Minority shareholders in a closely held private company are not gifted with the same powers of foresight that Steven Spielberg granted John Anderton (a.k.a Tom Cruise) and his ‘Pre-Crime’ unit in the 2002 seminal, futuristic crime-drama ‘Minority Report’. Set in the year 2054, the Pre-Crime unit relied upon mutated humans called “Precogs” who had an ability to visualize the future. Essentially, would-be murderers were arrested before they committed the actual crime.

Minority shareholders don’t have this power to ‘pre-tell’ in order to take unilateral ad hoc preventative steps to guard against harm or interference with their interests.  As a result, the task of protecting minority shareholders’ interests falls to the legislature and clever corporate lawyers to draft protections for the minority shareholders from future peril. For example, it is common in oppression remedy cases for the minority shareholder to claim they were excluded from the business and that vital financial information was withheld. Section 140 of the Ontario Business Corporations Act, (“OBCA”) requires that companies “prepare and maintain” certain enumerated documentation including “adequate accounting records” which has been interpreted to include financial statements. Furthermore, section 145 of the OBCA confers that any registered or beneficial owner of shares of a company may examine the records referred to in section 140 during the regular business hours of the company. Essentially, minority shareholders in private companies are entitled to unfettered access to the accounting records of the company. It’s not quite as good as an ability to tell the future, but it’s useful information that can be relied upon when it comes time to vote your shares. The Canadian Business Corporations Act has similar provisions at section 155.

Additionally, most readers of this newsletter will be familiar with the shotgun provision in a shareholders’ agreement. Of less notoriety, but also effective in protecting minority shareholders’ interests, is the tag-along right. A tag-along right, or “piggyback”, is generally a right that is attached to a minority shareholder’s interest. The tag-along right provides a minority shareholder with the ability to veto a sale by the majority shareholder to a potential purchaser, unless the purchaser also agrees to purchase the minority shareholder’s interest as well. The tag-along right protects the minority shareholder from a potential corporate takeover where the purchaser is intent on limiting the existing shareholder(s)’ ability to manage and control the company. Perhaps more importantly, it guarantees that the minority shareholder will not have to become a joint owner with an undesirable third party.

The third-party purchaser may be hesitant to purchase all of the outstanding shares of the minority shareholder who enjoys the tag-along right. Tag-along rights can be drafted to ameliorate this concern, while also affording protection for the minority shareholders, by requiring the purchaser to reduce the amount of purchased shares in proportion to the interests of the party enjoying the tag-along right. For example, say Shareholder A and Shareholder B each own 30% of the company. Shareholder A enters into an agreement with a purchaser to sell her interest in the company, and Shareholder B wishes to exercise her tag-along rights. If the tag-along right is structured as set out above, by exercising the tag-along right the purchaser would be required to purchase 15% of shareholder A’s shares and 15% of Shareholder B’s shares, or 30% in total just as originally contemplated. The party enjoying the tag-along right gets to sell a percentage of her interest and therefore reduce her overall risk.

Finally, section 185 of the OBCA provides that where a shareholders’ resolution is passed which involves a fundamental change in corporate operations, the objecting shareholders are afforded “disserting rights”. In essence, the objecting shareholders (who by definition hold a minority interest) can initiate a dissenting process which leads to their exit from the company after being paid fair market value for their shares. However, this section of the legislation is less effective than a shotgun provision because it only applies to resolutions that requires two thirds of shareholders’ approval to pass, and only those resolutions creating a fundamental change such as:

The timelines and deadlines for complying with the requirements of section 185 are technical and detailed, so corporate counsel should be engaged to assist with navigating this process.

Majority shareholders have an ability to appoint the officers and directors and, therefore, to indirectly control the company and, as the interests of the majority and minority may not always be aligned, you have fertile ground for sowing the seeds of discontent. As minority shareholders are not blessed with the power to see into the future and change the course of events, like John Anderton and his ‘Pre-Crime’ unit, they need to protect themselves by firstly having a shareholders’ agreement in place containing dispute resolution and ‘shotgun’ provisions and secondly by retaining competent corporate counsel. 

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

Registering a construction lien against a property is a significant remedy that immediately triggers certain obligations and responsibilities for an owner. For that reason, the Construction Lien Act, 1990, c. C. 30 places an obligation on the party that is registering the lien to ensure the lien amount is accurate and not inflated.

A recent decision released by the Ontario Superior Court of Justice (Divisional Court) called HMI Construction Inc. v. Index Energy Mills Road Corp., highlights the pitfalls for a lien claimant in overstating its lien amount. In HMI Construction Inc. v. Index Energy Mills Road Corp. the owner purchased an energy generating plant. HMI was hired by Index to update the building and convert it into a biomass fired cogeneration facility. A falling out occurred between the parties and HMI registered two liens in the total amount of $32,807,468.11 against the property.

Index disputed the lien amount and elected to cross examine HMI’s affiant on the lien. It was determined that HMI used a “costs plus” approach in calculating that quantum of the lien amount. In essence, HMI calculated is actual costs, materials, equipment and labour and then added a 10% markup for profit to reach $32,807,468.11. The problem with this approach was that HMI and Index were on a fixed price contract. The court determined that absent approved changed orders, a contractor cannot include in a claim for lien extra charges over and above the contract amount, despite the fact that the contractor’s costs were more than usual or expected.  After reviewing the fixed price contract, and HMI’s progress draws, the Divisional Court affirmed the lower court’s determination that the maximum lienable amount was $13,872,154.86. As a result, HMI was found to have exaggerated its lien amount by $19,000,000. Index was successful on the appeal, and only had to post $13,872,154.86 as security in order to vacate the liens. Index was also awarded costs of the lower court motion and the appeal.

It is noteworthy that the Divisional Court ruled that “HMI is fortunate indeed that the motions judge exercised his discretion not to discharge the liens entirely, given all the circumstances.” Accordingly, it needs to be highlighted that if lien claimants are haphazard in calculating their lien amounts, the court has discretion to discharge the lien entirely if it is improperly inflated. Additionally, pursuant to section 86 of the Construction Lien Act, a party (or that party’s lawyer) can be ordered to pay a severe cost award if found to have willfully exaggerated the amount of its lien. The lesson here is that caution and care needs to exercised when calculating a lien amount. Lien claimants should consult with knowledgeable counsel in order to ensure the lien is properly calculated, otherwise, they run the risk of unwittingly losing their lien rights or making themselves vulnerable to an adverse cost award.

Jeff Van Bakel

Advocates LLP

Jeff practices predominantly in construction litigation, professional negligence defence and commercial litigation. Jeff takes pride in providing advice to his clients aimed at finding solutions. When a resolution cannot be reached, Jeff regularly appears before the Superior Court of Justice, the Divisional Court and the Court of Appeal for Ontario and aggressively advocates on behalf of his clients’ interests.