Legal Blog

Irony

Only in a construction scenario can a cause of action arise in 2000 and still be kicking up litigation battles in 2018: see HOOPP Realty Inc. v Guarantee Company of North America, 2018 Alta Q.B. We have already discussed (see September 2014 newsletter) a sister action in A.G. Clark Holdings Ltd. v. HOOP Realty Inc., a 2013 decision of the Alberta Court of Appeal.

History

And we do mean history.

HOOPP, the owner, retained Clark, the general, to build a warehouse. GCNA, the surety, provided a CCDC performance bond. The project was substantially completed in March 2000. Unfortunately, problems arose and, in 2002, the owner commenced two actions: the first against the general for damages arising out of construction deficiencies and the second against the surety on the bond.

The parties ultimately agreed that the general would replace the warehouse floor and the general did so. However, other damages were in issue and, after the general replaced the floor, the owner pushed on with its damages action. We assume that the bond action remained in limbo pending the results of the damages action.

We do not know how the action progressed from September 2004, when the general agreed to replace the floor, until 2009. We suspect that little was done. However, in 2009 the general applied to strike the owner’s statement of claim. The general argued that its contract with the owner  mandated arbitration, not litigation, to resolve disputes and that, just coincidentally, the limitation period for commencing the arbitration had long since expired, leaving the owner with no remedy at all. The general’s gambit was successful and the owner’s damages action was struck.

For the general, all’s well that ends well. Or is it?

Bond

Remember the bond action? It did not magically disappear, much to the surety’s dismay. The owner was precluded from claiming its damages against the general, but was it precluded from doing so against the surety under the performance bond? In 2015, the surety applied to have the owner’s statement of claim in the bond action struck out. This was, in effect, a pleadings motion. The motion judge held, using the correct test for this type of motion, that it was not “plain and obvious” that the owner had no cause of action. The judge therefore allowed the action to proceed. The parties then moved on to a summary trial, from which the decision being discussed arose.

Limitation

The surety’s main argument was relatively straight forward: the owner’s claim against the general had been dismissed and, since the surety could be no more liable to the owner than was the general, whose work the surety was guaranteeing, the owner had no claim against the surety. This was referred to as the spillover effect.

Did the Alberta Limitations Act, which, for purposes of this issue, had the same effect as the current Ontario Limitations Act, deprive the owner of its right to claim against the surety? The judge’s answer was no. The Act did not operate to extinguish a claim; rather, it operated to bar a party from enforcing (i.e. suing on) the claim, while allowing the claim and the debt to continue to exist. For example, although a party may be barred from commencing an action to enforce its claim for damages or debt, it still has a right, under some circumstances, to advance a claim if the debtor is assigned into bankruptcy. It can also use the claim as a setoff defence.

The judge acknowledged that the damages action and the bond action may have been started at the same time, were triggered by the same default, and had the same quantum of damages, but they were still two separate claims. Nothing in the bond required the owner to pursue a claim against the general first. Indeed, nothing in the bond required the owner to pursue a claim against the general at all.

Accordingly, since the owner’s claim against the general had not been extinguished, just proscribed from suit, the surety could not claim that the dismissal of the owner’s action deprived the owner of its right to claim under the bond. The surety submitted that it had the right to take advantage of every defence available to the general, but the judge held that surety law did not go that far. The judge explained that:

“An unenforceability defence does not spill over to the guarantor, because it does not affect the liability for which the guarantor has answer. The guarantor was exposed when the principal debtor defaulted, incurring liability to the creditor. The guarantor obtains no benefit when the debtor leaves the stage, because the liability remains.”

Express

The judge also reviewed the express provisions of the bond. The bond contained its own time limitation defences, such as timely notice and the requirement to commence an action within a specified time. However, none of the defences applied because, we assume, the owner complied with the conditions in the bond (i.e. it gave appropriate notice of its claim and commenced the bond action on a timely basis).

The judge noted that the bond contained no provision tying in, as a condition of the bond, the limitation defence available to the general. In essence, the bond could have contained its own spillover provision; but it did not. The judge declined to read one in.

The End

Maybe, but probably not. Here is where the parties find themselves:

• two actions
• damages action dismissed, appeal to Alberta Court of Appeal dismissed, leave to appeal to Supreme Court of Canada dismissed
• bond action survives main attack that relied on the spillover defence, but other defences remain and trial is not yet concluded

From we can see, this “summary trial application” dealt with the spillover effect and some other defences that the surety raised, but did not deal with all of them, which are to be left for another day. Given the history of this action, an appeal of this decision is also quite likely.

Irony (again)

Why do we reference irony? The general brought its dismissal application based on technical requirements and contract interpretation, was successful on the application and through two appeals, and, we assume, thought it was home free. But it is not. If the owner is successful against the surety, the surety will immediately move against the general, relying on the contract between the general and the surety.

Sureties are not the insurer of a principal (i.e. the general); they merely provide assurance to the obligee (i.e. the owner) that the principal will honour its construction contract obligations. A surety contract is onerous and allows a surety significant rights against the principal and, usually, contains personal guarantees from directors and officers of the principal. We often reference the contract requirements as the equivalent of giving up one’s first born child.

The general won the battle, but may well lose the war.

 

Image courtesy of SimonClark85.

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