation“). The parties’ dispute originated from complaints received by the Condo Corporation about excessive noise from the Respondents’ unit, and subsequently regarding the use of the unit as a short-term rental.

The parties initially agreed to proceed with mediation, but ultimately no mediation occurred because the Respondents withdrew their consent. In October 2020, the Condo Corporation wrote a cease and desist letter to the respondents demanding that they cease using their unit for short-term rentals. A month later, the Condo Corporation delivered a notice of arbitration pursuant to the Condo Corporation’s declaration. By February 2021, the Respondents were in the process of selling the unit – which would effectively resolve nearly all of the parties’ substantive issues – but there remained a live issue as to whether the Condo Corporation was entitled to its legal costs incurred in pursuing the Respondents.

On March 4, 2021 – the same day that the Respondents signed a conditional agreement for the sale of the unit – the parties entered into an arbitration agreement for the resolution of (1) the alleged contraventions of the rules regarding short-term rentals, and (2) the issue of all costs as incurred by the parties. The arbitration agreement stipulated that there would be no right of appeal, and specified that the parties agreed not to appeal to attempt to set aside any aspect of the Arbitration award (although not specifically addressed by the Court of Appeal in its decision, this latter agreement was obviously unenforceable given that the Arbitration Act’s set-aside provisions are not waivable).

The arbitration was completed in writing by August 2021, and the arbitrator rendered his decision on September 6, 2021, awarding the Condo Corporation $30,641.72 in costs on a partial indemnity basis.

The Application Judge’s Decision

57 days after the arbitrator delivered his decision, the Respondents commenced a set-aside application in the Superior Court under Section 46(1) of the Arbitration Act to set aside the award on the basis of fraud by the Condo Corporation, and constructive fraud by the arbitrator. Notably, this was despite the fact that the deadline for commencing a set-aside application, which is 30 calendar days from the date of delivery of the arbitrator’s award, had passed. That being said, this statutory time limit also contains an exception for set-aside applications based on allegations of corruption or fraud.

Sections 46(1)(9) and Section 47 of the Arbitration Act provide in relevant part as follows:
46 (1) On a party’s application, the court may set aside an award on any of the following grounds:
[…]
  1. The award was obtained by fraud.
[…]
47 (1) An appeal of an award or an application to set aside an award shall be commenced within thirty days after the appellant or applicant receives the award, correction, explanation, change or statement of reasons on which the appeal or application is based.
(2) Subsection (1) does not apply if the appellant or applicant alleges corruption or fraud. [emphasis added]

Although the application judge concluded that there was no actual fraud in this case, he concluded that the arbitral award was obtained by constructive fraud, as the arbitrator had adjudicated issues beyond those set out in the arbitration agreement.

In that regard, the application judge concluded that there was no fraud in the well-established legal definition of “deceit and dishonesty”.[1] By contrast, he found that there was constructive fraud given that this term ” does not necessarily involve dishonesty or moral fraud in the ordinary sense, but a breach of [the] sort that would be enforced by a court of conscience”, but rather focuses more on unfairness than deceit.[2]

On the facts of this case, the application judge concluded that the arbitrator had adjudicated beyond the scope of the parties’ arbitration agreement by looking at substantive issues beyond the narrow issue of costs. Although such a conclusion would normally be considered to raise a jurisdictional issue, and potentially an issue as to deprivation of natural justice, the application judge found that it amounted to constructive fraud insofar as it was “‘unconscionable and unfair’ that the Condo Corporation ‘lured their legal counsel, and the Arbitrator’ into adjudicating issues beyond those of costs” by delving into substantive issues beyond costs.[3]

Accordingly, the application judge concluded that  the term “fraud” as it appears in the Arbitration Act includes constructive fraud, and set aside the award.

The Court of Appeal’s decision

On appeal, the Condo Corporation took the position that the application judge had erred in the interpretation of the term “fraud”, insofar as he concluded that it encompasses constructive fraud. The Court of Appeal allowed the appeal, concluding that the application judge had erred in expanding the definition of “fraud” to include constructive fraud.

In that regard, the Court of Appeal noted that while the arbitrator did determine substantive issues, it was both “appropriate and necessary for him to consider factors such as the history and the nature of the complaints, the length of the proceedings, and the reasonableness of the parties’ conduct in exercising his cost discretion” pursuant to Section 54 of the Arbitration Act.[4]

With respect to whether the term “fraud” should be construed so as to encompass constructive fraud, the Court of Appeal observed that because the term “fraud” has an established legal meaning at common law, it was incumbent upon the legislature to use clear language in order to displace this well-understood meaning. In other words, if the legislature had intended to expand the meaning of “fraud” in the Act in order to include constructive fraud, then the legislature would have made this explicit in the language of the Act.[5] It did not, meaning that as a matter of statutory interpretation, “fraud” could not include constructive fraud.

Furthermore, the Court of Appeal observed that expanding the meaning of “fraud” to include constructive fraud would be at odds with the relevant case law on the Arbitration Act’s set-aside provisions, which are not intended as an alternative appeal route. To allow such an interpretation would risk undermining the principles of efficiency and finality that have been consistently emphasized by the case law. Therefore, this too was a basis upon which to reject the inclusion of constructive fraud within the concept of “fraud”.

Finally, the Court of Appeal noted from a policy perspective, the Arbitration Act clearly intended that there should be limited court intervention in arbitral matters. To the extent that an arbitration agreement allows for any appeal rights, courts are required to avoid strategic attempts to broaden the scope of the appeal by turning questions of mixed fact and law into questions of law, and are required to guard against strategic attempts to enlarge the scope of an appeal beyond what the parties have agreed to.

Bearing all of the foregoing in mind, the Court of Appeal concluded that “fraud” should not be interpreted to include constructive fraud, and that in reality, the Respondents in this case were simply seeking to circumvent the time limit for a set-aside application by alleging fraud and constructive fraud. Accordingly, the Court of Appeal allowed the appeal, restoring the arbitral award.

Takeaways

Campbell is a useful reaffirmation of the basic principles of arbitration, including most prominently that court intervention is intended to be limited. In that regard, the Court’s decision not to include constructive fraud within the concept of “fraud” under Ontario’s domestic arbitration legislation is a positive step, insofar as the alternative would appear far less desirable. Notwithstanding that the facts of this case were arguably somewhat unusual, it is not difficult to envisage an alternate outcome in which parties would exploit the inclusion of constructive fraud as a means of avoiding the Arbitration Act’s set-aside deadline in order to draw out dispute resolution even further. This is particularly true in circumstances where Sections 46(1)(9) and Section 47 of the legislation do not provide a deadline for bringing applications based on fraud, meaning that the standard two-year limitation period would presumably apply.

In the circumstances, the Court of Appeal has rightly continued to uphold arbitration as a means of private dispute resolution and not simply a dress rehearsal for court proceedings.

[1] Campbell v. Toronto Standard Condominium Corporation No. 2600, 2024 ONCA 218, at para 24 [“Campbell“].

[2] Campbell, at para 24.

[3] Campbell  at para 24.

[4] Campbell, at para 61.

[5] Campbell, at para 54.

Eurobank Ergasias S.A. v. Bombardier Inc: Letters of Credit and the Fraud of Third Parties

Introduction

Eurobank Ergasias S.A. v Bombardier Inc is an important decision of the Supreme Court of Canada addressing letters of credit. In this decision, the Court has provided guidance on the relationship between the autonomy principle and the fraud exception as these principles apply to letters of credit in circumstances where an issuing bank is asked to honour a demand for payment in the face of fraudulent conduct by a third party.

Background

The underlying dispute involved two contracts between the Hellenic Ministry of Defense, or “HMOD” (as purchaser), and Bombardier Inc. (as seller). The first contract was a procurement agreement for the purchase of aircrafts; the second agreement was an offsets contract, which stipulated that Bombardier would subcontract some of its work to Greek companies, failing which it would be liable to pay liquidated damages to HMOD.[1] Disputes arising from the offsets contract were to be settled pursuant to the rules of the International Chamber of Commerce (the “ICC”).[2]

Payment of the liquidated damages was guaranteed by a letter of credit issued by a predecessor company of Eurobank Ergasias S.A., a Greek bank (“Eurobank”), in favour of HMOD (the “Greek Letter of Guarantee”), which letter was governed by Greek law.[3] Subsequently, the National Bank of Canada issued a second letter of credit in favour of Eurobank, ensuring reimbursement for any amounts Eurobank might need to pay HMOD under the Greek Letter of Guarantee (the “Canadian Letter of Counter-Guarantee”).[4] This letter of guarantee was governed by Quebec law.

Ultimately, Bombardier determined that it could not satisfy its subcontracting obligations because of an insufficient number of available and qualified Greek companies. As a result, Bombardier claimed that it should not be liable for liquidated damages; HMOD disagreed. The parties therefore initiated ICC-administered arbitration proceedings. After the arbitration had begun, HMOD formally undertook to Bombardier and the arbitral tribunal not to demand payment under the Greek Letter of Guarantee for as long as the arbitration remained ongoing.

Despite its undertaking, HMOD delivered multiple demands to Eurobank under the Greek Letter of Guarantee prior to the tribunal’s final award.[5] In response, Bombardier obtained a procedural order from the tribunal ordering HMOD to abstain from demanding payment under the Greek Letter of Guarantee. Bombardier then obtained an injunction from the Superior Court of Quebec to prevent payment under the Greek Letter of Guarantee and the Canadian Letter of Counter-Guarantee until the final award was issued, because it was not sure whether HMOD would comply with the procedural order.

Nevertheless, HMOD continued to demand payment. In the days prior to the issuance of the tribunal’s final award, HMOD delivered a further demand to Eurobank in which it advised that if Eurobank failed to pay HMOD within one day, then the Greek state would pursue civil and criminal measures against the responsible officers and employees of Eurobank. One day later, Eurobank paid HMOD under the Greek Letter of Guarantee, and then sought reimbursement from the National Bank of Canada under the Canadian Letter of Counter-Guarantee.[6]

The tribunal’s final award nullified the offsets contract on the basis that it violated European Union law, as a result of which the liquidated damages provisions were void.[7] Subsequently, Eurobank initiated proceedings in Greek courts to recover the funds paid to HMOD, but was unsuccessful.[8] In brief, the Greek courts ruled that HMOD’s actions did not constitute fraud under Greek law.

Meanwhile, in the Quebec courts, Bombardier sought to prevent the National Bank of Canada from paying Eurobank under the Canadian Letter of Counter-Guarantee, citing the fraud exception.[9] The trial judge determined that HMOD’s conduct in obtaining payment under the Greek Letter of Guarantee was fraudulent, and Eurobank’s awareness of this fraud (which the trial judge found as a fact) rendered its demand for payment under the Canadian Letter of Counter-Guarantee fraudulent as well.[10] Consequently, the trial judge enjoined the National Bank of Canada from making any payments to HMOD under the Canadian Letter of Counter-Guarantee.[11]

On appeal, the Quebec Court of Appeal upheld the trial decision, reasoning that the Canadian bank was not obligated to pay the Greek bank under the Canadian Letter of Counter-Guarantee because the Greek bank had prior knowledge of HMOD’s fraudulent conduct associated with the payment under the Greek Letter of Guarantee.[12] The lone dissenting judge concluded that Eurobank should not be held responsible for HMOD’s fraud, given that it had no way of knowing that HMOD expected to lose at arbitration or that HMOD intended to keep the funds even if it lost; while Eurobank may have had “suspicions” of fraud, this was not sufficient to rise to the level of knowledge necessary to hold Eurobank responsible. Eurobank then sought and was granted leave to appeal to the Supreme Court.

The Majority Decision

The Nature of Letters of Credit

Justice Kasirer, for the majority, observed that the legal distinction between demand guarantees and standby letters of credit is largely semantic. Legally, demand guarantees and standby letters of credit are indistinguishable, with the latter falling within the definition of demand guarantees.[13] (The dissent, from Justice Côté, disagreed, observing that while letters of credit protect against non-payment, demand guarantees protect against non-performance or part-performance.)

The majority observed that letters of credit – particularly standby letters of credit – are commonly used in both domestic and international commercial transactions in order to mitigate risk. In that regard, a letter of credit does not replace the customer’s obligation to pay the beneficiary under the contract; rather, it acts as an additional layer of security. A demand for payment typically arises when there is an alleged failure by the customer to fulfill their contractual duties, with the operative principle being “pay now, argue later”.[14] From a judicial perspective, courts are “slow to interfere” with letters of credit, out of concern that such interference might impair the reliance that international business places upon them.

The majority then reaffirmed that the two key principles governing letters of credit are (1) the autonomy principle and (2) strict compliance.

The autonomy principle refers to the proposition that a letter of credit contains an independent obligation of the issuing bank in favour of the beneficiary, unaffected by the performance or existence of the underlying contract between the beneficiary and the issuing bank’s client. This principle ensures certainty in credit transactions, as the issuing bank’s duty to pay is solely based on the terms outlined in the letter of credit; they need not inquire into the performance of the underlying contract.[15]

The rule of strict compliance dictates that the bank’s duty to make payment is conditional upon the beneficiary submitting documents that precisely conform to the requirements specified in the letter of credit, and which must also be consistent with each other. There is next to no room for error on this point, although courts do have minimal tolerance for immaterial discrepancies in exceptional cases.[16] That being said, if the issuing bank pays the beneficiary without evaluating the documents to ensure that they strictly conform to the requirements set out in the letter of credit, then the bank runs the risk of not being reimbursed by their client.

The Fraud Exception

Importantly, the majority also reaffirmed that fraud remains the only exception to the obligation to honour demands on letters of credit that is recognized in Canada, and “must import some aspect of impropriety, dishonesty or deceit”.[17] In that regard, the majority emphasized that this exception was identical in both common law and civil law systems, which underscores “the desirability of as much uniformity as possible in the law with respect to these vital instruments of international commerce”.[18]

Furthermore, a mere absence of good faith may not be sufficient; there must be some aspect of impropriety, dishonesty, or deceit.[19] The fraud exception permits non-payment if fraud by the beneficiary is sufficiently proven or brought to the attention of the issuing bank before payment. The standard for proving fraud is set high, in order to strike a balance between safeguarding the autonomy of letters of credit and deterring fraud. This exception applies not only to the original letter of credit, but also to counter-guarantees (the latter of which was particularly relevant in this case).[20]

In this case, Eurobank argued that the trial judge and the majority in the Court of Appeal had erred in applying the fraud exception, given that the Greek courts had found no fraud in HMOD’s demand for payment under the Greek Letter of Guarantee, and that even if fraud had occurred, it did not affect Eurobank’s right to demand payment under the Canadian Letter of Counter-Guarantee. Rather, the principle of autonomy suggested that the Canadian Letter of Counter-Guarantee should have been treated distinctly. In addition, Eurobank argued that there was no proof that Eurobank was aware of HMOD’s alleged fraud.[21]

However, the majority disagreed with Eurobank and HMOD, emphasizing that Eurobank had not identified a palpable and overriding error for appellate intervention, and that in this transaction, both letters of credit were intimately linked to one another such that fraudulent conduct in respect of one letter could be relevant to an assessment of the other.[22]

Further, the trial judge was entitled to deference with respect to his conclusions that (1) HMOD demanded payment under the Greek Letter of Guarantee despite having no right to do so, which constituted fraud, and (2) Eurobank knew of and participated in the fraud by making payment.[23] This was notwithstanding that Greek courts had concluded there was no fraud, because the Greek judgments had not been formally recognized by Quebec courts and were thus unenforceable in Quebec (although they were admissible as fact evidence).[24]

Notably the majority observed that while the fraud of a third party typically does not engage the fraud exception, the beneficiary may be deemed complicit if they have clear knowledge of the third party’s fraud and participated in that fraud.[25] Indeed, participation in the fraud is paramount, as knowledge of fraud without participation will not suffice to invoke the exception.[26] Participation may take the form of honouring a demand for payment in improper situations, such as (1) where the beneficiary is aware of the fraud but then nonetheless demands payment under the letter of credit,[27] and (2) by knowingly presenting fraudulent documents to the issuer.[28] In such instances, the fraud becomes the beneficiary’s own, justifying non-payment under the letter of credit.

Ultimately, the majority concluded that the fraud exception applied in this case to enjoin Eurobank from drawing down on the Canadian Letter of Guarantee. HMOD had demanded payment under the letter despite knowing it had no right to do so, contravening orders from the ICC Arbitral Tribunal and the Quebec Superior Court.[29] Eurobank had knowledge of HMOD’s fraudulent activities, but nonetheless made payments under the Greek Letter of Guarantee. The majority therefore concluded that Eurobank’s knowledge of and participation in the fraud thereby attributed HMOD’s fraudulent conduct to Eurobank itself.

Lastly, the majority dismissed Eurobank’s argument that they were acting under duress, finding that it voluntarily chose to participate in the fraudulent activities despite being aware of the circumstances.[30] Consequently, the fraud exception applied to prevent Eurobank from drawing down on the Canadian Letter of Counter-Guarantee.

The Dissent

In dissent, Justices Côté and Karakatsanis would have allowed the appeal.[31] The dissent differed from the majority primarily on two points: first, the factual finding that Eurobank knew of and participated in the fraud; and second, the extent to which the Greek judgments should be given weight. In particular, the dissent concluded that the decisions of the Greek courts, which found no fraud in the demand for payment under the Greek Letter of Guarantee, should be given weight and not disregarded due to the principle of international comity, and particularly given that foreign judgments are prima facie proof of the reported facts contained in those judgments, such that Eurobank ought not to be found to have known of or engaged in fraud itself.[32]

Moreover, the dissent highlighted the nature of demand guarantees as contracts established at the request of a principal where the guarantor (usually a bank) irrevocably promises to pay the beneficiary on demand, regardless of any disputes between the principal and the beneficiary.[33] The guarantor’s obligation to pay was triggered solely by the terms and conditions specified by the principal, and the guarantor’s role was to ensure compliance with those terms, without delving into the underlying contract’s disputes.[34]

Further, the dissenting justices emphasized the high bar for proving fraud in order to prevent payment under a demand guarantee, stating that fraud must be blatantly apparent and, under Quebec law, must involve an aspect of public order. The dissent found that fraudulent conduct by a third party should not necessarily prevent an innocent beneficiary from demanding payment under the guarantee.[35]

Finally, the dissent concluded that the judgments of the Greek courts should have been considered as factual constraints by the Quebec courts, even if those judgements were not formally recognized, and therefore should not have been ignored by Canadian courts.[36] Eurobank’s payment under the Greek Letter of Guarantee, based on the Greek court’s decision, therefore should not have been deemed fraudulent. Based on the principle of comity, Eurobank should have been considered an innocent beneficiary under the Canadian Letter of Counter-Guarantee, as it had no clear or obvious knowledge of any alleged fraud at the time of payment.[37] Thus, the dissent concluded that the fraud exception did not apply in this case, and that the appeal should have been allowed.[38]

Takeaways

As the foregoing suggests, Eurobank provides a thorough articulation of the Canadian law on letters of credit. Furthermore, the case clearly articulates the threshold for applying the fraud exception to letters of credit. Mere allegations or suspicions of fraudulent conduct are insufficient; compelling evidence demonstrating fraud, and the beneficiary’s knowing participation, is required. This stringent standard safeguards the autonomy principle, while addressing instances of clear misconduct that undermine the letter of credit’s purpose.

The majority decision also offers a helpful clarification as to the requisite nature of the fraud itself. While fraud in the context of letters of credit might arguably be more common with respect to the documents tendered by the beneficiary to the issuing bank, the fraud exception can also be engaged by fraud in the underlying transaction between the beneficiary and the issuing bank’s client (as was the case in Eurobank).

In addition, the majority’s confirmation that breach of a procedural order from an arbitral tribunal can constitute grounds for fraud (although there must be an element of dishonesty or impropriety) reaffirms judicial support for the legal force of such procedural orders.

Finally, with respect to international comity, Eurobank highlights the limitations of extra-jurisdictional judgments within Canada, given their status as issues of fact rather than law (and the trial judge’s ability to assign weight to such judgments accordingly).

[1] Ibid at para 21.

[2] Ibid at para 24.

[3] Ibid.

[4] Ibid at para 22.

[5] Ibid at para 25.

[6] Ibid at para 34.

[7] Ibid at para 36.

[8] Ibid at para 42.

[9] Ibid at paras 44-45.

[10] Ibid at para 46.

[11] Ibid at para 48.

[12] Ibid at para 54.

[13] Ibid at para 69.

[14] Ibid at para 70.

[15] Ibid para 74-76.

[16] Ibid at paras 77-79.

[17] Ibid at para 115.

[18] Ibid at para 84.

[19] Ibid at para 115.

[20] Ibid at paras 80-87.

[21] Ibid at paras 89-90.

[22] Ibid at para 138

[23] Ibid at paras 92, 108-111.

[24] On this point, the majority engaged in a detailed analysis under Quebec law as to why the trial judge was entitled to give the Greek judgments little evidentiary weight, particularly in circumstances where the Greek appellate courts gave no weight to the decisions of the Superior Court of Quebec and the Court of Appeal of Quebec: para 109.

[25] Ibid at para 129

[26] Ibid at para 131.

[27] Ibid at para 130.

[28] Ibid at para 131.

[29] Ibid at para 134.

