Madorin, Snyder LLP has rebranded and is now Bennett Grant LLP. We are a full service law firm based in Kitchener and Listowel serving clients throughout Ontario.
The only thing most contractors know about their liability insurance is the amount of their annual premium. Few of them have good understanding of value they get in return for that premium.
Generally, a commercial general liability insurance (“CGL”) policy covers a contractor for the financial consequences of an accident that results in bodily injury or property damage to a third party. For example, if one of your employees accidentally dropped a tool off of the fourth storey that hit a pedestrian, then your CGL insurer would indemnify you for any damages payable to the pedestrian. If instead the tool damaged a building adjacent to the worksite, then your CGL insurer would indemnify you for the cost incurred by the owner of the building to perform repairs. While these simple examples are useful to illustrate the general scope of coverage, they are, thankfully, rare events. The accidents that tend to trigger coverage under a CGL policy are accidents that result in damage to the project itself.
There are number of policy exclusions that may come into play where an accident results in damage to the project, but the most important is the ‘Own Work Exclusion’. Policy language varies, but here is one example of the Own Work Exclusion:
This insurance does not apply to:
j. "Property Damage" to "your work" arising out of it or any part of it and included in the "products completed operations hazard".
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
The general purpose of the Own Work Exclusion is to protect insurers from having to indemnify a contractor for the cost of repairing the contractor’s own shoddy work. If an insurer had to indemnify a contractor for the consequences of shoddy work, then it would create a moral hazard: Contractors would have little incentive to do the work correctly in the first place if they knew their insurer would have to pick up the cost of repair.
However, there are lots of accidents that occur on site to which the Own Work Exclusion does not apply. For example, if a window leaks because it was improperly installed, the installer would still be covered for the cost of repairing damaged drywall and flooring because that is not its ‘own work’. The flooring, drywall, and the window are the ‘own work’ of the general contractor, but the Own Work Exclusion would still not bar a claim for indemnity by the GC because the work out of which the damage arose was performed by a subcontractor, the window installer.
I suspect that subcontractors in particular are leaving money on the table when they fail to recognize that backcharges made against them for damage may fall within coverage. If the amount of the backcharge is minimal, then it may be wise for the subcontractor to absorb the loss without referring the matter to their insurer. Different considerations apply where the cost of repair is substantial.
My final point is that the most valuable part of your liability policy is not the damages your insurer will pay on your behalf if you are found liable for an accident but the lawyers’ fees that it will pay on your behalf to defend you. If a claim is made against you that may fall within coverage, then your insurer has an obligation to appoint and pay for a lawyer to defend you against that claim. If a claim is made against you that may fall within coverage, then notify your insurer so it can start investigating the claim.
Ted Dreyer is a lawyer and adjudicator at Madorin, Snyder LLP in Kitchener. This article should not be relied on as legal advice.
I dread being asked by a client whether he is able to terminate his contract.
There tends to be little margin for error. If a contractor acts too conservatively and continues work in the face of a customer's claim for backcharges or set-off, then the contractor risks incurring additional costs to perform work for which he will not be paid without a prolonged legal battle, if at all. If the contractor acts too aggressively and wrongfully terminates the contract, then he will face a claim for the increased cost incurred by the customer for getting the work done by another contractor on short notice and a claim for delaying the timely completion of the work. Making the right decision is usually critical.
Yet making the right decision is easier said than done. Typically there is a preliminary question as to whether the other party has even breached the contract. The outcome of underlying issues concerning extras, delays, and/or deficiencies is often unpredictable. Even assuming that the other side has breached of contract, it does not necessarily follow that the innocent party has the right to terminate the contract.
The ability to terminate a contract at common law is more limited than is commonly believed. Most breaches of contract do not permit the innocent party to terminate the contract. The usual remedy for a breach of contract is an award of damages sufficient to compensate the innocent party for the consequences of the breach. In the absence of a termination clause, the innocent party will only have a right of termination where the breach of contract deprives the innocent party of substantially the whole benefit of the contract.
