A recent decision by Justice Steele in the Ontario Superior Court of Justice has brought some much-needed clarity for road building contractors seeking to uphold (or overturn) an interim-binding decision of a referee under MTO’s dispute resolution procedures.

Background

In HMQ (Minister of Transportation) v. Bot Construction (Ontario) Limited, a payment dispute arose on an MTO project as a result of additional costs incurred by Bot for excavating, stockpiling, and compacting an unforeseen volume of rock material (the “Claim”).  Bot ultimately submitted the Claim to a referee in accordance with the contract’s dispute resolution procedure, set out in the February 2016 SP100S55 amendment to the contract’s general conditions.

A contractually mandated meeting was held between the parties and the referee. At the referee’s request, the referee received additional submissions and information after the meeting and before rendering a decision requiring MTO to pay Bot the sum of $341,012.70 plus HST for the Claim.  The referee’s decision was provisionally binding on the parties, subject to the right of either party to “review” the decision by filing a notice of protest within 30 days. 

The contractual dispute resolution process set out in SP100S55 does not specify a format or any procedural rules for a review of the referee’s decision.  The contract provides that either party may “resort to litigation” for a review of a referee decision.

MTO Moves to Review (and Reverse) the Referee Decision

MTO commenced an application seeking a declaration from the court that the referee’s decision was wrongly decided and for an order requiring Bot to return to MTO the payment awarded by the referee.  To our knowledge this is the first court challenge of the MTO’s unique referee process and the path to be followed in seeking review of a referee decision under protest.

The grounds advanced by MTO in challenging the referee decision included an allegation that the referee had deviated from the prescribed referee process by allowing reply submissions from Bot in response to written submissions by MTO that differed from those provided in MTO’s original field level decision to deny the claim.  MTO alleged that the referee erred by encouraging further submissions from both parties at the referee meeting.

MTO further alleged that the referee had made an error in interpreting and applying the relevant contractual provisions, particularly with respect to the contractual provisions dealing with increases in the volume of blasted rock material (compared to its pre-excavation volume) after it was placed and compacted in a stockpile by Bot.

MTO sought a review of the referee decision by the court on a summary basis to be restricted to the limited documentary record that was before the referee.  MTO took the position that this initial review of the referee decision could then be challenged a further time by the unsuccessful party with the commencement of a regular court action seeking a final decision at a trial based on a full documentary record.

Faced with the prospect of multiple proceedings to uphold the referee’s decision, Bot moved for an order to convert MTO’s application into a regular action destined for a trial that would provide a single-step to fully and finally resolve the dispute.  Kyle MacLean, a partner with Advocates LLP, argued the motion on behalf of Bot.

The Decision

In her decision on Bot’s motion, Justice Steele reviewed the relevant factors that favour converting an application into an action, which would proceed to a full trial, including the following:

  1. Where there are material facts in dispute;
  2. Where the issues to be determined go beyond the interpretation of a document;
  3. Where there are complex issues and/or credibility determinations that require the court to weigh evidence; and
  4. Where the judge hearing the application cannot make a proper determination of the issues on the documentary record.

Justice Steele then reviewed the record before the court on MTO’s application and noted that there was conflicting evidence on the central issue of how the excavated rock volume changed based on Bot’s handling and compacting operations.  Resolving the contradictory evidence on this type of issue could not be done by a review of the contract documents and would likely require evidence from the road building industry and/or experts.

Another factor in favour of reviewing the referee decision by an action leading to a full trial was the lack of a complete record of the referee proceedings.  There was no transcript or other record of the referee’s meeting with the parties, resulting in an incomplete record of the evidence considered, which prevented the court from making a proper determination of the issues on the application.

Finally, Justice Steele observed that reviewing the referee decision on an interim basis by way of an application was not required under the contract’s dispute resolution provisions.  To do so would add an additional step that would only increase the cost and time of all parties on their way to a final resolution.  Converting the application into an action and sending it to trial in the normal manner would permit the court to finally resolve the dispute on its merits.

