Alexandre and Epp Present to Construction Association

The Saskatchewan Construction Association (Saskatoon Chapter) regularly offers a range of courses covering topical industry issues, trends in technology, core industry competencies and business development skills.

On November 26, 2019, Misty Alexandre and Jared Epp presented “Preparing for Prompt Payment” as the industry readies itself for upcoming changes to legislation.

Good Faith in Contract Law

Good Faith in Contract Law

By Jared D. Epp, Robertson Stromberg LLP

Although no one on a construction project would argue that good faith is not important, what it means to act in good faith can mean different things to different people. The concept of good faith can often be relevant in the context of termination notices. It is not uncommon, where a party’s contract is terminated, for that party to allege, whether formally or informally, that some aspect of the termination was not done “in good faith”. The issue of good faith, in the context of a termination notice, was recently the subject of a decision by the Ontario Court of Appeal in CM Callow Inc. v. Zollinger.

In this decision, a condominium corporation, through its property manager, had two different maintenance contracts with Callow in relation to a number of condominiums. One contract was for summer maintenance work, while the other contract was for winter maintenance services. The summer maintenance contract was in effect between May 2012 and October 2013, while the winter maintenance contract was in effect from November 2012 until April 2014. Significantly, the winter maintenance contract could be terminated, prematurely, on 10 days’ notice without cause.

Although Callow’s work during the summer seemed to be largely satisfactory, the property manager received a number of significant complaints with respect to Callow’s snow removal services. As a result, in early 2013, the condominium management group (“CMG”) decided that it would terminate Callow’s winter maintenance contract.

However, the CMG specifically chose not to inform Callow of its decision to terminate the winter contract in order to ensure that Callow would complete its summer maintenance work. Not only did Callow complete this work, it also performed a number of additional summer maintenance services in “good faith” and free of charge. Callow also took steps during the summer to lease equipment for the upcoming winter season. Throughout this entire time, CMG did not give Callow any indication that it had decided to terminate Callow’s contract, however, as soon as the summer work was finished, CMG served notice of its intention to terminate Callow’s winter maintenance contract.

After being terminated, Callow decided to sue CMG alleging, among other things, that CMG failed to treat them in “good faith” by failing to let Callow know once a decision had been made to terminate Callow’s contract. At trial, Callow succeeded with this argument and was awarded its lost profit, from the income it would have generated from the winter work, less expenses. Callow was also compensated for the funds that it expended to lease winter equipment which it no longer needed.

However, this decision was over-turned by the Court of Appeal. Although the Appeal Court agreed that CMG had acted “dishonourably”, their deception of Callow did not amount to a breach of CMG’s duty to perform its contractual obligations in good faith. In coming to this conclusion, the Court of Appeal stressed the fact that no one, including CMG, has a duty to disclose information “relevant to termination” nor did the lack of forthright communication by CMG to Callow mean that CMG had forfeited its right to terminate the winter maintenance contract in accordance with that contract’s terms. Callow has since sought leave to appeal this case to the Supreme Court of Canada.

At its core, this decision serves to highlight the uncertain nature of good faith in contract law. Although the Court of Appeal did not believe that CMG had done anything “legally wrong”, the initial judge who heard the case came to the opposite conclusion. It also seems to highlight the difference between a deception by omission and a deception by action, two decidedly unclear legal categories. This is something that the Supreme Court of Canada may very well clarify once they make a decision. However, in the interim, it is a good reminder of the potential perils that can accompany a situation where a decision to terminate is made, but the actual implementation of that decision is deliberately delayed to the prejudice of the party performing the work

Alexandre and Epp Present to Healthcare Engineers

Misty Alexandre and Jared Epp presented a plenary session at the 39th Annual Conference of the Canadian Healthcare Engineering Society held in Saskatoon September 22-24.

Their presentation outlined the requirements of the recent prompt payment legislation introduced in Saskatchewan in the fall of 2018.  This legislation will have major impacts on consultants in the healthcare industry when administrating construction contracts for new or renovated facilities.