[30] Ibid at para 142.

[31] Ibid at para 157

[32] Ibid at para 235. The dissent also provided a detailed analysis under Quebec law of how foreign judgments are to be treated as findings of fact and which factors are appropriately considered in assigning weight to those findings of act. However, given that this case comment is intended for a common law audience, we do not discuss the dissent’s analysis on this point in detail.

[33] Ibid at para 240.

[34] Ibid.

[35] Ibid at para 259.

[36] Ibid at para 248.

[37] Ibid.

[38] Ibid at para 299.

IBA Guidelines on Conflicts of Interest in International Arbitration: Recent Amendments

Introduction

As arbitration practitioners will appreciate, the International Bar Association’s Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”)[1] are widely considered to be the authoritative resource on conflicts of interests for arbitrators; as such, they are a topic of particular interest. The IBA Guidelines were initially published in 2004, and were revised in 2014. Given the passage of another ten years, the IBA Guidelines were therefore ripe for further revision. Arbitration has continued to grow as a preferred mechanism for dispute resolution and the law on conflicts of interest has continued to evolve, such that those participating in arbitration will wish to ensure that the most recent changes are adhered to.

The IBA Guidelines are used by legal professionals across common law and civil law jurisdictions, and have been recognized as persuasive authority in Canadian courts.[2] As noted in the foreword in the IBA Guidelines, they are “recognised as a solid soft law instrument reflecting standards expected to apply to impartiality and independence of arbitrators, as well as disclosures in specific circumstances.”[3] While the IBA Guidelines do not override any applicable legislation or rules chosen by parties, they can be used as general guidance for practitioners and can be binding by agreement by the parties.

The IBA Guidelines are comprised of two parts. Part I set outs the “General Standards” regarding impartiality, independence and disclosure, along with accompanying explanatory notes on those standards. Part II provides three different non-exhaustive lists of situations that may occur in arbitration. The lists are broken down into Red, Orange, and Green, and are commonly known as the Traffic Light system (i.e. red means stop, orange means caution, and green means go).

While the recently revised IBA Guidelines (the “2024 Guidelines”) offer relatively modest amendments to both Part I and Part II, below we highlight some of the key changes and consider their implications.

Part I Changes

Changes were made to the following Sections in Part I:

(3) Disclosure by the Arbitrator

The 2024 Guidelines now expressly provide that “in determining whether facts or circumstances should be disclosed, an arbitrator should take into account all facts and circumstances known to the arbitrator.”[4] While similar language was in the explanatory notes in the 2014 version, this has now become an express obligation of the arbitrator.

Another critical change in the 2024 Guidelines is with respect to professional secrecy rules affecting an arbitrator’s duty to disclose. The 2024 Guidelines now provide that if an arbitrator must make disclosure, but is prevented from doing so by professional secrecy rules or other rules of practice or professional conduct that preclude disclosure, the arbitrator should reject the appointment or resign.[5]

Lastly, the 2024 Guidelines have clarified that a failure to disclose when required does not automatically result in a conflict of interest. In particular, the new rule provides that an “arbitrator’s failure to disclose certain facts and circumstances that may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence, does not necessarily mean that a conflict of interest exists, or that a disqualification should ensue.”[6]

(4) Waiver by the Parties

The 2024 Guidelines have introduced a new rule which incentivizes parties to conduct investigations into any potential conflicts of interest. The 2024 Guidelines provide that a party is deemed to have learned of any facts or circumstances that could constitute a potential conflict of interest for an arbitrator that a “reasonable enquiry” would have yielded if conducted at the outset or during the proceedings.[7]

(5) Relationships

In general, the recent amendments have broadened the relationship considerations throughout the 2024 Guidelines with respect to the arbitrator’s employment. For example, the term “or employer” has been added throughout the 2024 Guidelines when a rule makes reference to an arbitrator’s law firm (i.e. the Guidelines no longer assume that employment related conflicts of interest only arise via employment at a law firm).  In addition, the 2024 Guidelines provide a modern description of the concept of a “law firm” to account for the evolution in the structure of legal practices.[8]

The 2024 Guidelines have also created a new general rule that “[a]ny legal entity or natural person over which a party has a controlling influence may be considered to bear the identity of such party.”[9]

(6) Duty of the Parties

The 2024 Guidelines have amended the list of relationships that a party must disclose to the arbitrator so as to include any relationship between the arbitrator and “a person or entity over which a party has a controlling influence”,[10] and a party must disclose any relationship between the arbitrator and “any other person or entity it believes an arbitrator should take into consideration when making disclosures”.[11] This accordingly encompasses a very broad scope of potential relationships, although it does not extend as far as relationships that the parties ought to have known about, thus refraining from introducing a more challenging (and fraught) standard for parties to meet.

A new accompanying explanatory note to Section (7) also provides that the parties are required to explain the persons’ and entities relationship to the dispute “[w]hen providing the list of persons or entities the parties believe an arbitrator should take into consideration when making disclosures”.[12]

Part II Changes

In Part II, the Red Lists (both Waivable and Non-Waivable) did not undergo any significant substantive change. Notably, though, the 2024 Guidelines for the Red List have clarified that an “affiliate” also includes “an individual having a controlling influence on the party in the arbitration, and/or any person or entity over which a party has a controlling influence”.

The majority of the substantial changes in the 2024 Guidelines in Part II were to the Orange List. As readers will appreciate, the Orange List is a “non-exhaustive list of specific situations that, depending on the facts of a given case, may, in the eyes of the parties, give rise to doubts as to the arbitrator’s impartiality or independence.”[13]

The following situations were added to the Orange List:

  • The arbitrator has, within the last three years, been appointed to assist in mock-trials or hearing preparations on either (1) two or more occasions by one of the parties on an unrelated matter[14] or (2) more than three occasions by the same counsel, or the same law firm.[15]
  • The arbitrator serves or has served as counsel in another arbitration on a related issue or matter involving one of the parties, or an affiliate of one of the parties.[16]
  • The arbitrator currently serves as an expert for one of the parties in an unrelated matter or has, within the past three years, acted as an expert for one of the parties in an unrelated matter[17] or has been appointed as an expert on more than three occasions by the same counsel, or the same law firm.[18]
  • An arbitrator and counsel for one of the parties or an arbitrator and their fellow arbitrator(s) currently serve together as arbitrators in another arbitration.[19]
  • The arbitrator has been associated with an expert in a professional capacity, such as a former employee or partner,[20] or is currently instructing an expert appearing in the arbitration proceedings for another matter where the arbitrator acts as counsel.[21]
  • The arbitrator has publicly advocated a position on the case through social media or on-line professional networking platforms.[22]

The Green List only had one notable change, which was the addition of the following situation: “The arbitrator, when acting as arbitrator in another matter, heard testimony from an expert appearing in the current proceedings.”[23]

Conclusion

Although the overall changes to the IBA Guidelines are modest, the Orange List will of course be the subject of particular interest given the more extensive additions to it. In that regard, the additions reflect a number of circumstances that are not uncommon in the construction context, insofar as it is a relatively small bar both domestically and internationally such that the repeat appointments of arbitrators and experts is not uncommon. In the international context, it is not uncommon for counsel to act as arbitrators or legal expert witnesses in other matters, such that there is a heightened possibility of the new Orange List categories being engaged.

It is possible that the recent amendments to the IBA Guidelines may have a larger impact on the construction industry than others, given the nature and use of construction arbitrators and the pool of arbitrators to draw from. Given recent case law in Ontario finding that the IBA Guidelines are of persuasive value, even where the parties have not agreed they are applicable to their arbitration,[24] and given the degree of uncertainty as to what will qualify as a reasonable apprehension of bias in the arbitration context,[25] legal practitioners of the construction bar should therefore be particularly conscious of the IBA Guidelines irrespective of whether or not the construction contract specifies that the IBA Guidelines are binding.

[1] International Bar Association Guidelines on Conflicts of Interest in International Arbitration dated February 2024 (“2024 Guidelines”).

[2] See, for example, Aroma Franchise Company Inc. et al. v. Aroma Espresso Bar Canada Inc. et al., 2023 ONSC 1827 at para 33; and Vento Motorcycles, Inc. v. United Mexican States, 2023 ONSC 5964 at para 107.

[3] 2024 Guidelines, Foreword, pg. 2.

[4] 2024 Guidelines, Part I, Section (3)(a).

[5] 2024 Guidelines, Part I, Section (3)(e).

[6] 2024 Guidelines, Part I, Section (3)(g).

[7] 2024 Guidelines, Part I, Section (4)(a).

[8] 2024 Guidelines, Part I, Section (6), Explanatory Note (a).

[9] 2024 Guidelines, Part I, Section (6)(c).

[10] 2024 Guidelines, Part I, Section (7)(a).

[11] 2024 Guidelines, Part I, Section (7)(a).

[12] 2024 Guidelines, Part I, Section (7), Explanatory Note (a).

[13] 2024 Guidelines, Part II, pg. 14.

[14] 2024 Guidelines, Part II, Section 3.1.4.

[15] 2024 Guidelines, Part II, Section 3.2.10.

[16] 2024 Guidelines, Part II, Section 3.1.5.

[17] 2024 Guidelines, Part II, Section 3.1.6.

[18] 2024 Guidelines, Part II, Section 3.2.9.

[19] 2024 Guidelines, Part II, Sections 3.2.12 and 3.2.13.

[20] 2024 Guidelines, Part II, Section 3.3.2.

[21] 2024 Guidelines, Part II, Section 3.3.6.

[22] 2024 Guidelines, Part II, Section 3.4.2.

[23] 2024 Guidelines, Part II, Section 4.5.1.

[24] Aroma at para 33.

[25] See our article on the Aroma decision here, for further discussion.

Proposed National Building Code Changes for Encapsulated Mass Timber Buildings

Mass timber construction is a fast-emerging method in the construction industry, both in Canada and abroad; unsurprisingly, proposed regulatory changes to expand its use have therefore been the subject of significant interest and discussion within the industry. In particular, the proposed regulatory changes will bring greater alignment amongst Canadian model codes, with the goal of fostering harmonization between the national and provincial codes on the use of mass timber. Below, we review these proposed changes, and provide our takeaways on the awaited development of mass timber as an alternative method of construction.

Background

Mass timber buildings, which are easily spotted by their wooden aesthetic and biophilic design, use thick layers of engineered wood as structural load-bearing components such as beams, columns, and panels. In recent years, mass timber has received increased attention due to its role in sustainable construction (i.e. via the embodied carbon stored in the timber and the responsible forestry practices used as part of the manufacturing process), coupled with the cost and time efficiencies flowing from the increased use of prefabricated mass timber products. As a result, the adoption of mass timber construction continues to rise.[1]

In fact, the number of mass timber projects has increased two-fold since 2015, coinciding with changes to the National Building Codes (which, as discussed below, include a building code, fire safety code, and others), and in particular, the inclusion of permitted height allowances of up to six storeys for mass timber projects; in 2020, this was increased to a permitted height of up to 12 storeys.[2]

The Regulatory Landscape

However, the regulatory regime continues to evolve, portending more changes on the horizon for mass timber. In particular, the National Research Council (“NRC“) – a Federal Crown Corporation – publishes model codes (including a building code, fire safety codes, and plumbing and energy codes) for adoption by provincial and territorial authorities. Provinces and territories can then adopt these model codes in their entirety and modify them as they see fit, or they can publish their own independent code(s) that may or may not be based on the national model code(s). Manitoba, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island, and the Territories have all adopted these model codes, while British Columbia, Alberta, Ontario, and Quebec have published their own independent codes.[3]

Earlier this year, the Canadian Board for Harmonized Construction Codes (“CBHCC”) hosted a public comment period led by the Joint Task Group for Harmonized Variations for Mass Timber (“JTG-HVMT”), which includes the provinces of British Columbia, Ontario and Quebec, on proposed changes to the National Building Code (the “NBC”) in relation to encapsulated mass timber construction (“EMTC”). The proposed changes were developed on an expedited basis to meet provincial needs and will be considered by the CBHCC after feedback has been analyzed and next steps are determined.

The CBHCC is made up of representatives from provincial, territorial, and federal public services and is responsible for developing the National Model Codes, which are subsequently published by the NRC. The CBHCC provides a forum for the provinces to provide input with respect to proposed changes to a given model code, so as to promote the harmonization of codes between jurisdictions. Notably, this is a rare instance of a province-driven proposal being hosted by the CBHCC and represents a noteworthy change in the code development process that (1) appears to be more responsive to provincial priorities and (2) creates consistency amongst various codes across Canada’s jurisdictions.[4]

In short, there appears to be a broad consensus at the provincial and federal level to expand the use of mass timber in order to allow for greater building occupancy, allow for taller mass timber buildings, and varying encapsulation requirements dependent on the building archetype and height.

Key Proposed Changes

In relevant part the key proposed changes to the NBC relate to Encapsulated Mass Timber Construction (“EMTC“). Under the NBC, EMTC is defined as the “type of construction in which a degree of fire safety is attained by the use of encapsulated mass timber elements with an encapsulation rating[5] and minimum dimensions for structural members and other building assemblies”. This often translates to a lower quantity of exposed wood surfaces, but greater levels of fire protection, as the limiting of exposed surfaces will delay ignition and combustion.

By contrast, EMTC is different than two other widely-known mass timber construction methods, known as “combustible construction”[6] and “heavy timber construction”[7]. Both combustible construction and heavy timber construction, which often have larger areas of timber exposure, each only stipulate a fire resistance rating of under 45 minutes, which mean that they fall below the degree of fire protection required of EMTC. In other words, combustible construction and heavy timber construction offer less fire safety protection than EMTC; as a result, they pose a greater hazard than EMTC, and are more restricted in their usability. In particular, these two types of construction have a lower permissible storey height in order to ensure compliance with fire safety standards, but provide some flexibility through the availability of larger areas of exposed timber surfaces.

In summary, the proposed changes to the NBC would permit EMTC to be employed in (i) buildings up to 18 storeys with a 70-minute minimum encapsulation rating, (ii) buildings up 12 storeys with a 50-minute minimum encapsulation rating, and/or (iii) buildings up to 6 storeys with a 0-minute encapsulation rating – across 7 new building “archetypes”.[8]

There are 6 proposed changes in total:

  • EMTC Proposed Change 01: EMTC, Various Heights and Occupancy Types, Sprinklered — New Construction Article Summarizing All EMTC Building Types. This proposal introduces changes to several new building archetypes and to reflect the increase of maximum building heights, along with sprinkler requirements for all proposed buildings.
  • EMTC Proposed Change 02: Encapsulation of Mass Timber Elements — Encapsulation of Mass Timber Elements. This proposal introduces two other encapsulating ratings, being 0-minute and 70-minute ratings, which are now in addition to the existing 50-minute rating for EMTC.
  • EMTC Proposed Change 03: Encapsulation Materials — Prescriptive Option for 70 min Encapsulation Rating. This proposal allows for the 70-minute encapsulation rating to be achieved through the construction of two layers of 5/8″ Type X gypsum wallboards.
  • EMTC Proposed Change 04: Encapsulation Cladding — Tiered permissions for combustible cladding. This proposal introduces the types of cladding to be used on the exterior wall of an EMTC building, and specifically the allowance of 100% combustible cladding where the building is less than 4 storeys – and lower cladding permissions as the building height increases.
  • EMTC Proposed Change 05: Major Occupancy Fire Separations — Removal of requirements for higher fire-resistance rating (FRR) in EMTC major occupancy separations. This proposal removes existing requirements for higher fire-resistance rating in major occupancy fire separations of EMTC buildings, on the basis that such requirements are outdated and inconsistent with modern fire safety principles.
  • EMTC Proposed Change 06: Additional Requirements for EMTC — Revised measures for protection of EMTC during construction. This proposal defines the requirements related to the construction and assembly of encapsulated mass timber projects, and standards related to exposed surfaces during the construction phase.

These proposals are based on the International Building Code (“IBC”) 2021 elements, and the existing historical limits for buildings and fire safety principles in practice from the NBC. The joint task force had also independently commissioned a transferability report to compare the EMTC provisions in the IBC and their applicability to the Canadian context. The transferability report concluded that the NBC can adopt some of the fire and structural provisions with a handful of conservative modifications. By way of example, the IBC recommends that IV-B (Mass timber protected exterior, limited exposed timber interiors) allow for 100% mass timber ceilings and integral beams, whereas the NBC continues to require no more than 25% exposure of similar areas.

Takeaways

As focus shifts towards greater Environmental-Social-Governance (ESG) goals, more businesses are considering sustainable construction materials in their construction plans. EMTC is likely to gain further traction following the 28th Conference of the Parties to the UN Framework Convention on Climate Change (commonly known as “COP28”, which was held in November and December of 2023 in Dubai) as the environmental and financial benefits of building with mass timber continue to offer an appealing avenue for the various jurisdictions to explore in order to meet those requirements.

These proposed changes collectively improve the viability of EMTC as a viable construction method by establishing clear performance criteria, and it therefore stands to reason that it will encourage even wider adoption of EMTC in future Canadian projects. This will naturally be of interest to the construction industry as a whole, including those seeking low carbon alternatives to traditional construction materials and methods at a time when the regional, national, and international markets continue to struggle through supply chain disruptions and material shortages.

The JTG-HVMT public review and consultation closed on February 16, 2024. Subject to comments received, these changes are expected to be adopted by provinces as early as spring 2024. As of now, Ontario has not decided whether to adopt the proposed changes based on this initiative, and the province will likely undertake a technical review of the proposed changes. We await with interest to see how Ontario and other provinces proceed with this initiative.

[1] According to the 2021 State of Mass Timber Buildings in Canada Report, there were nearly 800 mass timber projects built or under construction across Canada as of 2021: https://cfs.nrcan.gc.ca/publications?id=40364.

[2] National Building Code, Division B Part 3 Fire Protection, Occupant Safety and Accessibility, s. 3.1.6 Encapsulated Mass Timber Construction.

[3] For example, the Ontario Building Code incorporates approximately 60% of the NBC.

[4] In this context, “public review” refers to members of the public submitting comments/feedback, via an online portal, on each of the proposed changes, including whether they should be approved, altered (and if so, how), or rejected.

[5] Under the NBC, the “encapsulation rating” is the amount of time that a material or assembly will delay the ignition and combustion of encapsulated mass timber when it is exposed to fire under specific test conditions and performance criteria.

[6] “Combustible construction” means construction that does not meet the requirements or criteria for (1) “non-combustible construction” as set out in the CAN/ULC-S114 “Standard Method of Test for Determination of Non-Combustibility in Building Materials” or (2) encapsulated mass timber construction.

[7] “Heavy timber construction” means combustible construction in which a degree of fire safety is attained by placing limitations on the sizes of wood structural members and on the thickness and composition of wood floors and roofs and by the avoidance of concealed spaces under floors and roofs.

[8] In essence, an “archetype” – which term does not carry an authoritative definition – is generally understood to refer to a building categorized according to a combination of (1) its function (e.g. residential single family, residential multi-family, office, commercial, etc.), and (2) its occupancy capacities (such as building height and floor/mass ratio, and how many units or individuals can occupy each floor).

Bennington Financial Corp. v. Medcap Real Estate Holdings Inc.: The Limits of the Immediate Disclosure Rule

Over the past several years, much has been made in Ontario about the importance of proper and timely disclosure of settlement agreements amongst parties in litigation proceedings. These disclosure requirements are critically important and present a significant risk both to clients and lawyers if not managed properly and in accordance with the requirements of the Court.

As a reminder to readers, as reaffirmed in March 2018 by the Ontario Court of Appeal’s decision in Handley Estate v. DTE Industries Limited , parties to a settlement agreement in Ontario must immediately disclose the existence of a settlement agreement in circumstances where that agreement alters the litigation landscape. We previously discussed the immediate disclosure of settlement agreements in the context of lien matters here.

Understanding the breadth of these requirements and how the Court interprets this duty is therefore also of significant importance. In that regard, recently in Bennington Financial Corp. v. Medcap Real Estate Holdings Inc., 2024 ONCA 90,[1] the Court of Appeal for Ontario refused to expand the interpretation of the immediate disclosure rule for settlement agreements. In upholding the Superior Court’s findings, the Court reaffirmed that the rule should only be invoked when settlement agreements have the potential to significantly change the litigation landscape. Below, we review the case and consider the implications of this decision for construction disputes.

Background

Bennington Financial Corp involved separate actions initiated by two corporate entities being Bennington Financial Corp. (“Bennington“) and Heffner Investments Limited (“Heffner“), both actions being commenced against Medcap Real Estate Holdings Inc. (“Medcap“). These actions stemmed from alleged defaults by Medcap on equipment leases and collateral mortgages related to fitness equipment and monetary advances which were made to entities controlled by a Mr. Cardillo, who was associated with Medcap and also related fitness chain known as Premier Fitness. The disputes also involved mortgages on a commercial real estate space (discussed in more detail below).

Bennington’s claim related to equipment leases and monetary advances made to Premier Fitness, alleging defaults that led to Medcap owing more than $13 million. These claims were substantiated by collateral mortgages granted by Medcap to Bennington.