For these reasons, Justice Steele ordered that MTO’s application to review the referee decision must proceed by way of an action. As the party challenging the referee decision, MTO would be the plaintiff and Bot the defendant. The provisionally binding decision and resulting payment that MTO had to make under order of the referee would stand until such time as a trial judge ruled that the payment need not have been made, or otherwise determined that Bot was entitled to keep the award of the referee.

Implications for Industry

This decision provides procedural clarity for road building contractors who are seeking to review (or uphold) a referee’s interim binding decision.  The lack of a complete evidentiary record for referee proceedings, when paired with the complex factual issues that are often encountered on MTO project disputes, will generally favour proceeding by way of an action for a final determination of the claim. Doing so will ensure that a contractor can secure the quickest and most cost-effective resolution of their dispute with MTO.

Advocates LLP acts frequently for general contractors encountering problems on their ICI and infrastructure projects around Ontario, including those under contract with MTO, Metrolinx, Infrastructure Ontario, and local Municipalities. We have extensive experience working with clients to assist them in preparing for and managing the MTO referee process. Contact any one of our partners or visit us at AdvocatesLLP.com , and we would be pleased to assist.

It is not uncommon to see invoices or purchase orders that provide for interest on overdue accounts at a rate of 2 per cent per month with nothing written about the rate of interest per year. The assumption being that anyone with a basic facility with arithmetic understands that this means that interest is payable on over due accounts at a rate not less than 24 per cent per year (with monthly compounding it is closer to 27 per cent).

Surprisingly, the Interest Act, an often overlooked, short piece of federal legislation, assumes otherwise. It has the effect of capping a creditor’s right to recover interest at 5 per cent per year where a non-mortgage debt recorded in writing expresses interest at a daily, weekly, monthly, or quarterly rate.

The result is that if your terms of sale (or quotation, purchase order, invoice, etc.) stipulates interest at a rate of 2 per cent per month on overdue accounts (and nothing more), the purchaser fails to pay, you sue to recover the debt owed, and you get judgment, then you will only be entitled to interest at a rate of 5 per cent per year (which is at least 19 per cent per year less than you intended).

Happily (or sadly, depend on when you are reading this), complying with the Interest Act is simple: state the rate of interest per year only or state both a monthly rate and its yearly equivalent. So, if you want to recover 2 per cent interest each month on overdue accounts, be sure to state the yearly rate of 26.824 per cent at the same time.

Introduction

The United States government, under the administration of Donald Trump, imposed tariffs on imports of Canadian steel and aluminum at the rate of 25% and 10% respectively, effective May 31, 2018. As a countermeasure, Canada’s Department of Finance intends to impose a reciprocal surtax (or analogous trade restrictive countermeasures) on imports of steel, aluminum, and other goods originating from the US in accordance with the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations, (SOR/94-23). The countermeasures will affect only those goods imported from the US and are anticipated to take effect on July 1, 2018.

Table 1 and 2, available here: 18.06.28 Table of Tariffs, set out the entire list of imported goods that will be subject to the countermeasures. All Table 1 items will be subject to a 25% surtax and all Table 2 items will be subject to a 10% surtax. The various goods listed did not end up on the list by accident. These items were included because they are produced or manufactured in districts with an influential Republican or key Trump Cabinet Member.

For example, yogurt is the first item listed in Table 1. The Speaker of the United States House of Representatives, Paul Ryan, is a congressman from Wyoming, which is a large producer of yogurt. Additionally, the Senate majority leader Mitch McConnell is a US senator from Kentucky. Accordingly, it is by design that whiskies (which include Kentucky-based bourbons) will now be subject to a 10% surcharge. The intent was to apply pressure on districts with influential Republican incumbents.

The NAFTA negotiations are not scheduled to convene until after the Mexican presidential election is completed on July 1, 2018.  It is not difficult to envision a scenario where those negotiations drag on for a significant period of time. As a result, this escalating trade war between Canada and its largest trading partner could become the new reality for the Canadian construction industry, at least for the foreseeable future. This paper will focus on the implications for those importing steel and aluminum originating from the US for a Canadian project.

