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Bogus Claims

Posted on November 1, 2021 | Posted in Construction

By the title, you might think that we will be referring to claims that contractors make. Actually, we are discussing claims that an owner makes in order to justify non-payment to a contractor. A good example of this manner of defence, in which the defendant throws everything against the wall to see what may stick, is set out in Feltz Design Build Ltd. v. Larson, a 2021 decision of the Ontario Superior Court of Justice.

A dart thrown at a dart board.

Contracts

The owner retained a construction manager to redevelop its premises. The reasons for decision referred to “a CCDC Construction Management Contract for Services and Construction.” Given some of the discussion in the reasons, we assume that this is a CCDC 5B. A CCDC 5B results in the owner paying the construction manager (i) for the subcontractors and specified general conditions at cost; and (ii) a fee, which can be a percentage of the cost or a fixed amount. The construction manager enters into all of the contracts with the subcontractors and pays them from the money that the owner is paying to the construction manager.

By contrast, CCDC 5A is a pure construction management contract. The construction manager is the owner’s agent. The owner enters into all of the contracts with the trades. The owner pays the trades and pays the construction manager for its services, again by way of a fixed fee or a percentage of the cost of construction.

Consultant

CCDC 5B refers to a consultant who might be inspecting the work performed and theĀ  progress of the work and who would certify payments to be made to the construction manager.

The contract in this case, referred to a consultant, but, for whatever reason, the owner did not actually retain the consultant to certify payments, until just before substantial performance of the project.

The consultant acted in an independent and impartial manner – contrary, in many cases, to a biased consultant who is supposed to be impartial, but, in effect, is merely an agent of the owner. The consultant certified the last progress payment and, in October 2019, certified substantial performance itself. The owner did not pay the amounts certified and the construction manager claimed $530,764 from the owner and its principal.

Why Not Pay

The owner made a number of claims to justify its non-payment. Those claims, and the findings relating to them, are set out below:

1. After the parties executed the CCDC 5B contract, the construction manager provided a document entitled “estimate,” but the actual cost of the project was more than the estimate.

  • The judge noted that the contract referenced the hourly rates of the construction manager’s employees, something that would be completely unnecessary if a fixed price had been contemplated. Estimates are just that, estimates that can ultimately be higher or lower than the actual cost. The judge held that an estimate is not a fixed price; it is not a quotation; and it did not purport to amend the actual contract that the parties signed.

2. The construction manager delayed the completion of the project.

  • The contract merely stated that the anticipated completion was June 2019. This was not a definitive hard date for completion. The consultant noted that “The work was extensive and took some time and expense to complete. The work was required, and as a result, it caused some delay to the Project schedule.” This evidence is not nearly sufficient to prove a compensable delay. Worse yet, the consultant noted that it had an architectural technologist regularly on site and this person, according to the consultant, “had no issues with how the Project was progressing.” Not surprisingly, the judge held that there was no genuine issue requiring a trial regarding this claim.

3. The work was inferior.

  • Again, the consultant’s testimony scuttled that claim. He stated that, in signing his certificates, he certified that monies were due and payable to the construction manager in accordance with the contract and that, although there were minor deficiencies, the majority of the project was completed to a good construction standard. The judge noted that minor deficiencies did not excuse the owner from its contractual obligation to pay just as a payment certificate did not excuse the construction manager from its obligation to attend to complete remedial work. We are not sure what the alleged deficiencies were or what was done to complete them. We do note, however, that it is not unusual to properly value the deficiencies and deduct that value from payment until the deficiencies are rectified.

4. The owner’s bankers had expressed concern during the progress of construction with the work that was performed and, ultimately, the certificates that the consultant issued.

  • Aside from the fact that a banker’s “concern” is utterly irrelevant to the owner’s payment obligations, the judge noted that, during cross-examination of the owner’s principal, it became clear that no third party financier had said any such thing. It never helps an owner, indeed any party, to be caught in a lie.

After dealing with all of the seemingly spurious defences, the judge granted judgment against the owner for breach of contract in the amount claimed.

Owner’s Breach of Trust

The construction manager alleged that both the owner and its principal breached the trust provisions of the Construction Act. Under sections 7(2) and (3), the owner becomes liable to hold trust money certified under a contract, either for progress payments or due to substantial performance, if the money is then in the owner’s hands or the owner receives it at any time after certification.

Financing that an owner subsequently receives would be obvious after-acquired money and that money would be subject to a trust. In this case, however, the owner testified that it was financing the project through its own cash flow. It owned other commercial and residential properties and participated in partnerships owning other businesses also.

It was clear that there was money. What was not clear was how much money. During the evidentiary process, the owner declined to provide information about the revenue attributable to the project or the other parts of its business operations. The owner went so far as to refuse information about the profit earned on the sale of one of its properties.

The judge noted that once a lien claimant establishes the existence of a trust, the onus shifts to the owner to show how the trust funds were used. In this case, the owner failed to take that legal principle into consideration and declined the opportunity to provide an explanation, if there was one. The judge, therefore, concluded that the owner had received funds that were impressed with the trust for the benefit of the construction manager and failed to account for and remit them. The owner was therefore liable for breach of trust.

Principal’s Breach of Trust

The principal admitted that he was an officer and director of the owner and that he owned and operated the owner. The judge, therefore, concluded that he had effective control over the owner. He was involved in the owner’s extensive business operations and knew or ought to have known that, after the consultant issued certificates, money that the owner received, from whatever source, were impressed with the trust. He breached his duties and was personally liable.

 

Image courtesy of 15299.

Jonathan Speigel

 

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

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