Legal Blog

Fair Wage Appeal

The City of Toronto has what it refers to as its fair wage policy. Presumably, the City feels that construction wages set on the open market might not be fair. We will not comment on the City’s social engineering. However, this artificial policy has created some problems, as evidenced in Safinco Mechanical Ltd. v. Toronto District Public School Board, a 2002 decision of the Ontario Superior Court of Justice.

Whoops 

A mechanical sub was the low tender at $2.26 million. It left $300,000 on the table. It then realised that it did not factor in the rates of pay contemplated under the fair wage policy. It attempted to withdraw its tender but the general, which had carried its bid, did not want to take a $300,000 bath and refused the withdrawal. There was some noise at the trial from the sub that the general had agreed to make up the shortfall to the sub but the judge did not take it seriously.

Approximately $1 million into the contract, the general paid a progress draw of $89,000 to the sub. One day later, the City notified the general that the sub was breaching the fair wage policy and that the City would be withholding $40,000 on the next payment date.

The general stopped payment on the $89,000 cheque. The sub had paid its suppliers based on that cheque and, of course, it had some problems. The sub demanded that the cheque be replaced.

The general complained that the sub had insufficient labour on the job, was not paying its suppliers, and was running afoul of the fair wage policy. The general notified the sub that the general would not make any further progress payments unless the sub supplied the general with a letter of credit or a labour and material payment bond.

The sub walked off the job, registered a lien, and claimed approximately $455,000 for unpaid work. The general alleged that the sub had only done approximately $300,000 worth of unpaid work and, in addition, because the general had to complete the job with other forces, the general claimed that the cost to complete had exceeded the subcontract price by $321,000.

Who’s wrong 

The outcome of this type of dispute depends almost entirely on whether the sub was justified in withdrawing its forces. As usual, that depended on whether any money was owed to it at the withdrawal date. If the sub was justified, it should receive the value of the work completed to the date that it left the project plus, if claimed, its lost profit on the portion of work that it did not get to complete. If the sub’s withdrawal was not justified, then the general should receive the amount that it actually paid to the sub and for the replacement forces less what it was supposed to have paid to the sub.

The judge held that there was no evidence that the sub was behind schedule or, before the general stopped payment on its cheque, that the sub had any problem in paying its suppliers. As to the fair wage policy, the judge emphasised that the City had notified the general of a reduction of $40,000 from the next progress draw. Why, the judge queried, would this give the general the right to withhold payment from the past progress draw? Further, why would the general withhold $89,000 instead of only $40,000?

Since non-payment of contract monies entitles a sub to terminate the contract, the judge awarded the sub $455,000 for completed work and dismissed the general’s counterclaim in its entirety.

Mistake 

The general overreacted. It took a completely unreasonable position. It had no right to insist on a labour and material payment bond; it had no right to terminate progress payments. By allowing the sub to terminate the contract, it allowed the sub to avoid the adverse consequences of a tender price that was clearly too low due to the sub’s mistake. The general’s unreasonable position cost it a lot of money, probably around $500,000.