Urbacon Building Groups Corp. v. City of Guelph is a 2014 case that illustrates the principle that a breach of contract does not necessarily entitle the innocent party to terminate the contract. The contractor to build a civic administration complex for the City. Substantial performance was to be achieved by August 2008. In mid-September the contract was still only 95 percent complete. The reasons for the delay were disputed. On September 19, 2008, the City terminated the contractor for delay. The Court concluded that, even if the contractor was responsible for the delay, the City had wrongfully terminated the contract. The City was not entitled to terminate the contract simply because the City would incur costs as a result of the delay. The City's expert said that, if the contractor had not been terminated, it may have reached completion in either early or late November. Far from demonstrating that continuing the contract would be intolerable to the Owner, the Court accepted that the termination of the contractor delayed the substantial completion of the project.
I will leave you with two thoughts. First, among the many advantages of using CCDC and CCA standard form contracts is that they include default clauses that help clarify the circumstances where a party is entitled to terminate a contract. Second, a decision to suspend work or terminate a contract is not one that should be made lightly. You should call your lawyer even though he may prefer that you didn't.
Ted Dreyer is a lawyer and certified construction adjudicator at Madorin, Snyder LLP in Kitchener. This article was published in Links2Build and is republished with permission. This article should not be relied on as legal advice.
The construction industry is littered with the bodies of the dead: Comstock and Kappeler Masonry are but two of the construction companies that have ended up in bankruptcy protection. Bankruptcy law affects the construction industry more than most. That is why the construction industry needs to know about subtle changes in bankruptcy law that have put the industry at a disadvantage relative to other creditors, most notably banks.
Bankruptcy in a Nutshell
When a company is assigned or petitioned into bankruptcy, the trustee in bankruptcy liquidates the bankrupt company's assets and collects its debts, insofar as it is economically feasible to do so. The resulting pot of money, called the "estate" of the bankrupt, is divided up among the company's creditors according to the priority rules of the federal Bankruptcy and Insolvency Act. Secured creditors of the bankrupt company (i.e. banks) typically get paid first. If there is anything left over for the unsecured creditors they get paid the same number of cents on the dollar.
Importantly, money held by the bankrupt company in trust for someone else does not form part of the estate of the bankrupt company. That is where Ontario's Construction Act comes into play.
Section 8 of Ontario’s Construction Act
Section 8 of Ontario’s Construction Act (formerly known as the Construction Lien Act) imposes a statutory trust upon any money paid to a general contractor for labour and materials. The beneficiaries of the statutory trust are the subcontractors and suppliers who supplied labour and materials to the project.
In the good old days, the statutory trust created by the Construction Act gave subcontractors and suppliers a limited priority over other creditors of a bankrupt general contractor. Any money paid by an owner to the trustee in bankruptcy were kept separate from the estate of the bankrupt general contractor because they were trust funds. The trustee in bankruptcy would pay the trust funds to the subcontractors and suppliers on the project instead of paying the money to secured and unsecured creditors.
Atlas Block Changed the Law
In the 2014 decision of the Ontario Superior Court of Justice in Royal Bank of Canada v. Atlas Block the Court ruled that only funds subject to a common law trust were to be kept separate from the estate of the bankrupt. I won't bore you with the distinction between statutory and common law trusts. The point is that funds impressed with a statutory trust of the type created by the Construction Act now form part of the estate of the bankrupt in spite of the trust. In other words, as a result of Atlas Block, subcontractors and suppliers lost their limited priority over trust funds.
A Local Example of Atlas Block In Action
The Kappeler Masonry bankruptcy illustrates how the Atlas Block case puts subcontractors and suppliers at a disadvantage relative to banks. The trustee in bankruptcy collected $147,119 from the owner of a project Kappeler had worked on. The trustee in bankruptcy asked the Court to approve payment of the $147,119 to Kappeler's bank, BMO. Hargest Concrete Ltd. of Cambridge was a supplier of Kappeler Masonry on the project that had generated the $147,119 payment. Hargest Concrete Ltd. objected to the proposed payment to BMO. In the good old days, the $147,119 would have been paid to Hargest Concrete Ltd. As a result of the Atlas Block precedent, the Court ordered the trustee in bankruptcy to pay the $147,119 to BMO.