Standard Force Majeure Clauses Unlikely to Be of Assistance

The primary objective of entering into a construction contract is to allocate responsibilities (including contract price and scope of work) and also to allocate risk. The standard force majeure clause contained in a construction contract is a means of allocating risk. Essentially, a force majeure clause relieves a party from the obligation of fulfilling the responsibility under a construction contract should a certain event occur.

Force majeure clauses are often confused with the common law doctrine of frustration. Although there can be some overlap between the two concepts, they are distinct. The doctrine of frustration applies when the very essence, or fundamental aspect of the contract, becomes impossible to fulfill due to an unforeseen event outside of the control of either party. In contrast, a force majeure clause is a contractual provision intended to address situations that fall short of frustration. As a contractual provision, a force majeure clause can be flexible and tailored to address specific events. Additionally, unlike the doctrine of frustration which nullifies an agreement in its entirety, a force majeure clause can be designed to apply to a discreet, standalone obligation in the contract, as opposed to the contract as a whole. In essence, the provision addresses risks deemed unacceptable by the contracting parties.

Obviously, how the courts will interpret a force majeure clause depends entirely on the specific wording of that provision. However, many construction agreements contain boilerplate language. The key features of most force majeure clauses contain one or more of the following elements:

The Supreme Court of Canada had an opportunity to review the law surrounding force majeure provisions over 40 years ago in Atlantic Paper Stock Ltd. v. St. Anne-Nackwawic Pulp and Paper Company Limited.[1] In that case, which remains the leading authority, Atlantic Paper contracted with St. Anne to supply 10,000 tonnes of waste paper (per year) for a 10 year period. That obligation was subject only to “an act of God, the Queens or public enemies, war, the authority of the law, labor unrest or strikes, the destruction of or damage to production facilities, or the non-availability of markets for pulp or corrugating medium.” St. Anne attempted to rely upon this underlined portion of the force majeure clause to get out of the agreement. The evidence established that there was an available market for pulp or corrugating medium, however, it just wasn’t profitable based on St. Anne’s operations. The Supreme Court determined that fell short of triggering the force majeure clause and ruled it was not proper to allow St. Anne to rely upon its soaring production costs to absolve it of contractual liability.

A more analogous situation to the current trade war occurred in Tom Jones & Sons Limited v. R, an Ontario High Court decision from 1982.[2] In that case, Tom Jones & Sons (“Tom Jones”) was the successful bidder for the construction of a building for the Government of Ontario. Shortly after the bid was accepted, the parties entered into a ground lease. Thereafter, Tom Jones advised the Government of Ontario that it could not arrange financing for the project.

The agreement between the parties contained a relatively standard force majeure clause that Tom Jones attempted to rely upon to rescind the contract. However, the court ruled that Tom Jones could not avoid its obligations to the Government of Ontario by relying upon the force majeure clause. It was determined from the evidence that it was not impossible for Tom Jones to obtain financing, but due to the volatility of interest rates in the money markets at the time, it could not get financing which would have led to the project being economically advantageous.

It is noteworthy that the courts have consistently determined that a project becoming unprofitable, or creating an economic hardship for one party, is not sufficient to trigger a force majeure clause. Again, while the analysis is fact specific depending on the specific wording of the force majeure clause, it is unlikely standard provisions will allow a party to be absolved of their responsibilities in an agreement due to the imposition of surtaxes and countermeasures, unless the force majeure clause is specifically written to apply to that situation.

Common Contractual Provisions That May Provide Relief: Price Acceleration Clauses for Duties and Taxes

Although not a strict force majeure clause, many standard construction agreements contain provisions dealing with government regulations, taxes and duties. For example, the CCDC 2 Stipulated Price Contract for 2008 contains the following provision:

Although “duties” is not defined in the agreement, it would appear that the surtax or countermeasures could be construed as a tax or a duty, which would give the contracting party an automatic right to increase the contract price to the same amount as the increased surtax or countermeasure. Obviously, this provision will give increased security and assistance to suppliers that entered into fixed-price arrangements before the imposition of the countermeasures.

