
Legal Blog
Allocate #2
In our May 2010 newsletter, we dealt with the rule that a debtor chooses how it wishes to allocate its payment when paying multiple invoices and a creditor chooses when the debtor fails to do so: Colautti Construction Ltd. v. Ashcroft Development Inc.
Recap
The owner had issued many cheques to the general that it allocated to specified invoices. However, it did not allocate its last cheques to any one invoice or project. The general actually contacted the owner to request the invoice allocation, but the owner did not respond. Accordingly, the general applied the cheques to the oldest debts. In doing so, the general applied $394,000 to invoices other than the seven on which the general was suing.
The trial judge stated that once the general requested the allocation and the owner ignored the request, the general was free to allocate the cheques as it wished. Accordingly, whatever was due on the seven disputed invoices was not reduced by the aggregate of the cheques.
The owner appealed and the Ontario Court of Appeal dealt with the matter in a 2011 decision.
Rule
Although the trial judge had not relied on any case law regarding the rules of allocation – an aspect of the decision that we found unfortunate because case law had existed for many years – the Court of Appeal had no such problem. It stated,
Common law principles of debtor/creditor law hold that a debtor may generally “appropriate” a payment in the manner it pleases and the creditor must apply it accordingly. In Waisman, Ross & Associates v. Crown Trust Co., [1970] S.C.R. 553 (S.C.C.), at p. 560, the Supreme Court of Canada adopted the following statement of Lord Macnaghten in Cory Brothers & Co. v. “Mecca” (The), [1897] A.C. 286 (Eng. H.L.), at p. 293:
When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor.
Accordingly, in the normal course, a creditor need not make any enquiries from a debtor; if the debtor does not allocate, the creditor can. However, not so for a trust claim. In that case, the “general rule regarding the allocation of trust monies imposes a requirement on the contractor to make appropriate inquiries as to the source of the funds and, if possible, allocate the payment in question to the project linked to those funds.”
In the Colautti case, the general did make enquiries of the owner, who refused or neglected to answer. Accordingly, the Court concluded, “In these circumstances, having fulfilled its obligation to make reasonable inquiries as to the source and intended allocations of the Advances, the Contractor had the right under long-established principles of debtor/creditor law to appropriate the Advances itself. This principle was recognized more than a century ago…”
Limitations
In our previous newsletter, we stated, “We do not understand why the owner was fighting the action on this issue. The other invoices, not part of the seven in issue, were for work done on the same two projects. If the general did not apply the cheques to the other invoices and had to apply them to the seven invoices, then the general would have included the other invoices as part of its breach of trust action.”
We now have our answer. If the general had not been allowed to allocate the payments as it did, it would have been too late to allocate them differently and sue on the invoices to which they were initially allocated; the limitation period had elapsed.
The owner also argued that the general ought not to have been able to allocate the payments to the old invoices, as they did, because the Limitations Act proscribed the contractor’s ability to sue for payment of the old invoices.
The court made short shrift of the alternative argument. It noted that the Act terminates the remedy (i.e. the ability to sue); it does not terminate the debt. The creditor was able to allocate the payment to a statute-barred debt.
The Court dismissed the owner’s appeal.
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NOTICE
Construction contracts that have even a touch of sophistication invariably contain provisions requiring a contractor (general, sub, subsub) to give notice of any claims. The time in which notice must be given and the degree of detail to be contained in that notice vary from contract to contract, but, without the requisite notice, the claim is gone. The general in Technicore Underground Inc. v. City of Toronto, a 2011 decision of the Ontario Superior Court of Justice, learned this lesson the hard way.
Parties
A tunnelling sub brought an action against the City after its tunnel-boring machine was damaged on site because of a burst watermain. The City brought a third party action against the general, claiming that the general was at fault. The general counterclaimed against the City for claims that it had against the City arising out of the work it did on the project.
The City brought a summary judgment motion to dismiss the general’s counterclaim on grounds that there was no genuine issue for trial.
Contract
The prime contract had clauses requiring the general to give 7 days’ notice after an event that might give rise to a claim and requiring the general to give a detailed claim as soon as reasonably possible and at least within 30 days after completion of the affected work.
The general made its first formal claim on March 6, 2007; however, it did not make its second claim, the one in issue, until August 2010. It was clear that the general’s second claim related to matters known at the time of the first claim.
The general argued that its second claim was encompassed in the first claim and that it was merely adding more details. However, it was apparent that the second claim had stand-alone issues that the first claim did not include.
The general also argued that the notice provisions were ambiguous because they never stated what would happen if the general did not give the notice. Unfortunately for the general, many cases have stipulated that if proper notice is not given, a claims dies. The courts have articulated that the notice provisions are inserted so that the paying party has time to investigate the problem and protect its interests. No notice and the paying party is prejudiced.
The judge granted the motion and dismissed the general’s counterclaim.
Problem
Notice periods can be short. It is easy enough to give notice of a problem. It is sometimes very difficult to give a detailed claim because the actual damages may not be known until a later date. We can only suggest that the claimant do the best it can, but stipulate that it makes the claim without prejudice to its rights to amend the claim when full circumstances are known.