For its part, Heffner alleged that it also leased equipment and advanced loans to Medcap, leading to a separate action against Medcap for the recovery of amounts owing.[2]

Mortgages and Property Involvement

A focal point of the disputes was a property located in Hamilton, Ontario owned by Medcap (the “Wentworth Property“). This property was encumbered with multiple mortgages, including those held by 2503866 Ontario Inc. (alleged to be controlled by Mr. Cardillo), Heffner, another company known as Physiomed, and Bennington, with the priority of mortgages in that order. The legitimacy of these mortgages was contested by Medcap, adding another layer of complexity to the litigation.[3]

Settlement Efforts

Over the course of litigation, as is often the case, the parties engaged in settlement discussions, with a pivotal issue being an alleged undocumented agreement among the plaintiffs (Bennington, Heffner, and others) not to settle with Medcap individually. This agreement not to settle purportedly required any settlement with Medcap by any of the executing parties to be collective, encompassing all claims against Medcap.

Medcap’s Motions and Allegations of Abuse of Process

Medcap moved to dismiss or stay the actions of Bennington and Heffner, arguing that the undisclosed agreement among the plaintiffs to require a collective settlement constituted an abuse of process. Medcap’s argument hinged on the immediate disclosure rule – i.e. the principle that settlement agreements reached between some parties to litigation, but not others, must be immediately disclosed to non-settling parties if they “entirely change the litigation landscape”.[4]

Given the nature of this particular “settlement” agreement, Medcap had the dubious task of having to argue not only that the ‘agreement’ changed the litigation landscape, but also that there was in fact a settlement agreement in the first place in order to apply the rule of immediate disclosure.

The Superior Court’s Decision

The issues before the motions judge at the Superior Court were as follows:

  1. Was there a settlement agreement;
  2. If so, did it change the litigation landscape significantly; and
  3. Was the agreement immediately disclosed.

Did a settlement agreement exist?

Heffner contended there was no formal settlement agreement, maintaining that while creditors could negotiate independently with Medcap, the only obligation Heffner had to Bennington, Physiomed and Wilson was to negotiate with Medcap in good faith.[5]  Bennington argued that there was never a true agreement, and that it was at best an understanding each of the parties came to independently, realizing they were better off working together, but they could each negotiate their own settlement.[6] It was on the evidence of Bennington’s affiant, in cross-examination, that the Court found a settlement agreement existed. In essence, the agreement was that Bennington, Heffner and Physiomed agreed to have a united front and to take the position that settlement with Medcap required settlement with all of them; settle with one, settle with all.[7]

Further, the Court found that this agreement, while not formally documented, was sufficiently evidenced by the parties’ actions and statements so as to constitute a “settlement agreement” for the purpose of the test.[8]

Did the agreement change the litigation landscape?

The critical portion of the Superior Court’s analysis was whether the agreement “significantly altered the litigation landscape”. On this point, the Court considered whether the plaintiffs’ agreement changed their adversarial positions into cooperative ones, thereby impacting the fairness and integrity of the court process. The Court also scrutinized whether the agreement incentivized cooperation among the plaintiffs against Medcap, and if it affected Medcap’s ability to defend itself or settle the claims individually.

Given the generality of the language in the phrase “significantly altered the litigation landscape”, the Court considered both the values that the rule is meant to advance, as well as the fact-specific nature of the inquiry. In this regard, the Court concluded that the factors which assist in determining whether a settlement agreement needs to be disclosed immediately include the following:

  1. the configuration of the litigation;
  2. the claims between the parties;
  3. the relationship between the parties and their orientation in the litigation;
  4. the terms of the agreement;
  5. whether the agreement is inconsistent with the pleadings or with the position(s) taken during litigation;
  6. whether the terms of the agreement alter the apparent relationships between the parties to the litigation that would otherwise be assumed from the pleadings or expected in the conduct of the litigation;
  7. whether the agreement changes the adversarial position of the parties into a cooperative one whereby the party is incentivized to cooperate with a former adversary;
  8. whether the agreement impacts the litigation strategy of the non-settling party; and
  9. the values the rule is meant to advance:
    1. preserving fairness to the parties;
    2. preserving the integrity of the court process; and
  • allowing the court to know the reality of the adversity between the parties.[9]

Ultimately, the Court concluded that the agreement among the plaintiffs did not fundamentally alter the adversarial relationship among the parties in a way that would significantly change the dynamics of the litigation. On this basis, it did not meet the threshold that would require immediate disclosure.

To the contrary, the plaintiffs’ actions – while coordinated – did not convert their relationship with Medcap from adversarial to cooperative in the context of undermining the fairness or integrity of the litigation process. The plaintiffs remained separate entities with distinct claims, and their agreement to negotiate collectively did not diminish Medcap’s ability to defend itself or engage in settlement negotiations.

Was the agreement disclosed immediately?

Notwithstanding that the Court considered disclosure was not necessary, it nevertheless considered (presumably in the interest of providing fulsome reasons on appeal) the allegations made that the agreement was not disclosed immediately.

Medcap alleged that the agreement should have been disclosed, but was not until cross-examinations on the motion(s). For their part, Bennington and Heffner alleged that Medcap should have known about the agreement from their past conduct. Ultimately, the Court concluded that the agreement was not disclosed immediately, although this point was ultimately moot given the Court’s finding on the prior issue.

With respect to Medcap’s abuse of process claim, the Court emphasized the necessity of balancing the need for disclosure with the parties’ freedom to strategize and negotiate settlements. In that regard, requiring immediate disclosure of the kind of agreement would unduly restrict the parties’ ability to conduct their litigation and negotiate settlements.

The Court stressed that the agreement did not mislead the court or disadvantage Medcap in a manner that would justify labeling the plaintiffs’ conduct as an abuse of process. The essence of the litigation, the claims, and the defenses remained unchanged by the plaintiffs’ agreement. Therefore, the Court dismissed Medcap’s motions to stay or dismiss the proceedings.[10]

Medcap appealed to the Court of Appeal.

The Court of Appeal’s Decision

On appeal, Medcap took a different approach, departing from the approach taken in Superior Court (and most often taken by similarly situated litigants) in respect of altering the litigation landscape. Specifically, counsel for Medcap argued that “agreements that fetter, clog, or frustrate, settlement must be disclosed.” In this regard, Medcap was looking to broaden the rule for immediate disclosure to encapsulate the situation it found itself in with Heffner and Bennington.

The Court did not provide precise definitions for these terms as advanced by Medcap, but concluded that their adoption would represent a “dramatic and unwarranted expansion of the properly narrow rule”.[11] Having refused to broaden the rule, the Court of Appeal therefore agreed with the motions judge and dismissed Medcap’s appeal.

In rendering its decision, the Court considered the purpose of the disclosure rule, emphasizing that it is premised on ensuring the litigation process remains fair and transparent, particularly when agreements may potentially alter the strategic behaviour of parties from being opponents to collaborators.[12]

The core of the Court’s analysis centered on the motions judge’s application of these principles to the facts at hand, particularly among the respondents (Heffner and Bennington) and a third-party creditor.

The Court reviewed the motion judge’s conclusion that the settlement agreement did not require immediate disclosure, observing that his conclusion was based on the finding that the agreement did not compel the respondents to support each other beyond the cooperation typically expected in litigation, nor did it modify their adversarial relationship with Medcap.[13]

Further, the Court found no palpable and overriding error in the motion judge’s finding that the respondents were not adverse to one another and that their collective strategy did not significantly alter the litigation landscape against Medcap. These findings were critical in determining whether the immediate disclosure rule was triggered.[14]

In the result, the Court’s agreement with the motions judge demonstrated that not all agreements among litigating parties necessitate disclosure, let alone immediate disclosure. Rather, the agreements that require such disclosure remain strictly those that transform the litigation landscape in such a way that significantly alters the dynamics of litigation do.

This distinction is vital for maintaining the balance between the strategic freedom of parties to negotiate and settle disputes and the overarching need to ensure fairness and transparency in the judicial process. It also furthers the Court’s general position that the rule, which strictly applied with no discretion, is only to be applied in narrow circumstances.

Commentary

As noted above, the Court of Appeal’s decision in Bennington provides important clarification on the boundaries of the immediate disclosure rule: the rule is invoked only when an agreement shifts the parties’ position from adversarial to co-operative, in a manner that could potentially disadvantage the other parties or mislead the court.

Both the Superior Court and Court of Appeal’s decisions suggest that this distinction is vital in preserving the strategic autonomy of parties engaged in litigation. It acknowledges that while transparency is fundamental, the ability of parties to negotiate, strategize, and settle disputes is equally important.

Autonomy in litigation is essential for allowing parties to effectively manage their strategies within the confines of the Rules of Civil Procedure and established jurisprudence. A lack of autonomy could complicate litigation and settlement processes, potentially hindering cooperation and collaboration among parties and affecting the overall possibility of reaching settlements.

As well, in the construction context, particularly as it relates to lien proceedings that involve multiple claimants and are intended to be conducted as a form of class proceeding, Bennington offers important guidance on the management of settlement agreements and collective bargaining strategies – which is an issue that comes up regularly in such proceedings.

Construction projects often involve a web of contractual relationships, with numerous parties across several levels of the construction pyramid, each potentially holding lien rights in the event of disputes. Given the complexity of these relationships, the principles outlined in this decision reiterate the importance of transparency and the potentially harsh consequences of undisclosed settlement agreements.

That said, this decision also clarifies that such agreements require disclosure only when they transform the litigation landscape in a manner that might disadvantage other parties or mislead the court. This creates a nuanced threshold for determining when the strategic cooperation among lien claimants crosses into territory that could potentially affect the fairness and integrity of the judicial process.

Construction stakeholders often enter into various forms of agreements during the course of litigation, including those aimed at coordinating their approach to settlement negotiations or litigation strategies, as well as agreements by mid-level claimants to settle with their subtrades and take an assignment of the subtrades’ claims. Ironically, rather than potentially “fetter, clog, or frustrate” settlement, such a scenario would arguably facilitate settlement among the remaining parties (insofar as there are fewer of them) and would therefore seem to be on-side of the appellant’s proposed expansion of the immediate disclosure rule.

On the other hand, the Court of Appeal’s decision to reject this broad interpretation nevertheless affirms that construction stakeholders can continue to negotiate and enter into agreements with one another and provides comfort that not all such agreements have the effect of complicating settlement negotiations needs to be disclosed.

Ultimately, because the test for disclosure remains somewhat vaguely worded and heavily fact-dependent, parties will need to remain mindful of whether their settlements meet the threshold for disclosure. While the Court has refrained from expanding the rule to include agreements that merely complicate settlement efforts, parties are still required to disclose any agreements that significantly alter the adversarial dynamics of a case in a way that could disadvantage other parties or mislead the court. It also remains open that the Court may modify the test in future cases, if the fact scenario withstands scrutiny and provides sufficient policy reasons to justify such an expansion.

On this basis, construction industry participants must remain vigilant in settlement processes and continue to carefully consider how their agreements affect the overall litigation landscape, and whether they could be seen as transforming adversarial relationships in a manner that necessitates disclosure. In this regard, we recommend reaching out to qualified counsel to work through settlement agreements and negotiations – particularly when engaged in settlement based processes such as negotiation or mediation.

[1] 2024 ONCA 90 [Bennington Financial Corp].

[2]  2023 ONSC 2742 at paras 8-11 [Bennington].

[3] Ibid at para 12.

[4] Skymark Finance Corporation v. Ontario, 2023 ONCA 234, at para 46.

[5] Bennington, supra note 2 at para 32.

[6] Ibid at para 33.

[7] Ibid at para 35.

[8] Bennington, supra note 2 at paras 32-38.

[9] Ibid at paras 39-69.

[10] Ibid at para 74.

[11] Bennington Financial Corp, supra note 1 at para 15.

[12] Ibid at para 14.

[13] Ibid at para 16.

[14] Ibid at para 17.

CVV v CWB: The Nature of Set-Aside Applications and Adequacy of the Tribunal’s Reasons

It is well established that parties seeking to set aside an arbitral award for a breach of natural justice face significant hurdles. In CVV & 10 Ors v CWB (“CVV”),[1] Singapore’s Court of Appeal addressed how parties often misapprehend the process and treat it effectively as an appeal on the merits, when it is in fact a much more limited review with a relatively high bar to success. Notably, the Court also provided guidance on whether an award can be attacked on the basis of inadequacy of the tribunal’s reasons (that is, lack of sufficient reasons), which will be of significant interest to Canadian readers. Below, we review the case and its takeaways.

Facts

In CVV, CWB[2] was engaged as an asset advisor by Singaporean fund manager CVQ, and claimed that CVQ had failed to pay it certain fees. CVQ and subsidiaries of two of its funds (collectively, the “Claimants”) brought the dispute to arbitration.

A tribunal dismissed their claims and allowed counterclaims by CWB for payment of the advisory fees, and in particular, a “Performance Fee”. The Claimants then came to court to have the award against them set aside on the grounds of a breach of natural justice.

The “crux” of their argument was that the tribunal “breached the fair hearing rule by failing to apply its mind and/or to give reasons for its decision on essential issues in the Award”.[3] Their application was dismissed at first instance, and – as discussed below – by the Court of Appeal.

The Decision

Readers will recall from our recent article on CZT v CZU[4] that a party challenging an award in Singapore on the grounds of natural justice must show:

  • Which rule of natural justice was breached;
  • How it was breached;
  • In what way the breach was connected to the making of the award; and
  • How the breach prejudiced its rights.[5]

In CVV, the Court also identified a common reason for unsuccessful challenges, namely that the applicant argues the merits of the award:

From a brief survey of Singapore cases, a significant majority of such applications have been unsuccessful because those challenges were found in substance to have engaged the merits of the award. When a dissatisfied party relies on an alleged breach of the rules of natural justice, it is crucial to bear in mind that the typical grounds on which a litigant may challenge a judgment are quite different and distinct from those which apply in the context of an arbitral award. The failure to properly appreciate this vital distinction is usually the reason why the challenge is ultimately unsuccessful.[6] [emphasis added]

The Court offered the following admonition:

For better or for worse, parties in an arbitration must accept the consequences of their choice of the arbitral tribunal as regards the merits of the award, irrespective of the degree of their dissatisfaction with the outcome in the award.[7] [emphasis added]

The Court also observed that finality is “[o]ne of the key virtues” of arbitration, but that this seems only to be “appreciated by the winning party because dissatisfied parties are increasingly seeking the court’s assistance and intervention to set aside arbitral awards.”[8]

Against that backdrop, the Court addressed four arguments from the Claimants.

First, the Claimants alleged that the tribunal did not consider whether the Performance Fee was due and payable. The Court rejected this argument, finding that the tribunal was not required in its award to individually address each submission from the Claimants.

Second, the Claimants alleged that the tribunal used inconsistent dates for the end of the life of one of the funds. The Court found this did not show that the tribunal failed to apply its mind to essential issues. In fact, the Court concluded the use of two dates was “readily explicable on the facts and d[id] not show that [the tribunal] made inconsistent findings”.[9] The use of different dates was a byproduct of the Claimants’ refusal to provide its own calculations for the advisory fees at issue. The tribunal had relied on the calculations of CWB’s expert, and he had employed dates that differed from the tribunal’s.

Third, the Claimants argued that the tribunal failed to consider its objections to calculations by CWB’s expert regarding various advisory fees. The Claimants pointed to the fact that the tribunal mistakenly stated in the award that the Claimants had failed to challenge his calculations until closing submissions, when they had in fact challenged them in his cross-examination.

The Court concluded that this was “at most an error of fact which would not justify setting aside the award.”[10] The Court then distinguished Front Row Investment Holdings (Singapore) Pte Ltd v Daimler South East Asia Pte Ltd,[11] a case in which an award was set aside. In that case, the arbitrator was “under the erroneous impression that the respondent had ceased to rely on several pleaded points in its counterclaim for misrepresentation, and consequently failed to have regard to the respondent’s submissions on the issue”.[12] By contrast, in CVV, the tribunal had not “failed to have regard to the Claimants’ case.”[13]

Fourth, the Claimants argued that the tribunal did not consider whether CWB’s claims were awarded as a debt or as an award for damages. The Court found that the Claimants did not argue before the tribunal that such a distinction was important, and that therefore the tribunal did not breach the fair hearing rule.

The Court also addressed another key question, being the sufficiency of a tribunal’s reasons (i.e. the extent to which the tribunal must give reasons in order to comply with natural justice). While the Court agreed with the Claimants that a tribunal must give reasons, it cautioned that, in Singapore, “it is not settled in the case law whether a tribunal’s failure to give adequate reasons is itself a reason to set aside an award”,[14] and it is “not entirely settled what the content of a tribunal’s duty to give reasons is.”[15]

The Court rejected the notion that an arbitral tribunal should be held to the “judicial standard” because, unlike arbitration, court proceedings are generally (1) open to the public, and “justice must not only be done but it must be seen to be done”, and (2) open to appeal, such that the reviewing court must be able re-examine the merits.[16] Rather, what is required of a tribunal “will depend upon the nature of the dispute and the particular circumstances of the case”.[17]

However, the Court ultimately decided not to address this point definitively, because it found that the Claimants relied on the alleged insufficiency of the tribunal’s reasons in order to demonstrate that the tribunal’s failed to “apply its mind” to the issues.[18] Echoing the Court in CZT v CZU, the Court of Appeal noted that “the inadequate provision of reasons and explanations is, without more, a mere error of law and an allegation of the same is therefore incapable of sustaining a challenge against an award”,[19] given that a mere error of law is not itself a breach of natural justice.

Commentary

CVV is instructive as to the finality of arbitral awards. It is broadly recognized that a set-aside application is not an appeal on the merits or a re-litigation of the dispute, but for whatever reason, it seems that this misapprehension persists in many jurisdictions (including in Canada). In that regard, errors of law or of fact may not be sufficient to warrant the setting aside of an award, and the fair hearing rule does not hold arbitrators to a standard of perfection.

As a practical matter, dissatisfied parties will therefore need to consider whether the potential errors they have identified in the award rise to the level of a breach of natural justice. As well, it is worth keeping in mind that the “fairness” of a hearing is often in the hands of the parties themselves. In CVV, the Claimants appear to have made a tactical decision not to provide their own calculations of the advisory fees. This decision apparently backfired, and the Court was unsympathetic to their complaints. Therefore, it will behoove parties to ensure from the very start of an arbitration that they craft a procedure with opposing parties and the tribunal in order to ensure that they are satisfied that the matter will proceed in a manner consistent with what they believe will ensure a fair hearing. Seeking out a procedural unfairness ex post facto is rarely a recipe for success, and parties should therefore proceed with that in mind.

In addition, the question of sufficiency of reasons is, of course, highly relevant to Canadian readers. It is unfortunate, although perhaps unsurprising, that the Court avoided deciding the question, given how difficult it would be to determine the content of the duty to provide reasons, particularly in the abstract and without the issue having been fully briefed by the parties. It is entirely common in the construction law context, particularly in the case of dispute adjudication boards – the status of which remain uncertain in Canada as to whether they qualify as arbitration or expert determination – for parties to agree that the tribunal or board shall only provide limited reasons (or in some instances, no reasons) in the interest of delivering a decision swiftly, such that the parties cannot subsequently complain on this basis. On the other hand, in circumstances where the tribunal or board’s duty to provide reasons is ill-defined, it should perhaps come as no surprise that parties may seek to use a lack of detailed reasons as the basis for attacking an award.

Similarly, it would seem reasonable to treat the content of the duty as contextual. For instance, given that Ontario’s Arbitration Act, 1991[20] permits appeals on questions of law with leave (and on questions of fact or mixed fact and law, if the arbitration agreement so provides), then the tribunal’s reasons would presumably need to be held to a higher standard in order to allow for the appellate court to be able to scrutinize the tribunal’s reasons. This has already occurred in prior Ontario case law where awards have been appealed, and interestingly, courts in that context have applied case law from the labour arbitration, administrative law, and even criminal law contexts in order to conclude that a failure to provide sufficient reasons is an error of law, effectively holding tribunals to the same standard as courts.[21]

On the other hand, however, this perhaps speaks to the idiosyncrasies of Ontario’s domestic arbitration legislation since, as readers, will appreciate, its international domestic legislation – just like other Model Law-based legislation – does not allow for appeals of any kind. Accordingly, this too may speak to the need for overhauling Ontario’s domestic arbitration legislation, in order to align it with international norms and avoid bringing it too close in form to litigation.[22]

[1] CVV and others v CWB, [2023] SGCA(I) 9.

[2] In keeping with convention, the Court anonymized the parties.

[3] CVV and others v CWB, [2023] SGCA(I) 9 at para 25.

[4] CZT v CZU, [2023] SGHC(I) 22.

[5] CVV and others v CWB, [2023] SGCA(I) 9 at para 29, citing Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd, 2007 SGCA 28.

[6] CVV and others v CWB, [2023] SGCA(I) 9 at para 2.

[7] CVV and others v CWB, [2023] SGCA(I) 9 at para 3.

[8] CVV and others v CWB, [2023] SGCA(I) 9 at para 1.

[9] CVV and others v CWB, [2023] SGCA(I) 9 at para 56.

[10] CVV and others v CWB, [2023] SGCA(I) 9 at para 62.

[11] Front Row Investment Holdings (Singapore) Pte Ltd v Daimler South East Asia Pte Ltd, [2010] SGHC 80.