We Need a Legislative Amendment
The Federal government should reverse the effect of the Atlas Block decision. It should amend the Bankruptcy and Insolvency Act to exclude funds impressed with a statutory trust pursuant to the Construction Act from the estate of a bankrupt general contractor.
Giving banks priority over subcontractors and suppliers is bad public policy. First, subcontractors and suppliers should have priority over funds arising from their labour and materials. Second, Atlas Block gives banks an incentive to push general contractors into bankruptcy so they can jump to the front of the line. Third, the law is now being applied differently in different provinces because judges in Alberta wisely declined to follow the Atlas Block precedent. A legislative amendment is needed to bring uniformity to the application of federal law.
In order to convince the Feds to amend the Bankruptcy and Insolvency Act we need as many voices as possible calling for change. I encourage you to raise the issue with your national trade associations and your local MP.
Ted Dreyer is a construction and insurance lawyer at Madorin, Snyder LLP in Kitchener. It was previously published in the Grand Valley Construction Association Journal and is republished with permission. This article should not be relied on as legal advice.
The word on the street is that steel producers did not wait for Donald Trump to apply the steel tariffs to Canada before they increased the price of steel. Contractors and subcontractors are worried about committing to fixed prices without knowing where steel prices are headed.
A material price escalator clause is a potential solution to the problem. However, such clauses are like pet rocks and polyester pants: They have been out of fashion for so long that it is a challenge to find the genuine article. I have combed through the archives and found three examples.
The first is from Bethlehem Steel Co. v. Turner Constr. Co., 2 N.Y.2d 456:
"The price or prices herein stated are based on prices for component materials, labor rates applicable to the fabrication and erection thereof and freight rates, in effect as of the date of this proposal. If, at any time prior to completion of performance of the work to be performed hereunder, any of said material prices, labor rates and/or freight rates shall be increased or decreased, then in respect of any of said work performed thereafter there shall be a corresponding increase or decrease in the prices herein stated."
The second is from Einhorn v. Ceran Corp., 177 N.J. Super. 442 involving a contract for the sale of a residential condominium:
"This agreement is conditioned upon the ability of Seller to complete the unit at present prices for materials and labor. If Seller is at any time or for any reason, unable to complete the unit at the present prices for materials and labor, Seller shall have the option to cancel this contract upon written notice to Buyer, in which event the full deposit shall be returned to Buyer without interest and this agreement cancelled. However, the Buyer shall have the option of paying any increased costs of labor and material, and if Buyer, within ten (10) calendar days after notice of any increase in cost, agrees in writing to pay such increased costs at closing, this agreement shall continue in full force and effect."
And finally, an example from a Canadian case, H.T. Drywall Ltd. v. Carriage Holdings Ltd., 1979 CarswellAlta 452:
"These prices to take effect as of now, May 13, 1976, and will remain until Sept. 30, 1976, or as such time as further increase in cost of materials. At such time, the price increase shall be passed on to the General Contractor, immediately (sic)."
In my view you should consider these clauses as a good starting point rather than the finished product that you can put directly into a contract. Of course, the hard part is likely to be convincing your client to accept an escalator clause in the first place.
Ted Dreyer is a construction and insurance lawyer at Madorin, Snyder LLP. Madorin, Snyder LLP is a full service law firm serving Kitchener, Waterloo, Cambridge, Guelph and the surrounding area. Please visit our construction law page.
The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.
Watch a video by Ted Dreyer about Bill 142 and the new Construction Act.
Ted Dreyer is a construction and insurance lawyer at Madorin, Snyder LLP. Madorin, Snyder LLP is a full service law firm serving Kitchener, Waterloo, Cambridge, Guelph and the surrounding area.
The information contained in this video is provided for general information purposes only and does not constitute legal or other professional advice. Viewers are advised to seek specific legal advice in relation to any decision or course of action contemplated.
It is not uncommon in the construction industry for a subcontractor to reach out to the owner where the general contractor is in default of its payment obligations to the subcontractor. If keeping the subcontractor working is vital to maintaining the project schedule, the owner may have a strong interest in seeing that the subcontractor get paid. Often there is an underlying concern that the general contractor is using the funds it has received from the owner for something other than paying the trades. While there is more than one way to solve this problem, issuing a joint cheque is one method of ensuring that money paid to a general contractor reaches a particular subcontractor.