There is nothing preventing a party from negotiating a similar provision into their contracts and to specifically reference the Government of Canada’s anticipated countermeasures in the clause.

Further, it should be noted agreements between owners and general contractors sometimes contain a provision entitling the owner to obtain the benefit of any tax exemption or tax rebate, and these provisions generally reference “customs” and “duties”.

As a result, depending on where you are in the construction pyramid, it is possible to flow through the surtax and countermeasures to the owner of the project. It is imperative that the contracts between the parties in the construction pyramid be reviewed to determine if this outcome is feasible.

Duty to Mitigate

Whether you are dealing with a force majeure clause, or a “duties and taxes price acceleration clause”, the parties still have a duty to mitigate any losses stemming from the non-performance of a contractual obligation. A well drafted force majeure clause will also contain an express duty to mitigate.

As a result, a party seeking to rely upon a price acceleration clause, or a force majeure clause, should ensure the material that is subject to the countermeasures cannot be sourced domestically or from a cheaper market.

Notice

Generally, a force majeure clause or price acceleration clause will contain an associated notice provision which creates a condition precedent to rely upon the clause. Strict adherence to any notice provision contained in the agreement is generally required by the courts. These notice provisions allow the responding party to mitigate the effects of the force majeure event.

In our particular example, the general contractor receiving goods subject to the countermeasures may have the option to de-scope the work from that subcontractor and source an alternative, cheaper supplier of the material. In certain situations, this might be preferable to being subject to the force majeure clause or price acceleration clause.

Conclusion

There is no guarantee that this trade dispute will be brief, and, there is no guarantee the dispute will not escalate. Further, standard boilerplate force majeure clauses are unlikely to provide relief for any party that is unexpectedly subject to the Government of Canada’s countermeasures. Price acceleration clauses addressing the countermeasures, or specifically tailored force majeure clauses, should be contemplated and inserted into construction agreements in order to purposely apportion the parties’ risk.

[1] Atlantic Paper Stock Ltd. v. St. Anne-Nackwawic Pulp and Paper Company Limited,[1975] 1 SCR 580.

[2] Tom Jones & Sons Limited v. R, 31 OR (2d) 649

The Construction Lien Amendment Act of Ontario (Bill 142) was given Royal Assent in December 2017. Among its many changes, it will introduce an adjudication process. The effective date of the necessary regulations allowing adjudication is currently set for late 2019. By that time, whether your contract includes adjudication procedures or not, these procedures will prevail.

In the 1990’s the Province of Ontario experimented with mandatory mediation as part of the Court process. It was a good thing. These days it is common for lawyers handling construction disputes, sooner or later, to find their way to a mediator to help the clients explore settlement possibilities.

This new Construction Act will introduce “prompt payment” provisions. From my perspective as a Construction Litigation lawyer, the single most significant of those changes will be the Adjudication process.

Part II of the new Act describes it as a Construction Dispute Interim Adjudication. In less than 30 days it will produce in an interim decision rendered upon a single issue in dispute, by an experienced construction adjudicator. Disputes that can be referred to these adjudicators include: payment disputes; disputes over change orders whether issued and approved or not; disputes over the release of holdbacks or other payments subjected to back-charge. The disputes may only be referred to adjudication if the contract under which the dispute arises has not been completed. Issues referred to adjudication must be dealt with on a stand-alone basis. Multiple issues cannot be referred as one dispute. Notwithstanding these rules, the parties and the adjudicator have some discretion to agree to adapt things to achieve a timely cost effective process.

Adjudicators will be vetted for their skills and training by a Ministry Authorized Nominating Authority, which will create and manage a roster from which parties may choose their adjudicator. They will either be chosen from the roster by agreement of the parties, or will be appointed by the Nominating Authority, upon the request of a party.