[12] CVV and others v CWB, [2023] SGCA(I) 9 at para 62.

[13] CVV and others v CWB, [2023] SGCA(I) 9 at para 62.

[14] CVV and others v CWB, [2023] SGCA(I) 9 at para 32 (italics in original).

[15] CVV and others v CWB, [2023] SGCA(I) 9 at para 33 (italics in original).

[16] CVV and others v CWB, [2023] SGCA(I) 9 at paras 33-34.

[17] CVV and others v CWB, [2023] SGCA(I) 9 at para 34, citing the High Court of Australia in Westport Insurance Corporation v Gordian Runoff Ltd, [2011] HCA 37.

[18] CVV and others v CWB, [2023] SGCA(I) 9 at para 35.

[19] CVV and others v CWB, [2023] SGCA(I) 9 at para 35 (emphasis added).

[20] Arbitration Act, 1991, SO 1991, c 17, s 45.

[21] See, for example, Wang v. Takhar, 2019 ONSC 5535 at paras 46-47 at 56-60. See also Farmer v. Farmer,  2021 ONSC 5913, where the Court relied upon s. 38(1) of the Arbitration Act, 1991 – which stipulates that “an award… shall state the reasons on which it is based” – and s. 40(1) and (2), which state that a tribunal may be compelled to give an explanation to the Court, before turning at paras 110-116 to a discussion of sufficiency of reasons that relies upon case law from the criminal law context. This latter case was a family law decision, which imports different policy considerations, but which in turn speaks to the proposition that family law arbitration might more appropriately be dealt with by its own legislation rather than together with commercial arbitration.

[22] Consider for example, that in The Bay Hotel and Resort Ltd and another v Cavalier Construction Co Ltd. And another, [2001] UKPC 34, the House of Lords determined that in respect of a private arbitration regarding the construction of a hotel resort in Turks and Caicos governed by the Construction Industry Arbitration Rules of the American Arbitration Association, the tribunal’s award contained sufficient reasons notwithstanding that it was five paragraphs in length and contained minimal substantive analysis (what the House of Lords referred to as “lean and unembellished”).

CZT v CZU: Arguments not Pleaded and Ex Parte Communications in Arbitration

Parties seeking to set aside arbitral awards face an uphill battle, even when one of the arbitrators on the tribunal has alleged “serious procedural misconduct” by their fellow panelists.

In CZT v CZU (“CZT”),[1] the plaintiff sought to have an award set aside in light of allegations by an arbitrator against the other two tribunal members, on the basis that those other arbitrators breached the rules of natural justice. A panel of three judges of Singapore’s International Commercial Court (“SICC”) dismissed the plaintiff’s application. In doing so, the Court succinctly explained the requirements of the fair hearing rule, which it described as a pillar of natural justice. Below, we consider this case’s implications.

Factual Background

In brief, the plaintiff had entered into a contract with the defendant to deliver certain component packages that included materials, machinery and equipment, which the defendant subsequently alleged were defective. The defendant commenced arbitration proceedings in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (“ICC”) in Singapore. The majority of a tribunal of three (the “Majority”) found in favour of the defendant.

The ICC sent the final award, reflecting the Majority’s decision, to the parties. On that same day, the dissenting arbitrator (the “Minority”) sent a copy of his dissenting opinion to the parties.

On this point, CZT v CZU may be familiar to some readers. We previously covered an initial step in this proceeding, which related to summons filed by the plaintiff against the three arbitrators for production of their records.[2] Those summons were dismissed by the same judges of the SICC in a benchmark decision on deliberative secrecy.

Thereafter, the plaintiff brought an application to have the Majority’s award set aside under Singapore’s International Arbitration Act 1994,[3] arguing, among other things, that the Majority “acted in breach of natural justice”.[4]

The Court’s Decision

The plaintiff made three arguments before the Court:

  • The Majority failed to consider critical arguments made by the plaintiff in the arbitration;
  • The Majority reached conclusions in the final award based on facts or matters that were not argued by the parties during the arbitration and wrongly attributed arguments and positions to the parties that were not supported by the arbitration record; and
  • There was a reasonable suspicion of bias on the part of the Majority.[5]

Citing Singapore’s Court of Appeal in Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd,[6] the Court held that the party challenging an award as having breached the rules of natural justice must establish:

  • Which rule of natural justice was breached;
  • How it was breached;
  • In what way the breach was connected to the making of the award; and
  • How the breach prejudiced its rights.[7]

The Court also held that the “two pillars of natural justice” are that (1) an adjudicator must be disinterested and unbiased, and (2), parties must be given adequate notice and opportunity to be heard, i.e., the “fair hearing rule”.[8]

The Court then explained the requirements of the fair hearing rule:

To comply with the fair hearing rule, the tribunal’s chain of reasoning must be: (a) one which the parties had reasonable notice that the tribunal could adopt; and (b) one which has a sufficient nexus to the parties’ arguments. A party has reasonable notice of a particular chain of reasoning (and of the issues forming the links in that chain) if: (i) it arose from the parties’ pleadings; (ii) it arose by reasonable implication from their pleadings; (iii) it is unpleaded but arose in some other way in the arbitration and was reasonably brought to the party’s actual notice; or (iv) it flows reasonably from the arguments actually advanced by either party or is related to those arguments.[9]

In that regard, the “overriding burden is on the applicant to show that a reasonable litigant in his shoes could not have foreseen the possibility of the reasoning of the type revealed in the award.”[10] The Court added, “The arbitrator is not expected to consult the parties on his thinking process before finalising his award unless it involves a dramatic departure from what has been presented to him.”[11]

In short, it must be “plain that the reasoning of the Tribunal was something so far outwith the contemplation of the parties as a course that the Tribunal could follow that it could not have been foreseen as flowing from what was argued.”[12]

The Court also stated that it is “axiomatic that an error of law or fact in the award does not amount to a breach of natural justice”,[13] and a court will only intervene if the tribunal “failed to consider an issue at all” (emphasis in original).[14]

With this high bar in mind, the Court found that the Majority considered all the issues to some extent. Further, it found that there was no causal connection between the alleged breach and the award, and that there was in any event no prejudice to the plaintiff.

The Court also acknowledged that the Majority did rely on some facts or matters that were not pleaded or argued, but that there was no causal connection between these alleged breaches and the award, and no prejudice to the plaintiff. The Court also rejected the plaintiff’s strict approach and found, for instance, that the Majority was entitled as part of its comparative analysis to refer to contractual provisions about which it had heard no argument.

On the question of bias, the Court found the allegation to be one of apparent, rather than actual, bias. The Court rejected the Minority’s bare allegations against his colleagues, including his claim that the Majority had concealed its true ratio decidendi (i.e., had falsified the basis of its decision). The Court noted that the “Minority’s frustration at not having been able to persuade the Majority to his views is palpable” but that “that is clearly no reason for this Court to intervene.”[15]

The Court also rejected the plaintiff’s argument that an ex parte phone call from a member of the Majority to the defendant’s counsel after the final award created a reasonable suspicion of bias. This member of the Majority called counsel for both parties separately to discuss the Minority’s dissent, which had been unilaterally distributed by the Minority and did not form part of the final award in the ICC’s view.

While the plaintiff argued that the phone call to the defendant contravened the tribunal’s own procedural order, the Court pointed out that the procedural order only prohibited counsel from reaching out to the tribunal ex parte, and not vice versa. The Court concluded that the call, and a subsequent email in which the member acknowledged making the call, evidenced his “unhappiness” with the Minority’s dissemination of his dissent.[16]

Commentary

Given that Singapore and Canada are both Model Law jurisdictions, this case is of significant relevance to Canadian readers (particularly as a coda to the Court’s prior decision in this matter). Given that the plaintiff relied in large part upon the same factual allegations that it advanced in its unsuccessful summons application, it is therefore perhaps unsurprising that the result in this set-aside application was the same.

On the other hand, some of the salient points of the decision raise the question of whether it might be decided similarly in Canada, where many jurisdictions have jealously protected parties’ rights to make their case and respond to the case against them (consistent with Article 34(2)(a)(ii) of the Model Law, to which the Court referred in CZT). As a result, it is not unheard for an award to be set aside[17], or a trial judgment to be overturned or remitted back to the trial judge, in similar situations on the basis that the arbitrator or judge deprived the parties of the opportunity to fully brief their case. Notwithstanding that the Court in CZT similarly emphasized the importance of parties having sufficient opportunity to be heard, it would seem that Singaporean courts contemplate a somewhat higher threshold for finding a violation.

On the other hand, the Court in CZT took a nuanced view of this issue, distinguishing between an award dealing with an issue not raised by the parties (and therefore outside the terms of submission to arbitration, contrary to Article 34(2)(a)(iii) of the Model Law), versus an award dealing with arguments not raised by the parties (which goes to the issue of a breach of natural justice). This, in particular, is an important distinction for parties to bear in mind when considering whether to apply for set-aside, and how to plead in such an application.

As well, the Court acknowledged that the Majority relied on facts or matters that were not pleaded or argued, but found that this was not grounds for setting aside the award because it had not affected the outcome. Readers will recall that in the recent Ontario Divisional Court decision in Ledore v Dixin[18] (discussed here), the Court found that parties to an interim construction dispute adjudication under Ontario’s Construction Act[19] had “the right to be heard on the determinative issue”.[20] This is potentially consistent with CZT, in that both decisions would require the parties be allowed to make submissions on any determinative issue.

CZT also makes clear that it is incumbent upon parties (and particularly counsel) to anticipate the possibility of the tribunal employing reasoning that does not necessarily flow solely from the issues and arguments raised by counsel, so long as it is not “a dramatic departure from what has been presented” to them. In that regard, it would behoove parties to retain counsel with ample experience in the type of dispute at issue.

It is also noteworthy that the Court found that the tribunal’s procedural order did not apply to ex parte communications from the tribunal. This may meet the letter of the procedural order, but perhaps not its spirit insofar as the underlying rationale for a prohibition on ex parte communications – procedural unfairness – would arguably apply regardless of who initiates the communication in question. That said, the Court’s thinking may have been influenced by the fact that the communications occurred after the award was issued, and the fact that the tribunal contacted both parties on the same day, implying reciprocity.

In any event, it is evident from the decision that there is a heavy burden on an applicant to set aside an award on the basis of a breach of natural justice. Arbitrators are not held to a standard of perfection – on either questions of fact or of law. Accordingly, parties to an arbitration may want to err on the side of over-inclusivity rather than under-inclusivity in their submissions.

 

[1] CZT v CZU, [2023] SGHC(I) 22.

[2] CZT v CZU, [2023] SGHC(I) 11.

[3] International Arbitration Act 1994 (2020 Revised Edition).

[4] CZT v CZU, [2023] SGHC(I) 22 at para 22.

[5] CZT v CZU, [2023] SGHC(I) 22 at para 26.

[6] Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd, 2007 SGCA 28.

[7] CZT v CZU, [2023] SGHC(I) 22 at para 28.

[8]CZT v CZU, [2023] SGHC(I) 22 at para 30.

[9] CZT v CZU, [2023] SGHC(I) 22 at para 33.

[10] CZT v CZU, [2023] SGHC(I) 22 at para 34.

[11] CZT v CZU, [2023] SGHC(I) 22 at para 34.

[12] CZT v CZU, [2023] SGHC(I) 22 at para 60.

[13] CZT v CZU, [2023] SGHC(I) 22 at para 27.

[14] CZT v CZU, [2023] SGHC(I) 22 at para 40.

[15] CZT v CZU, [2023] SGHC(I) 22 at para 100.

[16] CZT v CZU, [2023] SGHC(I) 22 at para 106.

[17] See, for example, our case comment on Mattamy (Downsview) Limited v. KSV Restructuring Inc. (Urbancorp), 2023 ONSC 3012, available here.

[18] Ledore Investments v Dixin Construction2024 ONSC 598.

[19] Construction Act, RSO 1990, c C.30.

[20] Ledore Investments v Dixin Construction2024 ONSC 598 at para 28.

Tam v. PD Plumbing & Heating Ltd.: Recent Developments in the Law Surrounding Want of Prosecution in Builders Lien Actions

It is well established law that builders lien actions in British Columbia are special cases that require expeditious prosecution.[1] In the recent decision of Tam v. PD Plumbing & Heating Ltd.[2] (“Tam”), the British Columbia Court of Appeal has confirmed that lien claimants must be prepared to prosecute their claims diligently, failing which they could face severe consequences. Below, we consider the case, provide our key takeaways and provide an update on the recent developments in the law surrounding applications for want of prosecution.

The Facts

In Tam, Betty Sui Fan Tam and Alexander Ming Tam (the “Tams”) entered into a contract with PD Plumbing & Heating, doing business as Kmpas Plumbing Ltd (“PD Plumbing”) for the provision of plumbing work and the installation of air conditioning (“the Work”) in a home owned by the Tams. After PD Plumbing completed the Work, a dispute arose due to the alleged non-payment by the Tams, and PD Plumbing registered a Claim of Lien against the title to the home. Approximately one year later, PD Plumbing sought to enforce its lien by filing a Notice of Civil Claim and Certificate of Pending Litigation. [3]

After the Tams delivered a response to the claim, the litigation stalled. PD Plumbing delivered its list of documents in the months that followed. However, after that, no steps were taken in the litigation for six years, at which point PD Plumbing filed a notice of intention to proceed. The Tams subsequently brought an application to dismiss the claim for want of prosecution. [4]

British Columbia Supreme Court Analysis

In the Supreme Court, the Application Judge, Justice Sharma, began by outlining the factors the Court will consider in an application for a want of prosecution, which are:

  1. The length of delay and whether it was inordinate;
  2. Any reasons for the delay;
  3. Whether the delay has caused prejudice or made a fair trial impossible; and
  4. Whether, on balance, justice requires dismissal of the action. [5][6]

With respect to the first factor, the Court observed that a delay is inordinate if it is uncontrolled, immoderate, or excessive. The starting point for determining delay is generally considered from the time an action is commenced. [7] PD Plumbing admitted that the delay was inordinate but attempted to justify its delay in litigating the action.[8] The Court then turned to consideration of the second factor: whether the delay was inexcusable in this case. PD Plumbing took the position that the cost of the litigation, relative to the amount of the claim, did not make it financially feasible to move forward with the litigation. In response, the Tams referred to prior authority that indicated that a litigant hoping to settle a claim as a reason for not moving forward with the litigation is not a reasonable excuse for delay.[9] However, Justice Sharma distinguished the prior authority primarily on the basis that there was evidence that the Tams had previously acknowledged it owed money to PD Plumbing. As a result, the Court concluded that it was not unreasonable for PD Plumbing to have delayed the litigation in the hope the Tams would pay the amount owing, given the cost of moving the litigation forward relative to the size of the claim.[10]

Justice Sharma then went on to examine the third factor, prejudice. Once a defendant has established that there was an inordinate and inexcusable delay, a rebuttable presumption of prejudice arises that the plaintiff must rebut.[11] When considering prejudice, the primary consideration is a defendant’s ability to develop a defence.[12] However, previous jurisprudence has also found that the presence of a Certificate of Pending Litigation can lead to a presumption of prejudice.[13] Despite such authority, the Justice Sharma was unconvinced and was of the opinion that the mere existence of a Certificate of Pending Litigation was not sufficient to demonstrate prejudice and found that the Tams had not proven any actual prejudice. She suggested that while a rebuttable presumption of prejudice could be raised if the first two factors of the test were met, the entire burden was not shifted onto PD Plumbing. Instead, she opined that the case was to be looked at as a whole.[14]

In deciding not to dismiss the action, Justice Sharma found that the interests of justice could not justify the use of such a draconian remedy. She was of the opinion that the reason for the delay put forward by PD Plumbing was not so inexcusable and that the delay itself did not give rise to a presumption of prejudice. Moreover, Justice Sharma was of the view that even if a presumption of prejudice was raised, there was insufficient evidence to demonstrate actual prejudice, which ultimately was “problematic in terms of the ultimate balancing” of the interests of justice. Justice Sharma dismissed the Tams’ application for want of prosecution. The Tams appealed the decision to the British Columbia Court of Appeal.[15]

British Columbia’s Court of Appeal’s Analysis

At the Court of Appeal, the primary issue on appeal was whether Justice Sharma erred in her application of the test for want of prosecution. [16]

Although it served as obiter dictum, the Court of Appeal discussed the inordinate delay in this case. The Court of Appeal found that the actions by PD Plumbing had not only shown an inordinate delay in prosecuting the action but demonstrated an overall lack of commitment to moving the action forward in accordance with the Supreme Court Civil Rules. More specifically, the Court of Appeal highlighted the lien claimant’s delay in commencing the action until just shortly before the limitation period expired and their failure to participate in the appeal process.[17]

The Court of Appeal then considered whether the delay was inexcusable and found that Justice Sharma had erred in accepting PD Plumbing’s explanation for delays in the litigation. PD Plumbing had essentially admitted that it never intended to proceed with the action, and in the Court of Appeal’s opinion, attempting to leverage a settlement was not an excuse for unduly dragging out litigation.[18]

In considering prejudice, the Court of Appeal observed that although there may have been no prejudice to the Tams’ ability to develop a proper defence, the interference in property rights created by the Claim of Lien and Certificate of Pending Litigation gave rise to a presumption of prejudice that PD Plumbing failed to rebut.[19]

The Court of Appeal concluded that the interests of justice weighed in favour of dismissing the claim given the amount of time that had passed since the completion of the Work, the delays in prosecuting the action, the admissions by PD Plumbing that it never intended to proceed with the claim, and PD Plumbing’s failure to appear at the appeal. [20]

The Court of Appeal ultimately overturned the Application Judge’s ruling and ordered that the action be dismissed for want of prosecution. [21]

Takeaways 

This decision provides some key takeaways for lien claimants prosecuting lien actions in British Columbia.

First, the Court of Appeal appears to have signalled that inordinance of delay in builders lien actions will be measured from the date a Claim of Lien is filed. In the oft-cited case of Wiegert v Rogers[22], the Court of Appeal observed that when determining whether a delay is inordinate, although there is no universal rule when time starts to run, the date when the action is commenced is usually the starting point to measure delay.[23] However, in Tam, when determining inordinate delay, the Court of Appeal specifically referred to PD Plumbing’s failure to commence an action until just before the Builders Lien Act’s limitation period expired in considering whether or not the delay was inordinate.

Second, the Court of Appeal confirmed that actual prejudice exists in lien actions due to the interference with a defendant’s property rights. It is important to note that British Columbia’s Court of Appeal subsequently revised the test for want of prosecution in Giacomini Consulting Canada Inc. v. The Owners, Strata Plan EPS 3173,[24] and removed the requirement of establishing prejudice in relation to an application for a dismissal for want of prosecution [25] (“Revised Test”). The Revised Test now asks:

  1. Has the defendant established that the plaintiff’s delay in prosecuting the action is inordinate?
  2. Is the delay inexcusable? [26]
  3. Whether, on balance, justice requires dismissal of the action. [27]

Notably, one of the factors the Court will consider in making a determination in relation to whether justice requires dismissal of the action is the “impact of the delay on a defendant’s professional, business, or personal interests.” The writers are, therefore, of the view that the substantial interference in property rights created by a Claim of Lien and Certificate of Pending Litigation is a consideration the Court will make when determining whether the interests of justice suggest dismissing an action for want of prosecution.

Lien claimants should be well prepared to prosecute their claim, including budgeting for the legal costs associated with doing so. In Tam, the Court of Appeal was unsympathetic about the fact that taking steps in the action would outweigh any potential recovery.  Therefore, lien claimants would be well served by consulting counsel who has experience dealing with builders liens and can provide strategic advice on enforcing their claim as well as alternative means of resolving their disputes earlier in the litigation by way of alternative dispute resolution mechanisms, such as mediation or engaging in negotiations with the other party.

[1] DEB Construction Ltd. v Mondiale Development Ltd., 2023 BCSC 1167 at para 26.

[2] 2023 BCCA 457 [Tam BCCA].

[3] PD Plumbing & Heating Ltd. v Tam, 2021 BCSC 2078 at paras 2-7 [Tam BCSC].

[4] Ibid at paras 7-9.

[5] The most important factor to be considered in an application of want of prosecution are the interests of justice.

[6] 0690860 Manitoba Ltd v Country West Construction Ltd, 2009 BCCA 535 at para 27.

[7] Callan v Cooke, 2020 BCSC 290 at paras. 74–75.

[8] Tam BCSC at paras 13-14.

[9]  North Shore Law LLP v. Cassidy, 2020 BCSC 1658 [North Shore]

[10] Tam BCSC at paras 16-19.

[11] Canadian National Railway Company v. Chiu, 2014 BCSC 75 at para 13.

[12] Tam BCSC at para 22.

[13] North Shore, supra note 10 at para 26.

[14] Tam BCSC at paras 26-28.

[15] Ibid at paras 30-33.

[16] Tam BCCA at paras 23-24.

[17] Ibid at para 27.

[18] Ibid at para 28.

[19] Ibid at paras 29-30.

[20] Ibid at para 31.

[21] Ibid at para 32.

[22] 2019 BCCA 334.

[23] Ibid at para 32.

[24] 2023 BCCA 473.

[25] Ibid at para 65.

[26] Ibid at para 69.

[27] Ibid at para 70.