How to joint cheques work? A cheque is one example of a 'bill of exchange' and they are regulated by the federal Bills of Exchange Act. Section 62(2) of the Act provides that both parties named in a joint cheque must endorse the cheque before it can be cashed:
Two or more payees
62(2) Where a bill is payable to the order of two or more payees or endorsees who are not partners, all must endorse, unless the one endorsing has authority to endorse for the others.
Going back to the our example, if an owner issues a joint cheque to a subcontractor and a general contractor, the bank will not cash the cheque unless it is endorsed by both the subcontractor and general contractor. Assuming the general contractor agrees that the subcontractor should be paid, a general contractor who receives a joint cheque should endorse the back of the cheque and give it to the subcontractor. The subcontractor can then endorse the cheque and deposit it in the subcontractor's bank account.
Ted Dreyer is a construction and insurance lawyer at Madorin, Snyder LLP. Madorin, Snyder LLP is a full service law firm serving Kitchener, Waterloo, Cambridge, Guelph and the surrounding area.
The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.
On June 23, 2012, a steel beam at the Algo Mall in Elliot Lake, Ontario, gave way. Tonnes of concrete, steel and glass fell into the Mall below. Two people were killed and 19 others were injured. The collapse of the Algo Mall set in motion a process that is leading towards amendments to the Building Code Act.
Six days after the collapse, Premier McGinty announced a government inquiry. Justice Paul R. Belanger released his report on October 14, 2014. In his report, Justice Belanger recommended the government enact mandatory province wide minimum maintenance standards for "large mercantile" buildings in Ontario. Furthermore, he recommended that all such buildings be inspected by properly qualified structural engineers whenever the building is sold and, at a minimum, "at a frequency that is commensurate with the risk of harm from a failure to meet the standard". Although Mr. Belanger recommended these standards apply to all buildings with "mercantile occupancies", as defined in the Building Code, he urged the government to extend the minimum standards to all publically accessible buildings and multi-residential occupancies. Mr. Belanger wrote the following:
"The Building Code provides that buildings exceeding 600 square metres or three storeys in height used for major occupancies classified as mercantile occupancy must comply with Division B of Part 4 of the Code, which sets out structural design requirements common to a wide variety of large structures in Ontario.
Since the Algo Mall would come within this definition, which is already recognized by the law of Ontario relating to standards designed to ensure safe construction of buildings, it is appropriate that I draft my recommendations to apply to all such buildings. … I believe, however, that these recommendations ought to apply to all publically accessible buildings in Ontario, including workplaces and multi-unit residential condominium and tenant-occupied buildings."
Therefore, Justice Belanger recommended that the province enact standards for the maintenance and inspection of all publically accessible and multi-residential buildings in Ontario.
The day the Belanger Report was released, the provincial government announced the appointment of the Building Safety and Technical Advisory Panel (the "BSTAP") to make further recommendations regarding the screening and inspection of buildings. The BSTAP released its report on January 27, 2016. The BSTAP recommended that buildings with rooftop parking structures constructed before 1988 be subject to a Risk Screening Evaluation within 3 years. Furthermore, it recommended that a Risk Screening Evaluation be performed on all other buildings constructed before 1976 within 6 years and all other buildings within 10 years.
On November 14, 2017, the provincial government issued a consultation paper regarding proposed amendments to the Building Code Act arising out of the recommendations of Justice Belanger and the BSTAP. The paper describes a Building Condition Evaluation that will apply to "prescribed structures". Significantly, the class of "prescribed structures" that will require Building Condition Evaluation is limited to buildings with rooftop parking structures. The consultation paper describes the buildings to which the new legislation will apply:
All buildings, regardless of the date of construction, that contain parking on the roof or part of the roof of the structure and that also have levels beneath the parking occupied with non-parking uses. This would include retail/commercial uses (e.g., shopping malls), industrial and residential uses, and also parking structures with car rental kiosks or car wash/auto detailing stands.