The Adjudication process will be expedited. Within 5 days of accepting an appointment to adjudicate the party demanding adjudication is to have submitted their supporting documentation to the adjudicator. The process thereafter is under the control of the adjudicator who is to ensure it is conducted fairly and impartially – rendering their final decision no later than 30 days from receipt of the applicant’s documents. The adjudicator may attend at the site, interview witnesses, hire experts, and has other broad powers to investigate so as to be able to render a decision with reasons in support on or before the 30th day. A late decision will be unenforceable.

An adjudicator’s decision must be acted upon by the parties within 10 days of the determination, failing which a party may suspend further work under the contract. Although it must be acted upon, the decision may be disputed by either party through subsequent litigation or arbitration. The written decision of the adjudicator will be admissible in that trailing litigation.

Together with the prompt payment provisions which require a notice of non-payment detailing all the reasons for a backcharge, the new ability to demand adjudication is going to dramatically change the payment process for our construction industry.

The Ontario Court of Appeal’s recent decision in MEDIchair LP reminds me of how difficult it can be for a lawyer to answer the question: Do you think this noncompetition agreement is enforceable?

In Medichair LP, the litigating parties were the franchisee and the franchisor.  The franchisee wanted to resile from of a restrictive covenant in the Franchise Agreement, which provided that when the Franchise Agreement terminated the franchisee would not operate a similar store for 18 months within a 30 mile radius of its store or the nearest franchise store.

The Court identified the promotion of free and open trade and freedom of the right to contract as being the underlying, and competing, policy factors to be balanced in determining whether a restrictive covenant is valid.

The Court referenced the well-known legal test that for a restrictive covenant to be enforceable it had to be “reasonable”.  In particular, the Court accepted that the “test for reasonableness is whether the clause is ‘limited’, as to its term and to the territory and activities to which it applies, to whatever is necessary for the protection of the legitimate interests of the party in whose favour it was granted”.

The words italicized by the Court are key, they set the terms of reference for whether the restrictive covenant being reviewed is reasonable in terms of its duration, geographic scope, and breadth of activities to be curtailed.  A restrictive covenant is not reasonable, and will be struck down, if it is too long in duration, or the geographic area and activities it covers are to broad in scope, based on what is necessary to protect the legitimate interests of the beneficiary of the prohibition.

The reasonableness analysis, therefore, may be considered to be a two-step process.  First, the legitimate interests of the beneficiary, to be protected, need to be identified. Second, these are to be compared to the restrictive covenant to determine if it is “overkill”.

The facts in Medichair LP, provided an interesting factual twist on the usual analysis as to whether the duration and scope of a restrictive covenant is reasonable.  This is because the franchisor had no intention of opening/operating another franchise store in the protected location—as the franchisor’s corporate parent owned another chain of competing franchises and it already had one of these other stores in the protected area.

As such, the Court overturned the judge and held that the restrictive covenant was not enforceable as the franchisor did not have any legitimate or proprietary interest to protect within the geographic area covered by the restrictive covenant.

The Court confirmed that legitimate interests to be protected are those in existence at the time the contract is made, including what might possibly happen in the future.  The Court referenced one of its 1982 decisions in support of this proposition.

In that earlier case, the Court upheld a restrictive covenant that covered all of Canada even though the business to be protected did not operate Canada wide, on the basis that at the time the contract was signed the reasonable expectation of the parties was that the business would be expanded across Canada even though that never happened. The Court in MEDIchair LP reasoned that if the reasonable expectations of the parties at the time of contract covered expansion, then they also covered the reasonable expectation of continued operations by the franchisor in the protected territory—and with that reasonable expectation not materializing the restrictive covenant became unnecessary to protect a commercial interest.

The Court does not explain the basis for arriving at this reasonable expectation at the time of contract—i.e., that the restrictive covenant was premised on the reasonable expectation that the franchisor would continue to operate a franchise in the protected area.  It seems that it may also have been fair to infer, in a commercial setting, a reasonable expectation at the time of contract that the franchisor would want to protect its general brand or goodwill by restricting competition in a certain area whether or not another store would be opened in that area.

Enforceability of restrictive covenants continues to be one of those “grey areas” of the law that lawyers will continue to struggle with.