Ledore v Dixin: Procedural Fairness and the Limits of Rough Justice

In Ledore Investments v Dixin Construction[1],on an application for judicial review, the Ontario Divisional Court was asked to consider whether an adjudication under Ontario’s Construction Act (the “Act”) should be set aside on the basis that the parties did not have an opportunity to make submissions on a determinative issue.

After reviewing the facts and the relevant law, the Court made a rare decision to remit the matter back to the adjudicator for further consideration on the basis that the conduct of the adjudication amounted to a breach of procedural fairness. Below, we consider the implications of this case in respect of the decision itself as well as broader implications on the adjudication regime as a whole – particularly given the intersection of the underlying principle of rough justice and the conflicting boundaries of procedural fairness.

Background

This case involved both the adjudication and prompt payment provisions of the Act. Here, Ledore Investments Limited, carrying on business as Ross Steel Fabricators & Contractors (“Ross Steel”), was a subcontractor on a project at Lambton College. In respect of that project, and relevant to the dispute between the parties, Ross Steel submitted three invoices to the contractor, Dixin Construction (“Dixin”), which went unpaid notwithstanding the prompt payment requirements of the Act. The invoices totalled $349,263.57, inclusive of HST and holdback.

Dixin had received payment from the owner in respect of the work performed by Ross Steel, but failed in turn to pay Ross Steel or, alternatively, to provide Ross Steel with a Form 1.3 “Contractor Notice of Non-Payment if Dispute” within the prescribed timeframe. Such a notice would have exempted Dixin from the requirement to pass down payments from the owner under the Act’s prompt payment provisions. Having not provided such notice, and in normal circumstances, the prompt payment requirements of the Act would ostensibly have been triggered so as to require Dixin to make payment down the chain to Ross Steel.

However, not long after the third invoice was issued by Ross Steel (with the first two invoices having gone unpaid), Dixin noted Ross Steel in default and subsequently terminated its subcontract. Dixin’s rationale for this default and termination appears to be that Ross Steel “had failed to agree to a schedule for the performance of the subcontract, had failed to perform its subcontract in a timely manner, and that its work also required repair.” In respect of this issue, Dixin claimed set-off against Ross Steel.

Ross Steel then referred the dispute to interim adjudication under section 13.7(1) of the Act. The adjudicator assigned by Ontario Dispute Adjudication for Construction Contracts (“ODACC”) permitted only written submissions from the parties. Ross had not previously referred the prior invoice non-payment issues to adjudication, notwithstanding its entitlement to do so.

In this post termination adjudication, the adjudicator concluded that Dixin was not required to pay the invoices. However, and importantly, the adjudicator made this decision for reasons not raised by either party.

In particular, the adjudicator found that the invoice that Dixin had delivered upstream to Lambton College (the Owner) was not a ‘proper invoice”’ as defined in the Act. (That is to say, the adjudicator questioned an invoice that was not in dispute.) As a result, the Adjudicator determined that the prompt payment regime (including requirements for a notice of non-payment to have been issued) was not yet engaged.

The adjudicator expressly acknowledged that neither party had raised this issue, but did not solicit further submissions from either party on this point. The adjudicator instead suggested that Ross Steel “relaunch” the adjudication on a fresh basis, i.e., that Dixin failed to deliver a proper invoice to the owner and that this resulted in a breach of the subcontract and/or the Act.

The adjudicator also concluded that, if the prompt payment regime had been engaged, he would have found that Dixin was required to pay the invoices and was not entitled to set-off against them. This was primarily given that Dixin had failed to give appropriate notice of non-payment in respect of any of the three invoices issued by Ross Steel.

Unsatisfied with the possibility of returning to the beginning of the adjudication process, Ross Steel elected to seek leave from the Divisional Court under section 13.18(1) of the Act for judicial review of the decision. Under section 13.18(5), an adjudicator’s determination can only be set aside on the following grounds:

  1. The applicant participated in the adjudication while under a legal incapacity.
  2. The contract or subcontract is invalid or has ceased to exist.
  3. The determination was of a matter that may not be the subject of adjudication under this Part, or of a matter entirely unrelated to the subject of the adjudication.
  4. The adjudication was conducted by someone other than an adjudicator.
  5. The procedures followed in the adjudication did not accord with the procedures to which the adjudication was subject under this Part [i.e. Part II.1 of the Act], and the failure to accord prejudiced the applicant’s right to a fair adjudication.
  6. There is a reasonable apprehension of bias on the part of the adjudicator.
  7. The determination was made as a result of fraud.

Importantly, leave to judicial review is intended to be given rarely and only in respect of the above noted grounds. The general intent of the legislation is to allow rough justice and to provide deference to adjudicators except in the strictest of enumerated circumstances. Notwithstanding the rarity of this relief, and that it has not actually been provided for in any case to date, Ross Steel was granted leave to seek review based on grounds nos 3 and 5.

The Court’s Decision

The Court only found it necessary to consider ground no 5: that the applicant’s right to a fair adjudication was prejudiced by procedures that did not accord with the prescribed procedures.

While Part II.1 of the Act itself did not “expressly incorporate principles of procedural fairness”, section 13.6 (in Part II.1) did state that an adjudication shall be conducted in accordance with procedures set out in regulations.[2] O Reg 306/18 in turn provides a code of conduct for adjudicators that includes principles of procedural fairness. Therefore, the Court concluded that procedural fairness applied.

The Court also indicated that any “serious breaches” of procedural fairness would also necessarily fall with the Divisional Court’s jurisdiction.

The Court acknowledged that procedural fairness for an adjudication under the Act did not require “a full range of procedural protections”,[3] and that it was necessary to consider the statutory context and the prompt and abbreviated nature of the adjudicative process. However, it found that “the right to be heard on the determinative issue is a central component of even more limited procedural protections”,  adding:

It is a legal truism in our system of justice that it is fundamentally unfair, and quite possibly unreliable, for a judicial officer or adjudicator to reach a conclusion in his or her reasons for judgment in a proceeding based on an issue that has not been pleaded or relied upon by a party to the proceeding.[4]

The Court observed that it was “fundamentally unfair” to determine the dispute on an issue that neither party spoke to, because “the losing party has had no opportunity to know the case it has to meet, or to address the issue that has been determined to be decisive”.[5] The Court also noted that Dixin had not even submitted to the adjudicator any invoices that it had submitted to Lambton College.

In the Court’s view, the problem with the adjudication was not so much that the parties did not raise the issue, but more so that the adjudicator’s determination was not tested by the adversarial process. The Court noted that both parties could have “offered valuable insights to the adjudicator, had they been given the opportunity”.[6]

The Court concluded that the statutory scheme “does not preclude an adjudicator from requesting further written submissions on the determinative issue”,[7] and suggested that the adjudicator could have invited submissions on the following:

  1.    whether, even though Dixin had received payment from the College, its failure to issue a “proper invoice” to the College should allow it to withhold payment to Ross Steel;

  2.    what, if anything, in the Act required the use by a contractor of a “proper invoice” to an Owner to engage the rest of the prompt payment scheme; and

  3.    what effect a requirement to issue “proper invoices” to engage the prompt payment provisions would have on the policies and legislative choices that lie behind Part I.1 of the Act.[8]

The Court also rejected the idea advanced by Dixin that the adjudicator’s power to “tak[e] the initiative in ascertaining the relevant facts and law” overrides “an experienced party’s fundamental right to be heard on the determinative issue.”[9]

In terms of a remedy, the Court declined to substitute its analysis for that of the adjudicator, instead remitting the matter to the adjudicator for further consideration.

Commentary

At first blush, the result in Ledore appears intuitively correct insofar as the right to be heard, to make one’s case, and to respond to the case against them are fundamental principles of the adversarial system of dispute resolution. On balance, the Court’s conclusion is therefore a reasonable one, and is consistent with the proposition that judicial review is to be rarely sought (and relief rarely granted) with respect to adjudication.

That being said, the Court’s analysis nevertheless highlights certain issues regarding how the structure and intent of the adjudication regime are meant to interact with principles of fairness rooted in the more traditional format of adversarial dispute resolution.

First, it is notable that the issue of whether an invoice is a “proper invoice” is arguably a straightforward inquiry that requires limited scrutiny and might not admit competing interpretations. In particular, the Act stipulates that a “proper invoice” must include the following (in addition any other requirements stipulated by the parties’ contract):

  1. The contractor’s name and address.
  2. The date of the proper invoice and the period during which the services or materials were supplied.
  3. Information identifying the authority, whether in the contract or otherwise, under which the services or materials were supplied.
  4. A description, including quantity where appropriate, of the services or materials that were supplied.
  5. The amount payable for the services or materials that were supplied, and the payment terms.
  6. The name, title, telephone number and mailing address of the person to whom payment is to be sent.
  7. Any other information that may be prescribed in the Act.

It seems at least arguable that these types of information are not readily susceptible to interpretation or debate – either an invoice contains this information, or it does not.

On the other hand, as the Court observed, the nature of the submissions that the adjudicator could have sought from the parties was not limited to simple review of invoices, but rather went to the interpretation of the Act’s adjudication provisions themselves, as well as their underlying policy and legislative choices. These issues would be more susceptible to robust debate, but they in turn raise a further issue with respect to the accessibility of adjudication: whereas sophisticated parties with counsel would be capable of delivering submissions on this point, it is highly unlikely that those parties at the bottom of the construction pyramid – in other words, that most vulnerable class of persons for whom adjudication was intended to provide the greatest benefit – would retain counsel, or be able to meaningfully argue over the provisions of the Act or its policy objectives.

Put differently, an interesting counterfactual to consider is if the parties in this case had been third- and fourth-tier subtrades operating as sole proprietorships, and engaging in adjudication without counsel. In that scenario, it is debatable whether seeking further submissions from the parties on the proper interpretation or policy objectives of the Act would have provided a meaningful benefit to either of the parties or the adjudicator. To the contrary, it stands to reason that the parties might very well have limited themselves to whether the contents of the invoices included all of the relevant information.

Second, it is also noteworthy that the Court concluded that Dixin’s argument that the adjudicator’s ability to undertake certain inquisitorial activities – such as ‘ascertaining the relevant facts and law’, pursuant to s. 13.12(1) of the Act – did not “override an experienced[10] party’s fundamental right to be heard on the determinative issue”. This argument seems correct insofar as the balance of s. 13.12(1) does not explicitly endow the adjudicator with plenary authority to determine the adjudication’s procedure, although on the other hand, it does authorize the adjudicator to issue “directions respecting the conduct of the adjudication” (emphasis added). It is not clear on the face of the provision whether and to what extent “conduct” is meant to be analogous to “procedure”, although it seems at least debatable (and consistent with the Court’s observation that deference is owed to the procedure chosen by the adjudicator). Ultimately, it seems that an adjudicator does have a broad procedural discretion under the Act, but not a limitless discretion.

Similarly, it is at least arguable that the adjudicator’s ability to “tak[e] the initiative in ascertaining the relevant facts and law” extended to making findings of fact and/or law, and in that sense, could credibly support the proposition that the adjudicator was entitled to conclude whether an invoice was a “proper invoice” without hearing submissions; ultimately, this point is illustrative of the tension between a quasi-inquisitorial model and the adversarial model (and culture) within which it resides. Given the latter, it is unsurprising that the Court erred on the side of a robust right to be heard – particularly in circumstances where the finding in question – that Dixin did not deliver a proper invoice to Lambton College – related to an issue not raised by the parties.

Interestingly, it is also notable that the Court’s acknowledgement of the adjudicator’s inquisitorial powers arguably undermines its reliance on the case law supporting the right to be heard, and again speaks to the tension of an inquisitorial model in an adversarial system. In particular, in support of the proposition that an adjudicator reaching a conclusion based on an issue not pleaded or relied upon by a party, the Court relied upon case law to the effect that

It is potentially unreliable because, in a system in which the adversarial process is relied upon to reach the best and most thoroughly considered determination, a decision that has not been tested in that framework cannot be trusted to have had its flaws exposed and addressed.[11] [emphasis added]

As noted, statutory adjudication under the Act is not purely adversarial, and as a result, it is arguable that the relevant case law might therefore have been of less persuasive value.

Ultimately, and although the result in Ledore v Dixin is both intuitively and legally reasonable, it nevertheless raises some concerns as to the underlying principle of adjudication as a quicker, “rough justice” approach.

If procedural fairness dictates that parties are always entitled to a right to be heard on a “determinative issue”, then it may be easy to envision sophisticated parties raising technical points of law and policy as “determinative” in an attempt to obtain a tactical advantage over less experienced, self-represented counterparties to adjudication.

This would run the risk of ‘over-legalizing’ adjudication – thus dissuading parties at the bottom of the construction pyramid, whom adjudication was intended to benefit – and of extending timelines in adjudication so that parties could properly brief any legal or policy issues raised by the adjudication. If taken too far, this could defeat the very purpose of adjudication itself and lead to more cases ending up back in courts across Ontario – where resources are already limited. We await with interest to see how the adjudication case law continues to develop in Ontario.

[1] Ledore Investments v Dixin Construction, 2024 ONSC 598.

[2] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 25.

[3] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 27.

[4] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 28.

[5] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 29.

[6] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 32.

[7] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 35.

[8] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 32.

[9] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 36.

[10] It is not clear from the Court’s analysis whether the reference to an “experienced party’s right” (emphasis added) is meant to suggest that the right to be heard in the adjudication context is more robust for experienced parties than inexperienced ones; presumably, such a fundamental right would apply equally to inexperienced parties, notwithstanding our observation above that inexperienced parties would not be as well-positioned to discuss legal and policy issues as experienced parties.

[11] Ledore Investments v Dixin Construction, 2024 ONSC 598 at para 29.

Schickedanz v. Wagema Holdings: The Costs of Arbitral Costs Awards

In Schickedanz v. Wagema Holdings Limited, 2023 ONSC 7219, the Ontario Superior Court of Justice dismissed an appeal of an arbitrator’s costs award. The Court emphasized that there is a high bar for overturning a costs award, as the decision-maker at first instance (i.e. the arbitrator) is in the best position to determine costs. The Court also found that, unless expressly stated otherwise in the arbitration agreement, an arbitrator may award reasonable legal fees without reference to any court scale. Below, we review the case and consider the implications of this decision in the construction industry.

Factual Background

The underlying dispute in this case involved five siblings who were equal shareholders of Wagema Holdings Limited (the “Wagema Respondent”).

In the fall of 2020, one of the siblings, Charlotte Schickedanz, and her holding company, Wagema Holdco (CDS) ULC (together, the “Appellants”), commenced litigation proceedings against the Wagema Respondent, Ms. Schickedanz’s brothers and their respective holding companies (the “Brothers”), a global law firm (the “Firm”), and the responsible partner at the Firm.

Ultimately, all the claims were consolidated into a single arbitration. For this purpose, the parties executed an arbitration agreement in April 2021 (the “Arbitration Agreement”). In the Arbitration Agreement, the parties agreed that the arbitration would be governed by the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”) and that all parties would have appeal rights from any final decision in the arbitration. With respect to the conduct of the arbitration, the parties agreed that the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”) would govern.

In December 2020, the Wagema Respondent retained the Firm to provide corporate advice to the Wagema Respondent in connection with the litigation commenced by Ms. Schickedanz against the Wagema Respondent in the aforementioned arbitration (the “Litigation Support Retainer”). The Firm had previously been retained by the Wagema Respondent as legal counsel in relation to a corporate reorganization and unanimous shareholder agreement in 2018.

On March 23, 2021, counsel for the Appellants sent a letter to counsel for the Firm and the Wagema Respondent regarding the Litigation Support Retainer. In this letter, counsel for the Appellants objected to an invoice sent by the Firm to the Wagema Respondent as: (a) it was unclear what the nature of the professional services were, and the Appellants did not know why the Firm would invoice the Wagema Respondent for Ms. Schickedanz’ litigation or in such high amounts; (b) the Wagema Respondent indicated that it would not take an active role in the litigation, and had a different law firm acting as litigation support; and (c) if the Firm was assisting the Brothers in litigation, those fees should be charged directly to those co-defendants, not the Wagema Respondent.

Counsel for the Wagema Respondent responded on April 7, 2021. The letter explained that the services were provided to assist the Wagema Respondent in “considering and, if necessary, responding to the arbitration and civil proceedings” commenced by the Appellants. In addition, counsel for the Wagema Respondent noted that although the Wagema Respondent did not intend to play an active role in the litigation, it believed that it was in “the company’s best interests that documents and information in [the Firm’s] possession as [the Wagema Respondent’s] corporate counsel be made available to, among other things, facilitate an expeditious determination of the matters in dispute.” Accordingly, the Wagema Respondent believed “that these costs are expenses incurred on behalf of the company and should be paid by the company.”

Later in 2021, the Appellants ultimately advised they were willing to dismiss the arbitration on consent and on a without-costs basis. However, the Brothers advised they were unwilling to settle the matter on a without-costs basis, as a result of which both the Brothers and the Wagema Respondent brought motions before the arbitrator for costs.

On October 8, 2021, the arbitrator released his costs award (the “Award”). In the Award, among other things, the arbitrator awarded $172,150.34 in costs to the Wagema Respondent for the legal expenses paid to the Firm pursuant to the Litigation Support Retainer.

The Appellants then commenced an appeal of this Award.

Motion to Quash the Appeal

In June 2022, the Wagema Respondent brought a motion to quash the appeal on the ground that leave to appeal was not sought pursuant to section 133(b) of the Courts of Justice Act, R.S.O. 1990, c. C.43 (the “CJA”).

The motion judge noted that the parties had negotiated and agreed upon a broad appeal process, without carving out a leave requirement for costs, and imposing a leave requirement would amount to judicial interference with the parties’ right to contract. After reviewing section 133(b) of the CJA and the Arbitration Act, she was not persuaded that leave to appeal was required.

Ultimately, the motions judge dismissed the motion to quash as she was “not satisfied that the appeal was devoid of merit nor that there was no likelihood that, if leave was required, it would not be granted in this case.” If leave was required, the application for leave could be dealt with by the judge hearing the merits of the appeal.

The Superior Court’s Decision

The Court dismissed the appeal, as the Appellants failed to show that the arbitrator made an error in principle or that the Award was plainly wrong.

Leave to Appeal

As a preliminary matter, the Court addressed the issue of whether leave to appeal an arbitral costs award is required. In the Courts view, leave to appeal was not required in this case.

The Wagema Respondent relied on section 133(b) of the CJA, which provides that “[n]o appeal lies without leave of the court to which the appeal is taken […] where the appeal is only as to costs that are in the discretion of the court that made the order for costs”. However, the Court noted that the CJA only referred to a court, not a tribunal or arbitrator, and found that the CJA drew a distinction between a tribunal and a court.

The Court confirmed that “[l]eave to appeal an order as to costs is granted sparingly and only where there are strong grounds on which the appellate court could find that the decision-maker at first instance erred in exercising their discretion because they made an error in principle or their decision is plainly wrong”.

The Court then held that leave to appeal was not required in this case for the following reasons:

  1. By its clear language, subsection 133(b) of the CJA only applies to costs awards made by a court.
  2. Section 45 of the Arbitration Act deals with appeals from an arbitral award. It does not draw a distinction between (1) an appeal regarding the substantive disposition of the award, and (2) an appeal as to costs only.  Further, the Arbitration Act does not refer to subsection 133(b) of the CJA, even though it refers to other provisions of the CJA, when relevant: see sections 45(6) and 57 of the Arbitration Act.
  3. As pointed out by the motions judge, the parties had negotiated and agreed upon broad appeal rights, without carving out a leave requirement for costs. The appeal rights were set out in section 12 of the Arbitration Agreement, in which the parties agreed that they had appeal rights from any final decision in the Arbitration, including on a question of fact, law or mixed fact and law. Subsections 45(2) and (3) of the Arbitration Act allow a party to appeal an award to the court on such questions “[i]f the arbitration agreement so provides”.

As subsection 133(b) of the CJA only applies to courts, and as there is no leave requirement imposed by the Arbitration Act with respect to costs award appeals, the parties were not required to seek leave to appeal the Award.

Applicable Test for Setting Aside a Costs Award

The Court set out the applicable test for setting aside a costs award as follows:

A court should set aside a costs award on appeal only if the decision-maker made an error in principle or if the costs award is plainly wrong.

The Court noted that costs awards are “notoriously difficult to appeal because they represent the decision-maker’s exercise of judgment as to the overall justice of the situation that they saw unfolding before them”. In that regard, a “reviewing court must be mindful that a costs award is a discretionary order and the decision-maker at first instance is in the best position to determine the entitlement, scale and quantum of any such award.”

Scale of Costs

The appellants argued that the arbitrator had made a reversible error by holding that cost recovery on a full indemnity basis was the normal practice in commercial arbitrations.

First, the Court noted that while Section 54 of the Arbitration Act states that an arbitral tribunal may award the costs of an arbitration, it does not refer to the Rules or the concept of scale of costs.

In granting costs to the Wagema Respondent, the arbitrator had relied on J. Brian Casey’s well-known textbook, Arbitration Law of Canada: Practice and Procedure for the proposition that the practice under domestic arbitrations is to award reasonable legal fees without reference to any court scale. The Court found that the general principles in that textbook were consistent with the language in section 54 of the Arbitration Act, and that there was support in the case law in other provinces that full indemnity is the norm for commercial arbitration.