So, whereas Justice Belanger and the BSTAP recommended a process of risk evaluation that applies to all major occupancies, the proposed changes to the Building Code Act only apply to the buildings with rooftop parking.
Presumably, the underlying premise of the proposed amendments is that Justice Belanger and the BSTAP overreached in their recommendations. An important link in the chain of events that led to the collapse of the Algo Mall was that the water that leaked through the roof of the Algo Mall was full of dissolved salts that had been spread on the rooftop parking structure and which accelerated the corrosion of the steel structure that eventually collapsed. It is not apparent to a layman that the risk factors that led to the collapse of the Algo Mall are present in all other building types. The risk that other types of buildings may collapse may not justify the cost of periodic risk evaluation.
The consultation period regarding the proposed changes to the Building Code Act ends on January 4, 2018. If you have any comments on the proposed changes you can send them to the Minister of Municipal Affairs at buildingcodeconsultation@ontario.ca
Ted Dreyer is a construction and insurance lawyer at Madorin, Snyder LLP. Madorin, Snyder LLP is a full service law firm serving Kitchener, Waterloo, Cambridge, Guelph and the surrounding area.
The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.
Do you need to obtain a WSIB Clearance Certificate from your construction contractor? The short answer is "yes" unless the contractor is performing "exempt home renovation work."
Section 141.1 of the Ontario Workplace Safety and Insurance Act, 1997 requires anyone who hires a contractor to perform construction work to ensure that the contactor has registered with the WSIB and paid its premiums. An owner who obtains a WSIB Clearance Certificate has complied with its obligations pursuant to section 141.1 of the Act. A "Clearance Certificate" is issued free of charge to owners, contractors, and subcontractors by the Workplace Safety Insurance Board (the "WSIB"). The Clearance Certificate shows that the contractor or subcontractor is in good standing with the WSIB. An owner who fails to obtain a Clearance Certificate may be liable for the contractor's payment obligations to the WSIB, including outstanding WSIB premiums.
However, contractors performing "exempt home renovation work" are exempt from section 141.1 of the Act. An owner for whom a contractor is performing "exempt home renovation work" does not need to obtain a Clearance Certificate and has no potential liability for the contractor's payment obligations to the WSIB.
The definition of "exempt home renovation work" is set out at section 12.2 (10) of the Act as follows:
“exempt home renovation work” means construction work that is performed,
by an independent operator, a sole proprietor, a partner in a partnership or an executive officer of a corporation, and
on an existing private residence that is occupied or to be occupied by the person who directly retains the independent operator, sole proprietor, partnership or corporation, or by a member of the person’s family;
“member of the person’s family” means,
the person’s spouse,
the person’s child or grandchild,
the person’s parent, grandparent, father-in-law or mother-in-law,
the person’s sibling, or
anyone whose relationship to the person is a “step” relationship corresponding to one mentioned in clause (b), (c) or (d); (“membre de sa famille”)
“private residence” includes,
a private residence that is used seasonally or for recreational purposes, and
structures that are,
(i)normally incidental or subordinate to the private residence,
(ii)situated on the same site, and
(iii)used exclusively for non-commercial purposes.
The bottom line is that an owner who hires a contractor to perform construction work should obtain a WSIB Clearance Certificate unless the contractor is performing "exempt home renovation work". If you have questions about what qualifies as "exempt home renovation work" you can contact the Workplace Safety Insurance Board at 1-800-387-0750.
The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.
Policies of home insurance typically include an 'Intentional Act Exclusion' which provides that an insured person may not recover for any loss arising from their own intentional or criminal act. Here is an example of an Intentional Act Exclusion from a home insurance policy:
This Policy does not insure:
(d) loss or damage caused by a criminal or wilful act or omission of the Insured or of any person whose property is insured hereunder;
The Intentional Act Exclusion in a policy of home insurance gives effect to the common sense notion that a person should not recover from their insurer for a loss which they intentionally caused.
The effect of the Intentional Act Exclusion can be controversial where a policy covers multiple insureds. Where a policy of insurance covers multiple insureds, the effect of Intentional Act Exclusion is to prevent all insureds from recovering for a loss intentionally caused by any one insured. On the one hand, this prevents one insured from committing insurance fraud for the benefit of another. On the other hand, denying coverage to all insureds can result in an injustice where one insured is victimized by another.