Jared Epp Quoted in Canadian Lawyer

In the May 2019 issue of Canadian Lawyer Marg Bruineman writes about the changes afoot in construction lien legislation across Canada.

In the article she talks about how the increasingly complicated construction projects have necessitated discussions around prompt payment and adjudication regimes.  Industry groups such as subcontractors and trades have been calling for legislative reform as money is slow to “cascade down the construction pyramid” when claims choke the cashflow of a project.

In the article, Jared Epp gives his take on the current situation in Saskatchewan:

Saskatchewan, like Ontario, is conceiving of a very broad adjudication regime as part of this new legislation and it would allow a lot of the interim disputes and disputes before the project is completed to to put in front of someone, probably from someone in industry, just to make some sort of a decision.  There are still quite a few disputes in construction projects that wind their way through the courts, but there’s really no need for them to go that way.  In a lot of cases, parties simply need someone to make a decision.

Exciting times in the construction industry!

 

Negligent but not Liable

One of the key ways in which risk is allocated on a construction project is through insurance, typically in the form of builder’s risk, course of construction, or “all-risk” property policies. In most cases, the responsibility for obtaining insurance coverage is set out in a parties’ construction contract. It is common for these contracts to require a policy holder to add others, such as the owner or a subcontractor, as named insureds, which then affords this party the benefit of coverage. By ensuring all parties can be indemnified by a common insurer, there should be, in theory, less disputes over who is responsible for a loss on a construction project when such a loss occurs, which should allow construction projects, even in the event of loss, to proceed in a timely manner.

In Jacobs v. Leboeuf Properties Inc., an Ontario court had an opportunity to consider who should be responsible for a loss, on a construction project, when the owner fails to obtain the insurance coverage stipulated in the prime contract.

The basic facts of Jacobs were as follows:

1. The Owner executed a contract with a General Contractor to demolish and replace a residential property located in the City of Toronto.

2. The Prime Contract stipulated that:
The Owner shall purchase and maintain property . . . insurance in a form acceptable to the Construction Manager upon the entire Project for the full cost of replacement as of the time of any loss. This insurance shall include, as named insureds, the Owner, the Construction Manager, Trade Contractors, and their Trade Subcontractors and shall insure against loss from the perils of Fire, Extended Coverage, and shall include builder’s risk insurance for physical loss or damage including, without duplication of coverage, at least theft, vandalism, malicious mischief, transit, collapse, and where applicable, flood, earthquake testing, and damage resulting from defective design, workmanship or material. . .

3. The Owner did not include the General Contractor as a named insured.

4. Although it appears the demolition work scope was completed without issue, the Owner alleged that there were numerous issues with the workmanship of the General Contractor, which caused the Owner to suffer property damage.

5. Ultimately the Owner sued the General Contractor, alleging that the General Contractor was responsible for paying the Owner the costs incurred to correct this property damage.

6. The General Contractor then brought a court application to dismiss the lawsuit on the basis that the costs the Owner was claiming should have been covered by the Owner’s property insurance policy and, more particularly, on the basis that the General Contractor was supposed to be included as a named insured under that policy.

7. In response, the Owner argued that even if it had obtained a builder’s risk policy, the type of property damage that occurred would have been excluded from coverage.

Ultimately the Court agreed with the General Contractor and dismissed the Owner’s action. According to the judge, the Owner had clearly agreed to obtain a builder’s risk policy indemnifying the parties, including the General Contractor, from “damage resulting from defective design, workmanship or material”. The fact a “hypothetical” insurance policy may not have covered the loss was not important. Rather, by failing to obtain insurance, the Owner had voluntarily assumed the risk of loss. As such, even if the General Contractor was negligent, it could not be held liable. Jacobs is a timely reminder for both owners, as well as general contractors, who in many cases are responsible for obtaining builder’s risk policies, of the importance of ensuring that contract provisions, relating to who must obtain insurance as well as who must be added as an insured under an insurance policy, are followed.

Download Jared’s article here.

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