The Court then considered a number of decisions the Appellants relied upon to argue against the above proposition, and found that all of the cases could be distinguished.

The Court found that, in light of the uncertainty in the authorities and the absence of any clear rule, the arbitrator did not make an error in principle and was not plainly wrong when he decided to award the Wagema Respondent its full legal expenses as the costs of the arbitration. The arbitrator did not infringe the Arbitration Act and exercised his discretion judicially, and not irrationally or whimsically.

Although the Appellants argued that the arbitrator had to proceed in accordance with the Rules of Civil Procedure as provided for in the Arbitration Agreement, the Court agreed with the arbitrator’s conclusion that the Arbitration Agreement only referred to the Rules in how the arbitration would be conducted by the parties, not with regard to how costs would be governed. Instead, the arbitrator concluded that he was to be guided on costs by the Arbitration Act. The Court found that it was open to the arbitrator to interpret the Arbitration Agreement in the way that he did. The Appellants did not raise any error in principle or show that the arbitrator was plainly wrong on that point.

Finally, the Court affirmed that appellate intervention solely based on quantum is problematic, as there is no meaningful way to determine when a number is too high. The amount of the costs award alone is not enough to show that the award is unreasonable or that there was an error in principle. Again, the Court emphasized that the decision-maker at first instance is in the best position to determine the quantum of any costs award.

Costs for Work Done by the Firm Pursuant to the Litigation Support Retainer

At the hearing, the Appellants also argued that the arbitrator made two other reversible errors: (1) allowing the Wagema Respondent to recover the Firm’s “litigation support” fees, as the Firm’s fees were excessive for an arbitration that did not progress beyond the production stage; and (2) allowing the Firm to recover its own arbitration costs indirectly through the Wagema Respondent, despite the Firm’s agreement to a without-costs withdrawal.

With respect to the Appellants’ argument that the fees were excessive, the Court again observed that the arbitrator was in the best position to determine the reasonableness of the fees. The arbitrator’s decision that the services were appropriate and the fees were reasonable did not disclose any error in principle.

With respect to the second alleged error, the Appellants complained that the arbitrator did not address their following arguments: “(i) the costs paid pursuant to [the Firm’s] Litigation Support Retainer should have been [the Firm’s] costs as a litigant and were improperly diverted to [the Wagema Respondent], and (ii) such costs were not recoverable given the settlement between [the Firm] and the Appellants.”

In response to this argument, the Court noted three key points:

  1. The amounts charged by [the Firm] pursuant to the Litigation Support Retainer did not include the fees paid by [the Firm] for its own counsel in the litigation […].
  2. When the Appellants and [the Firm] agreed to a without costs dismissal at the end of July 2021, the Appellants had known for more than four months that [the Firm] was doing litigation support work for [the Wagema Respondent] and invoicing [the Wagema Respondent] for that work.
  3. [The Firm] was the repository of virtually all of [the Wagema Respondent’s] relevant corporate records. Since [the Wagema Respondent] was [the Firm’s] client with respect to these documents, the documents were within [the Wagema Respondent’s] power or control for the purposes of production.

The Court found that the arbitrator had adequately addressed this argument. The arbitrator found that the work done by the Firm pursuant to the Litigation Support Retainer was work that would have had to be done by a law firm representing the Wagema Respondent regardless, and that if other counsel had done the work under the applicable tight timeframe, the cost would have been higher than that paid to the Firm.

The Court found no error in principle, and that the arbitrator was not plainly wrong in his conclusion that the assistance provided by the Firm to the Wagema Respondent and its litigation counsel to bring litigation counsel up to speed and to produce documents was an appropriate expense. The arbitrator was in the best position to make this factual determination.

Analysis

For arbitration practitioners, Schickedanz is a helpful reminder for parties to specifically turn their minds to the issue of costs when drafting an arbitration agreement and/or Procedural Order #1. In large construction disputes, where costs can (and often do) run several millions of dollars, identifying the limits (if any) on the tribunal’s authority to award costs may have a significant impact. This is particularly true when one considers that in arbitration, the parties will also have to pay the costs of one or three arbitrators, the costs of having an institution administer the arbitration (if the parties so choose), and the costs of any experts the tribunal might retain for itself. This latter set of costs, which do not exist in litigation, can in and of themselves add significant sums to the costs award.

That being said, and contrary to the Court’s observation of commercial arbitration that full indemnity costs are the norm, it is more common in the construction context (where arbitrations typically include a multitude of different disputes) for an award to apportion costs between the parties based on their relative success in the arbitration as well as the manner in which they conducted themselves throughout proceedings (e.g. did they facilitate or obstruct the efficient and economical resolution of the dispute).

Furthermore, and as noted by the Court in Schickedanz, institutional rules will typically stipulate that the costs award will allocate the parties’ “reasonable” legal fees and expenses, such that there are typically safeguards against excessive fees (unless the parties contract out of such provisions). Thus, the costs regime in arbitration is not without guardrails, and it is unusual – albeit possible, as Schickedanz confirms – in practice for costs to be awarded on a full indemnity basis. In the authors’ experience, full indemnity costs in construction arbitrations are highly unusual, which may be attributable to the use of institutions and/or procedural orders stipulating that costs are to be apportioned.

In any event, as the foregoing makes clear, courts are reluctant to overturn arbitral awards, as decision-makers of first instance (both in litigation and arbitration) are entitled to significant deference on this issue. Despite arbitration generally being understood to offer greater flexibility compared to litigation, this flexibility can in fact cut both ways if parties do not specifically consider how they might be best served by reducing that flexibility.

On the issue of costs, parties will therefore now be acutely aware that courts will often enforce an award functionally the same way as a lower court’s decision. In order for a court to overturn an arbitrator’s costs award, a party must prove that the arbitrator made an error in principle or that the costs award was plainly wrong. As such, parties should ensure that all relevant cost arguments are heard at first instance, even if there is a broad right to appeal (as there was in this case).

Finally, it is significant that the Court recognized that an arbitral costs award may be for all reasonable legal costs for the arbitration. Despite costs commonly being restricted to the partial indemnity or substantial indemnity scale at court, Schickedanz confirms that arbitrators do not have the same restrictions and may award full indemnity in the absence of language to the contrary in the arbitration agreement or procedural order(s) (which may incorporate institutional rules).

In that regard, the outcome of Schickedanz may also be attributable in part to the brevity with which the Arbitration Act deals with the power to award costs, as it simply states that “an arbitral tribunal may award the costs of an arbitration” (emphasis added). As compared to institutional rules that deal with costs more comprehensively (including for example, ADRIC, LCIA, and ICC) and specifically address apportionment on the basis of relative success, the Arbitration Act is much less robust in this regard. Accordingly, Schickedanz reinforces the necessity, as expressed by others in Ontario’s arbitration bar, of updating Ontario’s arbitration legislation on this issue and many others.

Clock’s Ticking – 3 Gill Homes Inc. v. 5009796 Ontario Inc. (Kassar Homes), ‘Time is of the Essence’ Clauses and “Harsh” Outcomes

The Court of Appeal for Ontario’s recent decision in 3 Gill Homes Inc. v. 5009796 Ontario Inc. (Kassar Homes) (“3 Gill Homes“)[1] reminds parties to a contract that breach of a “time is of the essence clause” – even a breach by a matter of minutes – is sufficient to justify termination of the contract.

Although the Court’s reasons are straightforward and apply the well-accepted rules of contractual interpretation, this decision nevertheless raises certain questions as to the nature of a termination on such a strict reading of the contract, which we consider below.

Factual Background

On July 4, 2020, the appellant entered into three agreements for purchase and sale (“APS“) for the construction of three separate residential homes. While two of the APSs closed without issue, the third (which was the subject of this appeal) did not.

The APS at issue was scheduled to close on August 31, 2021, but experienced construction delays which prevented the closing as set out in the terms of the APS. The APS contained the following termination and “time is of the essence” clauses:

16.02 Upon default by the Purchaser, in addition to any other rights or remedies which the Vendor may have, the Vendor, at its option, shall have the right to declare this Agreement null and void and in such event, all monies paid hereunder and monies paid or payable for extras and/or upgrades ordered by the Purchaser, whether or not installed in the Property, shall be forfeited to the Vendor, without prejudice to the Vendor’s rights to bring such further or other action as may be available to it as a result of such breach. It is understood and agreed that the rights contained herein on the part of the Vendor are in addition to any other rights which the Vendor may have at law, in equity or under any other provisions of this Agreement, and the Vendor expressly has the right to exercise all or any one or more of the rights contained in this Agreement, at law or in equity, without prejudice to the subsequent right of the Vendor to exercise any remaining right or rights at law, in equity or in this Agreement…

[…]

17.04 Time shall be of the essence of this Agreement in all respects, and any waiver, extension, abridgement or other modification of any time provisions shall not be effective unless made in writing and signed by the parties hereto or by their respective solicitors who are hereby expressly authorized in that regard. [emphasis added]

However, and of note, neither party exercised their right to terminate the APS notwithstanding the delay in achieving closing.

After missing the original closing date, the parties amended the APS, changing the closing date to January 28, 2022. The amended APS included a “time is of the essence” clause similar to that included in the original APS.

As the January closing date approached, the respondent delivered multiple reminders about the importance of timely payment, with the deadline for payment of the closing funds (the “Funds”) being 3:00PM on January 25, 2022. The day before closing, the appellant requested an extension to the closing date, but the respondent denied any extension (as it was permitted to do based on the terms of the APS). At the same time, the respondent reiterated the importance of the appellant paying the Funds by 3:00PM the next day, as was required under the terms of the APS. Crucially, the respondent also advised the appellant that failure to pay the Funds by the deadline would result in the termination of the APS.

On the closing day, at 2:47PM, counsel for the appellant advised counsel for the respondent that the Funds had been obtained, and that banking procedures were underway to transfer the Funds to the respondent. However, at 3:10PM, with the Funds having not yet been transferred, the appellants were advised that the transaction would not close because the payment deadline had been missed. The funds were ultimately transferred at 3:35PM, but were rejected and returned by the respondent. The respondent then terminated the APS on the basis that the appellant failed to pay the Funds by the deadlines as set out in the APS.

The Application Judge’s Decision

The appellant sought a declaration that the respondent had breached the APS by refusing to accept the transfer of funds. In the alternative, the appellant sought a declaration that the APS was unconscionable and termination could not be enforced. The appellant also claimed that it was entitled to damages in the form of lost profits because the property had been resold by the time of the lawsuit.

The application judge found that pursuant to the terms of the APS, the appellant had a strict requirement to close (e.g. deliver the Funds) before 3:00PM on January 28, 2022.

Since the property was within the land titles system, the application judge deemed the use of the electronic registration system mandatory, thus engaging another provision of the APS which dictated that the respondent would not be required to release the transfer or deed for electronic registration unless the Funds had been remitted to the respondent’s lawyer by 3:00pm on the closing date. The judge found that this provision obliged the appellant to pay the Funds by the time and date specified under the APS, and as such, the respondent was entitled to terminate the APS because of the late payment. While the result seemed harsh, the application judge found that it was not unfair for the respondent to enforce the payment deadline in light of the time is of the essence clause.

With respect to unconscionability, the application judge found that there was no evidence of unequal bargaining power, as demonstrated by the successful closing of the two other APSs. The application judge also noted that while the court has equitable jurisdiction to grant relief as against a breach of a time is of the essence clause, such relief would require evidence of unfair or unjust conduct by the party enforcing the clause, and such unfair or unjust conduct was absent in this case.

Finally, the application judge found that even if the appellant had succeeded in its claims, the issue of damages could not be addressed based on the written record, as the property in question had been sold. The value of the property was in dispute, requiring a full trial to resolve.

Issues on Appeal

The appellant raised “approximately” 22 grounds of appeal, which the Court of Appeal grouped into the following questions:

  1. Did the application judge err in finding that 3:00 p.m. was the payment deadline under the APS?
  2. Did the application judge err in finding that, in respect of the closing payment, time was of the essence?
  3. Did the application judge err in finding that the payment deadline was not unconscionable?
  4. Were the reasons of the application judge sufficient to permit appellate review?
  5. Did the application judge err in finding that damages could not be fairly and justly determined on a written record?

The Court of Appeal’s Decision

The Court of Appeal found that while the result was harsh for the appellant, it was neither unconscionable nor unfair. The clear language in the APS, together with the repeated warnings given by the respondent, meant that the appellant was well aware of the consequences for a failure to pay the Funds by the deadline.

While the appellant argued that the application judge erred in interpreting the APS, particularly regarding the closing time, the Court of Appeal agreed with the application judge’s findings. Specifically, the Court of Appeal found that the APS was clear and required that the Funds be received by 3:00 p.m. on the closing date when electronic registration was mandatory. The Court of Appeal further found that altering the closing time would be an unwarranted intervention by the Court and deviate from the bargain struck between the parties.

Regarding the time is of the essence clause, the Court emphasized that such a clause is “engaged where a time limit is stipulated in a contract… mean[ing] that a time limit in an agreement is essential such that breach of the time limit will permit the innocent party to terminate the contract” upon a breach. [2]

While the appellant argued that the clause had not been strictly enforced in prior transactions between the parties, the Court noted that the November 2021 amendment to the APS made the closing deadline firm. Moreover, according to the Court, the exchanges between the parties leading up to January 28, 2022, demonstrated their shared understanding of enforcing the closing date and time. As such, the Court found no error in the application judge’s reliance on the time is of the essence clause.

With respect to the appellant’s argument that the provision was unconscionable, the Court concluded that there was no basis to interfere with the application judge’s findings, particularly considering the parties’ prior transactions and their sophistication in real estate matters.

Lastly, the Court acknowledged the possibility of the Court’s equitable jurisdiction to relieve against the breach of a time provision, but found that such relief would require an evidentiary foundation showing unfair or unjust action by the respondent, which was lacking in this case.

Commentary

As many commentators have observed, along with the Court of Appeal itself, the outcome of 3 Gill Homes is arguably a harsh one given that the closing deadline was missed by a matter of minutes. The most obvious takeaway is therefore, of course, that parties would be well advised to ensure strict compliance with contractual timelines, particularly where a time is of the essence clause is included in an agreement.

That being said, 3 Gill Homes also raises other interesting questions that, although not presented to the Court, might colour the impact of this case.

First, it is notable that in this case, the time is of the essence clause and related provisions only gave the respondent the option – that is, the discretion – to terminate the APS in case the deadline was missed. In other words, the missing of the deadline did not automatically result in the termination of the APS. As readers will appreciate, this therefore required that the respondent exercise its contractual discretion to terminate the APS for failure to meet the contractual timeless reasonably.

As the Supreme Court of Canada made clear in Wastech, a contractual discretion is exercised reasonably if it is exercised in a manner consistent with the purpose(s) for which it was conferred. On the facts of 3 Gill Homes, it was clear that the parties’ communications and conduct placed a high priority on the deadline being respected; however, it is not clear why this was the case, leaving open the question of whether the appellant might have been able to advance a credible argument that terminating the APS was inconsistent with the purpose of the respondent’s discretion to do so.

In that regard, it is interesting to note that the Supreme Court’s analysis in Wastech indicates that determining the purpose of a contractual discretion flows from a review of the contract itself,[3] but the Court did not reference consideration of the parties’ subsequent conduct as part of this analysis. In 3 Gill Homes, the Court of Appeal (and the application judge) considered the parties’ subsequent conduct to be instructive regarding a number of issues, including the proper interpretation of the time is of the essence clause and the unconscionability issues, which presumably falls under the general proposition, applicable in certain circumstances, that the parties’ subsequent conduct may be relevant to the interpretation of a contract.[4] It will be interesting to see whether future decisions consider the subsequent conduct of the parties in the interpretation of a contractual discretionary clause.

On the other hand, there have been no specific pronouncements from Canadian courts as to  whether a contractual right to terminate a contract is even subject to the duty to exercise a contractual discretion in good faith, insofar as it seems this issue has not been considered in Canada at the appellate level outside of the employment context.[5] The Supreme Court in Bhasin observed that “[c]lassifying the decision not to renew the contract [where the defendant had to give notice of non-renewal] as a contractual discretion would constitute a significant expansion of the decided cases under that type of situation”[6], so it is possible that a court might view the discretion to terminate a contract in similar terms.[7]

This issue also raises the further question as to the nature of the discretion to terminate the agreement – specifically, whether it is relevant that the discretion is contractual or at common law.

As noted above, the APS in 3 Gill Homes contained a provision that explicitly entitled the respondent to terminate the APS if the appellant defaulted on its obligations under the APS (including its obligations with respect to timely delivery of the Funds). In this regard, it is unclear whether the respondent terminated the contract purely on the basis of the time is of the essence clause, or on the basis of the discretionary termination clause.

Conversely, and as the Court of Appeal noted, a time is of the essence clause has the effect of making the breach of any contractual time limit a basis upon which the innocent party can terminate the contract. This is because a time is of the essence clause makes a contractual time limit into a condition rather than a warranty, which at common law entitles the innocent party to treat the contract as at an end.

As a result, it is unclear whether a common law discretion to terminate a commercial contract would attract the same restrictions as a contractual discretion to do so, particularly in the context of the possible requirement to exercise a termination clause in good faith. Again, this point does not appear to have received consideration in Canada, particularly given the recency of Wastech. The England & Wales High Court considered a similar issue in MSC Mediterranean Shipping Co SA v. Cottonex Anstalt [2016] EWCA 789, where it determined that a common law right to terminate for repudiatory breach is subject to requirements of good faith, but the Court of Appeal overturned the High Court on this point such that there would seem to be no guidance in that regard.

Ultimately, since these issues were not raised by the parties, determination will have to wait for a future decision. However, it bears keeping in mind that this case stands for the simple principle that parties should be held to their bargains (harsh though the result may be).

[1] 2024 ONCA 6 (CanLII) [“3 Gill Homes“]

[2] Ibid at paras 24-27, citing Di Millo v. 2099232 Ontario Inc., 2018 ONCA 1051 at para. 31.

[3] Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7at paras 71-72.

[4] Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912.

[5] The issue was considered by the Court of Appeal of Alberta in Styles v Alberta Investment Management Corporation, 2017 ABCA 1. There, the Court of Appeal determined that there was no common law obligation to exercise contractual discretionary powers reasonable, and therefore that an employer had no obligation to exercise a discretion reasonably to terminate an employee without cause – in part, because termination without cause is not a breach of contract. As a result, the Court of Appeal concluded that termination without cause cannot be considered a “discretion”: para 41. Notably, this decision was rendered prior to Wastech, so it is unclear to what extent the Court of Appeal’s reasoning still applies.

[6] Bhasin v. Hrynew, 2014 SCC 71 para 72.

[7] In England, this issue has been considered (albeit in the context of an implied term). Specifically, in Monde Petroleum SA v. Westernzagros Ltd [2016] EWHC 1472, the High Court considered whether a contractual right to terminate was subject to an implied term that the party terminating must act in good faith. The Court decided that it was not subject to such an implied term, and interesting, distinguished a termination right from a contractual discretion.

New Return-to-Work Obligations for Both Employers and Employees in British Columbia

In 2022, the BC legislature introduced Bill 41 which set out a host of amendments to the Workers Compensation Act, RSBC 2019 c.1. The final group of these amendments, dealing with return-to-work obligations, came into force on January 1, 2024 and are touted by the provincial government and WorkSafeBC as encouraging the speedy, safe, and supported return to work of employees injured on the job. The aim of these amendments is to minimize the disruptive impact of workplace injuries on both employers and workers.

These amendments create two separate obligations: (1) the duty to cooperate[1] and (2) the duty to maintain employment[2]. The former applies to both employers and workers while the latter applies primarily to employers.

The Duty to Cooperate

The duty to cooperate imposes obligations on employers and workers to work with each other and WorkSafeBC to ensure a timely and safe return to work following injury. It focuses on maintaining open lines of communication.

Employer obligations include:

  • Contacting the worker as soon as practicable following injury;
  • Maintaining communication with the worker throughout the injury period, as appropriate in the circumstances;
  • Identifying suitable work for the worker that restores their full wages, if possible;
  • Providing WorkSafeBC with required information regarding the worker’s return to, or continuation of work; and
  • Cooperating in the return-to-work process.

Similarly, injured workers are obligated to contact their employer following injury, maintain communication, and work with their employer to identify suitable work. The duty to cooperate also imposes a further obligation on workers to not unreasonably refuse to accept suitable work.

Where a dispute arises between an employer and worker regarding the worker’s return, an application can be made to WorkSafeBC who will make a determination within 60 days. WorkSafeBC also has discretion to suspend a worker’s compensation payments until they comply with the process.

The duty to cooperate applies to claims with injury dates on or after January 1, 2022.

The Duty to Maintain Employment

The duty to maintain employment applies primarily to employers with 20 or more workers.

Where a worker has been continuously employed (full or part-time) with an employer for at least 12 months prior to injury and that worker becomes disabled from earning full wages at their pre-injury work due to a workplace injury, the employer is obligated to maintain the employment of the injured worker.

The nature and scope of the duty to maintain employment depends on the circumstances:

  • Where a worker is fit to carry out the essential duties of their work, with or without accommodation, an employer must offer the worker their pre-injury work or an alternative that is comparable in duties and earnings.
  • Where a worker is not fit to carry out the essential duties of their pre-injury work, but is able to work in some capacity, an employer must offer the worker the first suitable work that becomes available.