The 1989 decision of the Supreme Court of Canada in Scott v Wawanesa Mutual Insurance Co illustrates the problem of the 'Innocent Co-Insured'. Mr. and Mrs. Scott took out a policy of home insurance with Wawanesa Mutual Insurance. Their 15 year old son deliberately set fire to their home without their knowledge or complicity. Wawanesa Mutual Insurance denied their claim for compensation. The Supreme Court of Canada agreed that the Scotts were not entitled to compensation. Since the son was an 'insured' for the purpose of the policy, the effect of the Intentional Act Exclusion was to deny coverage to his mother and father for damage caused by the fire that he deliberately set.
On April 26, 2017, the Liberal MPP for Lawrence-Eglington Mike Colle introduced the Bill 125, Innocent Persons Insurance Recovery Act, 2017, in the Ontario Legislature. If it is enacted, Bill 125 will amend Ontario's Insurance Act to add an additional section 118.1. The proposed section 118.1 will allow an Innocent Co-Insured to recover from their insurer to the extent of their interest in the insured property. The proposed section 118.1 provides as follows:
Recovery by innocent persons
118.1 (1) If a contract contains a term or condition excluding coverage for loss or damage to property caused by a criminal or intentional act or omission of an insured or any other person, the exclusion applies only to the claim of a person,
(a) whose act or omission caused the loss or damage;
(b) who abetted or colluded in the act or omission;
(c) who,
(i) consented to the act or omission, and
(ii) knew or ought to have known that the act or omission would cause the loss or damage; or
(d) who is in a prescribed class.
Recovery limited to proportionate interest
(2) Nothing in subsection (1) allows a person whose property is insured under the contract to recover more than the person's proportionate interest in the lost or damaged property.
If Bill 125 was the law at the time that Mr. and Mrs. Scott lost their home, then they would have recovered from their insurer for the losses caused by their son.
It remains to be seen whether Bill 125 will be enacted as law in Onario. However, the Liberal government has indicated that it will support Bill 125.
The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.
An estimate may give rise to a fixed price contract, which is binding upon a contractor subject to variations in the contract price. But the case of 413784 Ontario Inc. v. Adams[1] illustrates that an estimate may also have a limiting effect on the amount charged by a contractor where the contract price is either time and material or cost plus.
In 413784 Ontario Inc. v. Adams a contractor gave the owner of a vacant lot an estimate of $57,000 to build a custom house. Relying on the estimate, the owner entered into a contract with the contractor to build a custom home for cost plus 10% for overhead and 5% profit. Things did not go as planned. The contractor billed the owner $89,000 before the house was completed. The owner realized that he could not afford to complete the home. He sold the home and took a loss of $68,000. The contractor brought a claim against the owner for a further $11,500. The court found that the actual price for the construction of a custom home should not exceed an estimate by more than 10 or 20 per cent. The Court wrote:
17. I consider that the difference between the estimated cost and the actual cost to finish the house is far too much and the Defendants are entitled to expect that the house would have been built for something within reasonable range of the estimated cost and certainly no more than 10% or 20%.
The Court concluded that the estimate given by the contractor to the owner was negligent because the actual cost of construction exceeded the estimate by 100%. The Court dismissed the contractor’s claim against the owner.
The outcome in 413784 Ontario Inc. v. Adams may have been different if the owner had asked the contractor to perform expensive extras, if the contractor was confronted with unforeseen site conditions, if the owner was more sophisticated, if the estimate was qualified, or if the type of work involved was more difficult to estimate accurately. Nevertheless, 413784 Ontario Inc. v. Adams illustrates that a contractor needs to exercise care if it gives an estimate even if it does not intend to commit to a fixed price.
Ted Dreyer is a construction and insurance lawyer at Madorin, Snyder LLP. Madorin, Snyder LLP is a full service law firm serving Kitchener, Waterloo, Cambridge, Guelph and the surrounding area. Please visit our construction law page.
[1] 413784 Ontario Inc. v. Adams, 1983 CarswellOnt 2939