Further, an employer who is subject to the duty to maintain employment must make any changes to the work or workplace that are necessary to accommodate a worker, to the extent that they do not cause undue hardship.

Where it is unclear or a dispute arises as to the employer’s obligations to maintain employment, WorkSafeBC will provide guidance and collaborate with the parties to identify possible solutions.

The duty to maintain employment applies to claims with injury dates on or after July 1, 2023 and continues until the second anniversary of the date of injury. At that time, if the worker has not returned to work, the employer’s obligations end. If the worker has returned to work and is carrying out suitable work, the employer’s obligation to offer pre-injury or alternative work ends. However, the obligation to accommodate the worker’s injury is ongoing.

Finally, an employer who terminates the employment of a worker who has returned to pre-injury work, suitable work, or alternative work for less than six months will be deemed to have failed their duty to maintain employment, unless the employer can establish that the termination was unrelated to the injury.

Failure to Comply

Where WorkSafeBC determines that an employer has failed to comply with their duty to cooperate and/or maintain employment, the employer may be subject to one or more administrative penalties.

Employers who feel that a worker is not meeting their duty to cooperate should contact WorkSafeBC. WorkSafe BC will then work with all parties to clarify obligations. If WorkSafeBC determines that a worker has unreasonably refused an offer of suitable work, their wage loss benefits may be reduced or suspended.

Unionized Employees and Fixed-Term Contracts

Unions should take note that the duty to maintain employment will override collective agreement terms (with the exception of terms regarding seniority) where the legislated duty provides greater benefit to the worker than the collective bargaining agreement. Unionized employers should review their collective bargaining agreements to determine whether the duty to maintain employment will override any agreement terms.

The duty to maintain employment is not intended to extend to fixed-term contracts. However, where a fixed-term employment arrangement has been repeatedly renewed over an extended period of time, WorkSafeBC may find that the duty to maintain employment extends beyond the fixed term. Employers should contact WorkSafeBC to determine their obligations regarding any specific instance of renewed fixed-term contracts.

Take Aways

The duty to cooperate and duty to maintain employment are intended to encourage a smooth and safe transition from injury back to work. At this stage, WorkSafeBC has communicated their desire to work with employers and workers to fulfill their obligations under the new amendments rather than seeking to penalize those who do not comply.

Employers should review their internal policies with respect to workplace injuries to ensure that proper three-way communication (employer-worker-WorkSafeBC) is in place. Further, on report of a workplace injury, employers should turn their mind to the necessity of maintaining the worker’s job, including identifying suitable alternate work and accommodations. Managers should also be trained on the new obligations and resulting internal policies.

Our Workplace Group lawyers would be happy to help you navigate the new return-to-work duties, review and revise your policies, and train your staff.

[1] Section 154.2.

[2] Section 154.3.

Viceroy Homes v Jia Development Inc: The Consequences of Frivolous, Vexatious, or Abusive Liens

In 2018, the Construction Lien Act (the CLA) (as it was then called) underwent significant legislative reform that resulted in a number of revisions (including its name being changed to the Construction Act – referred to herein as the “Act”)[1] intended to, among other things, improve the function of and modernize the legislation. Among the revisions and upgrades, and relevant to this case and article, was the codification of the Court’s jurisdiction to discharge a lien on the ground that it is frivolous, vexatious, or an abuse of process.[2]

To date, there has been minimal case law on when a lien meets this threshold. However, and fortunately, 2708320 Ontario Ltd cob Viceroy Homes v Jia Development Inc[3] (“Viceroy Homes”) has provided guidance in the context of Section 47(1) of the Act on what qualifies as frivolous, vexatious, or abuse of process, as well as the consequences for registering such a lien.

Below, we review the case and provide its key takeaways.

Factual Background

In 2016, CB Bridle Path Inc. (“Bridle Path”) purchased lands that were previously being developed for the construction of townhomes (the “Project”) – which development was incomplete at the time of purchase, due to the insolvency of the previous owner. Specifically, the previous owners had acquired certain permits and performed preliminary work (including demolition, excavation and foundation work), but construction of the townhomes had not commenced. Upon purchasing the land, it appears that Bridle Path took no steps of its own to continue developing the project. In 2017 and 2018, Bridle Path transferred half of its ownership in the lands to Jia Development Inc (“Jia”, with Bridle Path and Jia collectively referred to as the “Owners”). Despite several changes in ownership, the Project remained dormant between 2016 and 2022, with the exception of setting up a small modular sales office at the site, as well as some minor cleaning, testing, and winterization work.[4]

In 2022, Bridle Path began efforts to sell its remaining ownership stake in the lands and entered into a conditional sales agreement (the “CSA”) with a prospective purchaser. The CSA provided the purchaser with thirty (30) days to satisfy himself of the feasibility of the Project and to secure financing. During the thirty (30) day due diligence period, Jia (as co-owner of lands) and the prospective purchaser of Bridle Path’s ownership stake, entered into a Letter of Intent (“LOI”) with 2708320 Ontario Ltd cob Viceroy Homes (“Viceroy”)  whereby the purchaser and Jia agreed to contract with Viceroy to construct the Project in the event that the sale was completed. Viceroy then appears to have performed what was described as limited “excavator” work, totaling $13,560.00.

Importantly, however, the purchaser could not close the sale (for reasons unexplained by the Court).[5] Despite the failure to close by the purchaser, Viceroy’s agent, Mr. Sun, contacted Jia and proposed that Viceroy be the contractor for the Project and that Viceroy instead become co-owner of the land (the “Proposal”). For reasons unknown, it appears Jia did not take Viceroy up on this Proposal.

After Jia failed to accept the Proposal, Viceroy sent invoices for work that it alleged it performed over 39 days, including demolition, foundation, and repair work, which purportedly cost $3.74 million (the “Alleged Work”). Jia rejected the invoices, at which point Mr. Sun threatened to lien the property and notify the Owners’ lender of the claim of lien. Following this threat, Viceroy registered a claim of lien in the amount of $3,740,300 for the Alleged Work. Shortly thereafter, Viceroy perfected its lien by issuing its Statement of Claim.[6]

Subsequently in the lien proceeding, Mr. Sun was cross-examined pursuant to Section 40 of the Act, which entitles a party with an interest in the liened property to cross-examine the lien claimant or their agent in order to scrutinize the validity and quantum of claim for lien. During his cross examination, Mr. Sun admitted that $2.2 million worth of the alleged Work was not performed.

Accordingly, and on the basis of the evidence obtained from Mr. Sun, the Owners brought a motion to discharge the lien on the basis of it being frivolous, vexatious and/or an abuse of process pursuant to Section 47 of the Act.[7]

The Superior Court’s Decision

The Court began its analysis by determining which version of the Act was applicable in this case, as Bridle Path and Jia alleged that the Viceroy Homes lien was “frivolous, vexatious, and an abuse of process,” which is a ground under the current version of the Act. However, the evidence indicated that the previous iteration of the Act, the CLA applied, as the procurement and contracts for work performed on the Project pre-dated July 1, 2018. Regardless, the Court ultimately determined that it was irrelevant whether the Act or the CLA applied, as previous case law[8] indicated that although Section 47 of the CLA provided that a lien could only be discharged “upon any proper ground,” the CLA allowed for motions to discharge liens on the ground that they were frivolous, vexatious, or an abuse of process.[9]

The Court then outlined the process to be followed on a Section 47 motion to discharge. Specifically, when bringing such a motion, “the moving party must prove that there is no triable issue as to the basis on which the lien is sought to be discharged”[10], meaning that the parties must “put their best foot forward” when tendering evidence.[11]

The Court then considered the specific ground under which the Owners sought to discharge the lien, being that Viceroy had allegedly not performed any of the work alleged in its claim for lien (let alone work in the amount of almost $3.8 million, or even the reduced amount of $1.6 million when considering Mr. Sun’s admission that $2.2 million worth of work had not been performed).

In that regard, the Court addressed what constitutes frivolousness, vexatiousness, and/or an abuse of process under the Act, noting that the case law has provided the following guidance:

  1. Frivolous: An action that is so highly unlikely to succeed that it is apparently devoid of practical merit.
  1. Vexatious: An action that obviously cannot succeed and is brought for an improper purpose.
  1. Abuse of Process: A flexible doctrine that gives the court inherent power to prevent the misuse of its process.[12]

The Court agreed with the guidance noted above and applied it in this case. Based on this guidance and the evidence before it, the Court concluded that the Owners had established that there was no triable issue as to the basis on which the lien was being discharged. In this case, there was no triable issue as to whether the lien was frivolous, vexatious, or an abuse of process, as a result of which the Court discharged the lien and vacated the certificate of pending litigation.[13]

Interestingly, despite the power to do so[14], and while the Court discharged the lien pursuant to Section 47 the Court elected not to dismiss the action pursuant to the same Section. Rather, the Court dismissed Viceroy’s action pursuant to Rules 15.04(6) and (7) of the Rules of Civil Procedure as a result of Viceroy’s failure to appoint a lawyer or obtain an order granting it leave to be represented by a non-lawyer, as per an earlier order issued by the Court after Viceroy’s former lawyer obtained an order removing them from the record. [15]

Analysis

Viceroy Homes provides several important reminders for stakeholders in construction lien proceedings.

First is the fact-specific nature of Section 47 motions brought on the basis that a lien is frivolous, vexatious, or an abuse of process. In the recent case of 1936230 Ontario Inc v Hari Kaush Developments Ltd[16] and XPL Construction Solutions Inc v North Bay Capital Investments Ltd [17] (the case from which the Court in Viceroy Homes adopted guidance in respect of the concepts of frivolous, vexatious and abuse of process), the Court found in both cases that there was in fact a triable issue as to whether the lien was frivolous, vexatious, or an abuse of process as a result of deficiencies in their evidence.[18]

This is a stark contrast to the case of Viceroy Homes, wherein the Owners tendered significant evidence to establish that there was no triable issue with respect to whether the lien was frivolous, vexatious, or an abuse of process including photographs of the Project site, the cross-examination transcript of Mr. Sun, as well as affidavits from the Owner’s winter contractor, their principals, and officers. [19] As noted by the Court in Viceroy Homes, it is incumbent on parties to put their best foot forward on such a motion[20]; accordingly, both lien claimants and defendants in a lien action would be well-served by ensuring that they provide a fulsome record when preparing for such a motion. Although this places an additional burden on lien claimants as a respondent to such a motion, the Court has previously explained this burden of proof is premised on the fact that lien claimants are in the best position to provide the evidence required to make a determination (i.e. to justify the quantum of their lien).[21]

Second is the serious cost implications that can arise from registering a lien that is frivolous, vexatious, or an abuse of process. In a subsequent cost endorsement to Viceroy Homes[22], the Court awarded significant costs to the Owners. Specifically, the Court took the extraordinary step of awarding Bridle Path its actual costs of the motion and the action. Although uncommon, the Court concluded that the fabrication of a significant claim for lien (essentially the entirety of the lien except for the $13,560 in “excavator work”) in order to interfere in the sale of land warranted severe sanctions. In addition to the costs awarded to Bridle Path, and perhaps somewhat surprisingly, the Court awarded Jia substantial indemnity costs (that is, not its actual costs) for the costs of the motion and the action.[23] It appears that the Court’s differentiation between Bridle Path and Jia was based on the finding that Jia had performed some “duplicative work by the two senior lawyers” on the file, as well as some “excessive research”.[24]

Interestingly, the Court also pierced the corporate veil to make Mr. Sun personally liable for the substantial indemnity costs awarded to Jia, on several grounds. First, in relying on previous case law[25], the Court determined that Mr. Sun controlled Viceroy at the relevant times and caused it to register the claim of lien to extort the Owners, and therefore, the corporate veil should be pierced to trigger personal liability.[26] Second, the Court noted its powers pursuant to Section 86(1)(b) of the Act which justifies potential cost consequences[27] against a person who represents a party who knowingly participated in the preservation or perfection of a lien that is frivolous, vexatious, and an abuse of process. The Court found that Mr. Sun had represented Viceroy, and that he knowingly participated in preserving and perfecting the impugned lien.[28]

To conclude, it is important that construction industry participants take care in dealing with construction liens and steps taken under the Act. Liens should only be registered strictly pursuant to the Act, and liening parties should be conservative in reviewing what is included in the amount liened – not only to ensure that the lien is not frivolous, vexatious or an abuse of process, but also to be sure that what is being liened for represents a legitimate supply of services and/or materials under the Act. When in doubt, consult experienced construction counsel.

[1] Bill 142, An Act to amend the Construction Lien Act, 2nd Sess, 41st Leg, Ontario, 2017 (assented to December 12, 2017).

[2] Construction Act, RSO 1990, c C 30, s 47 (1)(a) [Construction Act].

[3] 2023 ONSC 2301 [Viceroy Homes].

[4] Ibid at paras 11-13.

[5] Ibid at paras 14-15,18.

[6] Ibid at paras 18-22.

[7] Ibid at paras 2, 23.

[8] Franco Property Development Ltd v Heritage Glen North Ltd, [1993] OJ no 2396, 43 ACWS (3d) 348

[9]  Viceroy Homes, supra note 3 at paras 24-26.

[10] Viceroy Homes, supra note 3 at para 27, citing Maplequest (Vaughan) Developments Inc v 2603774 Ontario Inc, 2020 ONSC 4308 at para 25.

[11] Viceroy Homes, supra note 3 at para 28, citing GTA Restoration Group Inc v Baillie, 2020 ONSC 5190 at para 56 [GTA Restoration].

[12] XPL Construction Solutions Inc v North Bay Capital Investments Ltd, 2023 ONSC 238 at paras 34-39 [XPL Construction].

[13] Viceroy Homes, supra note 3 at paras 30-31.

[14] Construction Lien Act, RSO 1990, c C 30, s 47(1)(c) as it read 30 June 2018; Construction Act, s. 47.

[15] Viceroy Homes, supra note 3 at paras 2-8, 32-37.

[16] 2023 ONSC 4718 [Hari Kush].

[17] XPL Construction, supra note 12.

[18] Hari Kush at para 35; XPL Construction at para 68-79

[19] Viceroy Homes, supra note 2 at para 10.

[20] GTA Restoration, supra note 13.

[21] Ibid at para 55.

[22] 2708320 Ontario Ltd. cob Viceroy Homes v Jia Development Inc, 2023 ONSC 3361.

[23] Ibid at paras 12-13,18-19.

[24] Ibid at para 17.

[25]  642947 Ontario Ltd. v. Fletcher, [2001] OJ No 4771, 152 OAC 313.

[26] Viceroy Homes Costs, supra note 22 at para 20.

[27] Costs on a substantial indemnity basis.

[28] Viceroy Homes Costs, supra note 22 at para 21.

Tenoes Construction v Pinto: The Importance of Compliance with Timetables in Construction Lien Actions

In Ontario, the Superior Court has repeatedly signaled to construction industry litigants that timetables in a lien action (and court proceedings in general) are not mere suggestions; instead, they are an order of the Court in respect of which parties must make honest and meaningful efforts to comply.[1] While it may appear common sense to counsel who frequently follow such timetables, the Court’s recent ruling in Tenoes Construction v Pinto[2] (“Tenoes) has reiterated the significance of following such ordered timetables by confirming that any schedule non-compliance with in lien actions can and will likely have severe consequences for lien claimants, including the discharge of a lien and dismissal of a claim.[3]

Below, we review the case and provide our key takeaways.

Factual Background

In Tenoes, Tenoes Construction – the lien claimant, who was a sole proprietorship without legal representation given their lawyer’s “recent” removal from the record – breached a Court-ordered timetable for the delivery of trial affidavits and will-say statements by over three months. Tenoes also failed to provide a reasonable explanation for its non-compliance. As a result, the defendant owners (the “Owners”) brought a motion for – among other things – an order (1) dismissing Tenoes’ claim and its defence to the Owners’ counterclaim, and (2) discharging Tenoes’ lien pursuant to rules 3.04(4) and 60.12(b) of the Rules of Civil Procedure (the “Rules) and Section 47 of the Construction Act (the “Act).[4]

The Superior Court’s Decision

After considering certain procedural issues, none of which are the focus of this case comment – including the validation of service of the motion record[5], a proposed adjournment of the motion[6], and variation of the timetable for the Owners to deliver their own evidence[7] – the Court considered whether Tenoes’ breaches of the timetable justified dismissing its claim, striking its defence to the Owners’ counterclaim, and/or discharging Tenoes’ lien.

The Court began by observing that prior case law had developed certain principles for motions brought for non-compliance with timetables pursuant to rules 3.04(4) and 60.12(b) of the Rules and Section 47 of the Act and the remedies sought by the Owners in this particular case. Based on the Court’s analysis, those principles included the following:

  • First, striking a pleading is a severe penalty that should only be granted where a failure to comply with obligations and the rules would prevent the orderly and fair hearing of the matter. In lien actions, this must be assessed in the context of the requirements of both the Rules and the Act, the latter of which expressly requires that lien actions proceed summarily[8]; and
  • Second, where a party is in breach of procedural orders issued in a court proceeding (including a timetable), the Court will examine the totality of the circumstances, including the severity of the breaches, the conduct of the party in breach of the order, and whether such breaches could be justly and fairly compensable. Less egregious conduct can be given some leeway, but in some cases, the circumstances of the case will dictate that the most just result is the dismissal of a lien action and discharge of a lien.[9]

In applying the above-noted principles to this case, the Court began by examining the seriousness of the alleged breach by Tenoes. As is customary in Toronto lien actions, this action had been referred to an associate judge[10], who was accordingly hearing this motion. The Court noted that Tenoes had failed to comply with several other orders during the course of the lien reference, and in fact, this was not the first motion to dismiss the action and discharge the lien advanced by the Owner.[11] Accordingly, the Court was of the opinion that the failure to deliver the trial affidavits and will-say statements in light of the other breaches demonstrated the severity of the breach.[12]

The Court then proceeded to examine the specific conduct of Tenoes in respect of the present motion. Although there was some room for adjustment of the timetable, Tenos had failed to serve evidence that was required for trial, despite the pending trial having been set down several months earlier. The failure to serve the evidence, as well as the failure to take steps to explain the non-compliance with the timetable, or even express an intention to comply with the timetable, was unacceptable to the Court.[13]

Based on the foregoing failures, and Tenoes’ failure to take any steps to remedy its breach of the timetable, the Court dismissed Tenoes’ lien action while allowing the Owners to proceed with their counterclaim. The Court also concluded that the aforementioned grounds for dismissing Tenoes action justified discharging the lien, which in itself could not survive independently in circumstances where the proceeding that was commenced to enforce it had been dismissed.

Interestingly, the Court remained unconvinced that Tenoes’ defence to the counterclaim should be struck, as in this specific case the evidence indicated that the Owners had also technically breached the procedural timetable. [14]

Importantly however, the Court also indicated that it would stay the operation of its order dismissing the action, discharging the plaintiff’s lien, and returning security until at least the next hearing for trial directions, in order to give Tenoes the opportunity to speak to its various failures. This left the next steps in this case somewhat ambiguous, particularly given that Tenoes’ failure to respond to the motion or attend the hearing might suggest non-attendance at any subsequent hearing as well.

Analysis

The case of Tenoes provides several important takeaways for lien claimants (in particular those without counsel).

First, although somewhat basic, Tenoes highlights the fundamental requirement of compliance with court ordered timetables (whether reached by agreement or by unilateral order of the court). As readers will appreciate, lien actions are meant to proceed summarily, and interlocutory steps that are not provided for under the Act are expressly prohibited without the consent of the Court.[15] Accordingly, the Court (and/or the parties, with the Court’s consent) will often establish timetables in lien actions that are meant to govern the conduct of the action. The failure to comply with these timetables is a breach of a Court order, and can result in severe consequences such as the discharge of a lien and dismissal of a lien action[16], cost consequences [17], the striking of a defence[18], or a bar on utilizing key evidence at trial.[19] This is true even in the case of self-represented litigants, as Tenoes shows, notwithstanding that they are generally afforded somewhat more latitude by courts – or “extended courtesies” as the Court put it in Tenoes – than parties represented by counsel. That latitude is not without limits, although as noted above, the Court did ultimately provide Tenoes one final opportunity to explain its failures and we are uncertain whether any explanations will influence the Court’s decision.

It is, therefore, highly advisable that parties to construction lien proceedings strictly comply with procedural timetables. Where it is not possible to follow a timetable, best practice is to vary the timetable on mutual consent from all of the parties, or where consent is not available, proactively seek the intervention of the Court by way of motion, case conference, or hearing for directions, in order to vary the timetable.[20] Counsel in the Ontario construction bar are generally reasonable when it comes to indulgences on schedule (as they are often mutual) so long as requests for same are made early and reasonably. These authors would suggest that construction industry litigants and counsel continue to be reasonable in this regard generally and to be collaborative as often as possible.

Second, Tenoes provides an important reminder of the highly discretionary nature of costs under the Construction Act, even in circumstances where two cases involve similar fact patterns and/or are brought under the same or similar rules. In Tenoes, the Owners only sought partial indemnity, which – although unopposed – the Court found reasonable and proportionate.[21] By contrast, in Northstone Homes Ltd. v Wu[22] (one of the cases considered by the Court with respect to the principles applicable to these issues), where only the defendant had failed to serve their trial evidence, the Court in that case granted substantial indemnity costs after the plaintiff successfully brought a similar motion to strike a defendant’s counterclaim for breaches of a Court-ordered timetable. [23] Parties would therefore be well advised to consider the precise particulars of their case when assessing the extent of costs they could reasonably expect to recoup on such a motion.

Finally, Tenoes – as well as other cases cited by the Court involving motions brought pursuant to Rules 60.12 and 3.04(4)[24] – confirms that those rules are consistent with the Act, which issue always warrants consideration given the fact that the Act only speaks generally to the relationship between the Act and the Rules (i.e. Rules that are inconsistent with the Act are rendered inapplicable in a lien action).[25]

This restriction can of course limit parties’ recourse in certain cases – for example, the Court has held that Rule 24.01(c) of the Rules is inconsistent with the Act as it relates to lien proceedings, such that parties to a lien action cannot seek dismissal for delay even where pleadings have been closed for more than six months and a party has failed to set an action down for trial.[26] As it relates to motions for the dismissal of an action or discharge of a lien as a result of a breach of a timetable, however, it would appear open for interpretation as to whether it is even necessary to bring a motion pursuant to the Rules, given that section 47 of the Act gives the Court a broad discretion to discharge a lien and dismiss an action on “any proper ground”. However, until the issue receives further judicial consideration, it is still advisable that parties seek all available remedies under the Act and the Rules as appropriate in the circumstances.

[1] Leblon Carpentry Inc v QH Renovation & Construction Corp, 2023 ONSC 3182 at para 14 [Leblon].

[2] 2023 ONSC 3787 [Tenoes].

[3] Ibid at para 37.

[4] Ibid at paras 1, 2 and 20.

[5] Ibid at paras 5-8.

[6] Ibid at paras 9-14.

[7] Ibid at paras 15-19.

[8] Northstone Homes Ltd v Wu, 2021 ONSC 5173 at paras 20-21 [Northstone].

[9] Kamlu Engineering v Cadorin Homes, 2023 ONSC 2940 at paras 14-16 [Kamlu].

[10] The Act, supra note 5 at s. 58.

[11] At the prior dismissal and discharge motion, Tenoes convinced the Owners to proceed with the action rather than purse the motion, and a new timetable was subsequently fixed.

[12] Tenoes, supra note 2 at paras 29-30.

[13] Ibid at para 36.

[14] Ibid at paras 37-38,

[15] O. Reg 302/18 at s. 13.

[16] Tenoes, Supra note 2 at para 37.

[17] Kamlu, supra note 13 at para 36; Northstone supra note 10 at paras 40-42.

[18] Northstone, supra note 10 at para 21.

[19] Leblon, supra note 1 at para 47.

[20] Ibid at para 1.

[21] Tenoes, supra note 2 at para 44.

[22] Northstone, supra note 8.

[23] Ibid at para 2-4; 9-21.

[24] Kamlu, supra note 13.

[25] Pursuant to section 50(2) of the Act.

[26] Smith v Hudson’s Bay Company, 2019 ONSC 2348 at para 19; Bernach v Makepeace, 2021 ONSC 1289 at para 17.

Ontario Securities Commission v Go-To Developments: The Limits of Solicitor-Client Privilege in a Receivership

The Ontario Superior Court’s decision in Ontario Securities Commission v Go-To Developments Holdings Inc et al (“Go-To Developments“)[1] highlights the significance of a receiver’s authority during their investigative mandate. In this case, the Court considered whether a receiver had the authority to access email correspondence involving the principal of the companies under receivership, on the one hand, and other interested parties, on the other hand. The Court’s decision in Go-To Developments serves as an important reminder that solicitor-client privilege cannot be used as a shield to a receiver’s investigative duties.

Background

In Go-To Developments, KSV Restructuring Inc. (the “Receiver“), was appointed as a receiver pursuant to an application by the Ontario Securities Commission (the “OSC“) under sections 126 and 129 of the Securities Act, R.S.O. 1990, c. S.5. This appointment gave KSV Restructuring authority over the specific real property and assets of a collection of corporations collectively identified as the Receivership Respondents, which were entities involved in real estate projects in Ontario that had raised significant funds from investors.

Oscar Furtado, the principal of the Receivership Respondents (the “Principal”), played a key role in these projects, particularly in raising capital for the Go-To Spadina Adelaide Square LP project (“Adelaide LP”). Over time, a dispute emerged that involved around 11,271 emails (the “Identified Emails”) sent or received by the Principal, some of which involved Alfredo Malanca (also known as Palmeri), who represented entities that conducted business with the Receivership Respondents.

Ultimately, Adelaide Square Developments Inc. (“ASD”) filed a claim of approximately $11.1 million against Adelaide LP and its general partner, Go-To Adelaide Spadina Inc. The Receiver disallowed the ASD Claim, leading to a dispute that impacted the distribution of funds within the broader  receivership proceedings.

As would be expected, the Receivership Order granted the Receiver extensive powers over the Receivership Respondents’ assets and businesses, with no exceptions. This order also authorized the Receiver to examine individuals with knowledge of the Receivership Respondents’ affairs under oath.

To govern the handling of privileged information within the receivership proceedings, a Privilege Protocol was established. Within this context, the Principal’s legal counsel raised objections to the release of around 78,000 records, including the Identified Emails at the center of the dispute in the case.[2]

The Dispute

The Receiver brought a motion to compel the Principal to release the Identified Emails to the Receiver. The Principal, being the only party opposing the Receiver’s motion, claimed solicitor-client privilege or common interest privilege in respect of the emails requested by the Receiver.

On the other hand, the Receiver stated that in fulfilling its role, it effectively stepped into the shoes of the Receivership Respondents and was entitled to access the Receivership Respondents’ emails for the purposes for which the Receiver was appointed, which included the investigation of the alleged improper dealings between the Principal and ASD.

The crux of the dispute therefore centered on whether the Principal was obligated to release the Identified Emails to the Receiver so as to facilitate the Receiver’s exercise of its powers under the Receivership Order.

The Decision

As outlined below, the Court found that the Principal was obligated to release the approximately 11,271 Identified Emails to the Receiver without further delay.

In that regard, the Court recognized the Receiver’s entitlement to review the emails for the purpose of exercising its powers under the Receivership Order, noting that the Identified Emails were primarily sent and received by the Principal during his tenure at Go-To, often without any lawyers copied in the correspondence. When lawyers were involved, they represented either the Receivership Respondents or ASD. Importantly, the Principal had not retained his own personal lawyer to seek separate director and officer advice, which influenced the Court’s decision.[3]

The Receiver argued that it stepped into the shoes of the Receivership Respondents and, in this capacity, possessed the authority to access the emails. This authority was deemed necessary for the investigation of alleged improper dealings between the Principal and ASD, aligning with the broader purpose of the Receiver’s appointment, which aimed to protect the interests of the public.[4]

Relying on Ontario (Securities Commission) v Greymac Credit Corp,[5] the Court confirmed that a receiver’s ability to waive privilege is derived from the powers granted to the receiver by the appointing order. This power typically exists for the purpose of obtaining information about the assets and affairs of the company from the company’s solicitor or former solicitor.

Conversely, the Principal stressed the importance of safeguarding solicitor-client privilege, emphasizing its status as a “principle of fundamental justice”, and argued that it should only be set aside under exceptional circumstances, such as a genuine risk of wrongful conviction. In other words, the Principal argued that the present case did not rise to the level of “exceptional circumstances”.

However, the Court clarified that the Receiver’s mandate was broad and encompassed all the property and businesses of the Receivership Respondents.[6] Furthermore, with respect to the Principal’s argument as to the primacy of solicitor-client privilege, the Court confirmed that in this instance it was not being asked to pierce or set aside that privilege; rather, it was being asked to confirm that the Receiver was the party who had the authority to assert or waive that privilege.

Regarding the language of the Receivership Order itself, the Receiver’s powers were further expanded under paragraph 4(r), which authorized the Receiver to examine, under oath, any person with knowledge of the affairs of the Receivership Respondents, including former and current directors, officers, employees, or individuals registered with regulatory bodies.[7] Additionally, paragraph 4(s) of the Receivership Order permitted the Receiver to take any steps reasonably incidental to the exercise of its powers or the fulfillment of statutory obligations.[8] The Court also emphasized that the Receiver possessed exclusive authorization and empowerment to take actions or steps in pursuit of its mandate without interference from any other party, including the Receivership Respondents.

Ultimately, the Court concluded that the language in the Receivership Order clearly supported the Receiver’s authority to investigate the affairs of the Receivership Respondents, including by review of the Identified Emails.

Further, the Court reiterated that the primary purpose of appointing the Receiver was to safeguard the interests of investors in the Go-To projects, ensuring proper management and protection of their investments.

Lastly, the Court observed that the outcome of the adjudication of the ASD Claim had significant implications for distributions to stakeholders, given the substantial balance in Go-To Adelaide’s receivership bank account. The Court clarified that the privilege carve-out provision in the Receivership Order did not apply to protect the Identified Emails, as any privilege rights, if applicable, belonged to the Receivership Respondents and not the Principal himself.[9]

Consequently, the Receiver was authorized to access and review the Identified Emails, such that the Principal was accordingly required to deliver them to the Receiver for that purpose.

Commentary

This case serves as an important reminder of the status and the limits of solicitor-client privilege in the context of a receivership. This is particularly important for persons in the construction industry, where the current economic climate is seeing a rise in insolvencies, and it is especially relevant in cases where the receiver is appointed to protect the interests of investors (as was the case here).

As the Court’s reference to the relevant case law suggests, a Receiver generally has a wide authority to manage the affairs of the person(s) under receivership, including to waive privilege to extent that doing so is consistent with the purpose(s) for which the Receiver was appointed. The receivership order – which, as readers will appreciate, is generally in the standard form used by bankruptcy and insolvency counsel, subject to modifications in order to fit the circumstances of a given case – will almost always confirm the wide breadth of the Receiver’s authority.

Finally, it is important for parties to bear in mind that, in the context of a receivership of a corporate person or persons, employees’ communications with their employer’s counsel are the subject of solicitor-client privilege that resides with the employer – not the employee. In this case, the Court’s analysis suggests that the Principal’s position misstated this crucial point, insofar as it seemingly treated the Receivership Respondents’ counsel as the Principal’s own, personal counsel. Accordingly, parties would be well served to remember this distinction and to govern themselves accordingly.

[1] 2023 ONSC 5921 (CanLII) [“Go-To Developments“].

[2] Ibid at paras 5-14.

[3] Ibid at para 17.

[4] Ibid at para 19.

[5] 1983 CanLII 1894 (ON SC), 41 O.R. (2d) 328 (Div. Ct.).

[6] Go-To Developments, supra note 1, at paras 23-25.

[7] Ibid at paras 28-29.

[8] Ibid at para 30.

[9] Ibid at para 36.

The FIDIC Practice Note on Dispute Boards – Lessons for Canada

Construction and infrastructure projects are complex endeavors with numerous inherent challenges and risks. Delays, cost overruns, and disputes are commonplace in the industry. Recognizing the need for effective dispute resolution mechanisms, the International Federation of Consulting Engineers (“FIDIC“) has recently published a practice note on dispute avoidance strategies on construction projects, with a focus on the use of dispute boards (the “Practice Note” – available here). In this article, we review the principles and practices of dispute avoidance outlined by FIDIC, and consider their applicability to the Canadian construction industry.

Background

As readers know, construction projects involve extensive time and cost commitments, often to an extent far beyond other types of contractual relationships. The competitive tendering process, project-specific designs, and the involvement of multiple stakeholders compound this complexity[1], creating a fertile ground for disputes.

Recognizing the inevitability of disputes in such projects, FIDIC has continuously evolved its standard forms of contracts to incorporate mechanisms for dispute avoidance.[2] To that end, and although the FIDIC suite did not invent the concept of a dispute board, FIDIC popularized the use of dispute adjudication boards beginning with the publication in 1995 of the Orange Book. More recently, FIDIC established a Dispute Avoidance and Adjudication Forum, which convened for the first time in 2022 and is intended to be a regular forum at FIDIC conferences on a semi-annual basis. From that Forum has come the Practice Note, which considers a series of issues associated with dispute avoidance.

The Practice Note – Five Core Tasks and Techniques

The Practice Note considers five core tasks and techniques of a dispute board, designed to foster awareness and collaboration among project stakeholders as a means of avoiding disputes before they begin.

Task 1: Raising awareness

The Practice Note advocates for early engagement between parties to establish rapport and build confidence. To that end the Practice Note recommends that the dispute board should convene an ‘introductory’ or ‘kick-off’ meeting as soon as practicable after it is appointed, in order to explain to the parties its dispute avoidance role. Ideally, this should occur prior to the start of work, and during this meeting, the dispute board should provide a comprehensive overview, addressing key aspects such as key contractual provisions and applicable dispute board procedural rules, such as the provision allowing parties to jointly seek an opinion from the dispute board when disagreements arise. It is essential for the dispute board, during this introductory meeting, to demonstrate how to implement dispute avoidance, and offer practical examples that showcase its effectiveness. [3]

Interestingly, the Practice Note also recommends that throughout the project’s duration, the dispute board should remind the parties of its dispute avoidance role. These reminders may involve the inclusion of “matters of concern” in site visit agendas, where potential issues are addressed pre-emptively. For instance, if there are concerns about a design change, the dispute board can proactively engage the parties to explore alternative solutions. Further, FIDIC recommends the board maintain a proactive dispute avoidance spirit in all communications with the parties so as to foster an environment where parties are encouraged to engage in avoidance efforts. For example, the board should remind parties to comply with their reporting requirements as Monthly Progress Reports often contain useful information, and such Reports may serve as early warning mechanisms to both the board and the parties to avoid disputes.[4]

Task 2: Building and Maintaining Trust

Given that trust is a cornerstone of successful dispute avoidance, the Practice Note cautions that dispute boards must demonstrate neutrality, effective communication, and professionalism to earn and sustain trust. Parties should view the dispute board as an indispensable component of the project team, dedicated to achieving the project’s success.

In that regard the dispute board must consistently convey its unbiased stance and freedom from any vested interests; for instance, when disputes arise over contractual interpretation, the board should impartially listen to both parties, avoid displaying any preference, and render a just assessment.[5]

Interestingly, the Practice Note recommends that the dispute board should adopt a “best for the project” mindset, positioning itself as a critical part of the project team focused on advancing the project’s overall success rather than favouring one party’s interests. For instance, when addressing issues like project changes or cost assessments, the board should emphasize that its recommendations aim to benefit the project holistically.[6] Although not addressed in the Practice Note, this recommendation arguably creates a tension between the dispute board being a ‘part of the team’ on the one hand, and acting as an independent, third-party adjudicator removed from the parties, on the other; while these two positions are not necessarily mutually exclusive, it nevertheless creates a fine line that the dispute board must walk.

In any event, the Practice Note also observes that the board must earn the respect of all parties to the project. At a minimum, this means having a strong understanding of project intricacies, FIDIC Contracts, and the construction industry in general.

Task 3: Determining Timing and Location

Deciding when and where to engage in dispute avoidance is critical. According to the Practice Note, dispute avoidance should take place when all key decision-makers from each party are available. Site visits, whether conducted physically or virtually, as well as meetings and email exchanges, serve as suitable venues for initiating dispute avoidance discussions. For instance, when a project alteration arises, such as a proposed design change, it is advisable to convene a site visit with all relevant stakeholders present. This allows for in-depth discussions and immediate decisions, potentially preventing the issue from escalating into a dispute.

Further, a dispute board should continuously remind parties that dispute avoidance is an ongoing process. By actively encouraging parties to make joint requests for an opinion or providing informal assistance, the board can proactively identify and address potential disputes. For example, the board, after reading the parties’ Monthly Progress Reports, may identify potential issues and engage the parties in discussions to avoid disputes. Such early intervention can reduce the chances of conflicts intensifying as the project progresses.

Task 4: Identifying Matters for Dispute Avoidance

Early recognition of potential areas of dispute is integral to the success of dispute avoidance efforts. To that end, the Practice Note observes that  matters that may be suitable for dispute avoidance include contract interpretation, variations and design responsibility.[7] For example, contract interpretation disputes typically revolve around understanding the substantive or procedural provisions of a contract. When parties encounter disputes related to contract provisions, the dispute board can offer informal guidance to help the parties grasp their respective responsibilities and rights, thereby pre-empting possible conflicts.

Task 5: Selecting the Appropriate Form

Dispute avoidance can assume various forms, each with its advantages. These forms include informal discussions, issuing opinions (either orally or in writing), and involving the dispute board during site visits or online meetings. The Practice Note recommends that parties consider their preferences and the specific circumstances of each situation when selecting the appropriate form for dispute avoidance (in other words, ‘fitting the forum to the fuss’).

For instance, informal discussions provide an opportunity for swift resolution through joint readings of the contract or negotiations facilitated by the dispute board. In situations where parties rapidly reach an agreement on contract interpretation, conducting these discussions orally can sometimes expedite the process without the need for written records.[8]

On the other hand, written opinions issued by the dispute board, whether as separate documents or included in site visit reports, offer valuable insights and a clear and definite indication of the board’s perspective on a particular issue. Written opinions can be especially beneficial when parties need documented records for their management or third parties, such as authorities or financiers.[9]

Commentary

Overall, the Practice Note contains a number of sensible recommendations that should yield tangible benefits for a project and its participants. Such benefits would include the following:

  • Maintaining cashflow. By avoiding disputes, construction can continue and the project can sustain a consistent cashflow, reducing the financial strains that arise from payment slowing or halting in the face of a dispute. Financial stability allows for efficient project management, enabling real-time oversight and reducing disruptions and delays;
  • Preservation of business relationships among project participants. By resolving disputes amicably and promptly, the professional rapport and trust among key stakeholders is safeguarded. This is particular important in the construction industry, where parties often re-engage with others (subcontractors, suppliers, etc.) over a period of years; and
  • As observed by the Practice Note, stress is reduced for all stakeholders involved. Minimizing disputes through early resolution or avoidance not only eliminates the anxiety and tensions that come with prolonged disagreements, but also enhances the overall work environment, promoting a more harmonious and productive atmosphere.

That being said, the Practice Note recognizes that there are external factors that may obstruct successful dispute avoidance, which factors may be broadly relevant no matter the jurisdiction.  External pressures, such as government audit pressure (that is, the need to have a formal means of justifying payment to another party), can force disputes into formal resolution processes. This is particularly true in Canada, where public owners are conscious that payments to a counterparty using taxpayer funds requires a reasoned basis. Similarly, certain jurisdictions may maintain a legal culture that prioritizes litigation (or rather, dispute resolution), thus making dispute avoidance more difficult.

As well, internal procedures within organizations may hinder the agreement or admission of any wrongdoing, just as internal financial pressures may prompt parties to prioritize financial results over dispute avoidance. On any given project, a party may also become entrenched in their view of an issue, making it difficult to avoid a dispute.

Notwithstanding that FIDIC’s suite of contracts is not regularly used in Canada, the issues identified in the Practice Note are equally applicable to the Canadian construction industry. The Practice Note therefore provides valuable guidance to construction industry participants on how best to minimize and resolve disputes on projects before and as they arise. As readers will appreciate, the use of dispute boards has grown on public projects in Canada over the past several years, although the growth of dispute review boards appears to lag behind that of dispute adjudication boards. With guidance from the Practice Note, we will await with interest to see if this changes.

[1] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 1.

[2] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 2.

[3] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 11.

[4] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 12.

[5] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 13.

[6] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 13.

[7] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 19.

[8] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 21.

[9] FIDIC Dispute Avoidance and Adjudication Forum Practice Note: Dispute Avoidance at 21.

Davis v. Amazon: A High Threshold for Staying Litigation, A Low Threshold for Precluding Class Arbitration

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:

  1. Delivery Partners (“DPs”): workers with a direct contractual relationship with Amazon; and
  2. Driver Associates (“DAs”): workers with an indirect contractual relationship with Amazon (instead they are workers for Delivery Service Partners that are contracted by Amazon).

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.

Backyard XP Inc v. Cesario-Valela: Limitations on Issuance of Third Party Claims Under 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.

Factual Background

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 Superior Court’s Decision

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:

  1. The motion must be on notice to the owner and all persons having subsisting preserved or perfected liens at the time of the motion; and although not required, it is “good practice” to provide the proposed third party with notice.
  2. The proposed claim must be for contribution and indemnity from the third party in respect of the claim against the party seeking to add the third party; and
  3. The Court must be satisfied that the proposed third party claim would not:
    1. Prejudice the third party or any lien claimant or defendant’s ability to prosecute or defend a claim; or
    2. Delay or complicate the resolution of the action.[5]

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]

Analysis

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.

Update: Federal Prompt Payment Legislation Comes Into Force

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:

  • Payment by the federal government to a contractor 28 calendar days after delivery of a proper invoice, at which point the contractor will have 7 days to pay its subcontractors, and so on down the construction chain;
  • Prescribed content for notices of non-payment; and
  • The implementation of an adjudication procedure as an enforcement mechanism for prompt payment.

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.