Legal Blog

Pass Through

An owner delays a general, the parties cannot resolve the dispute, and the general sues for damages. Can the general claim, as part of its damages, the damages that its subs incurred? That question was answered in Ledcor Construction Ltd. v.  Canada, a 2012 decision of the Ontario Superior Court of Justice, but the answer will need higher authority to persuade us to change our thinking.

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The project was delayed for 14 months. The general claimed damages for delay and included, as part of its damages, the damages three subs claimed they also incurred. Two of the three subs commenced their own actions against the general for delay damages. The general wanted to consolidate the two actions with its own. Not to be outdone, the owner brought a motion for summary judgment seeking to dismiss that portion of the general’s action that incorporated the subs’ claims for damages. The owner argued that, because it had no contract with the subs, it owed no duty of care to the subs. It also claimed the general had incurred no damages relating to the subs.

 

Contracts

 

In cases like these, the contracts are crucial.

 

The prime contract contained the following provisions:

1.         The contractor may subcontract the work.

2.         All conditions of the prime contract of general application shall be incorporated into the subcontracts.

3.         The contractor may claim for expense it incurs arising from the neglect or delay of the owner.

4.         The actual costs of the contractor will include payments to subcontractors.

 

The first two provisions are found in almost all prime contracts. As to the last two provisions, prime contracts often deal with delay claims (e.g. liquidated damages) against generals, but do not always cover delay claims that the generals may make.

The subcontracts all contained provisions that mirrored the prime contract, but also contained a provision that the general would pay a sub only when the general received a corresponding payment from the owner. Further, they contained a provision by which the sub would be limited to the amount that the general received from the owner for the sub’s delay costs. None of these provisions is unusual; indeed, any sophisticated subcontract will contain some version of them.

 

Analysis

The judge relied heavily on another case, decided by a Construction Lien Master and also involving Ledcor, that dealt with the same issues. That decision noted the following:

“A construction contract must be interpreted in accordance with its specific terms as informed by the statutory regimes and the realities of the construction industry. An owner engaging a general contractor on a fixed price contract is subject to the holdback and trust provisions of the Construction Lien Act but otherwise expects to be insulated from contractual or other liability to subtrades. The relationship with the subtrades is between the general contractor and those trades and it is the responsibility of the G.C. to manage the subcontracts within the envelope of the fixed price contract. Conversely all claims for additional costs or compensation because of delay or any other change to the scope of the job must be funnelled through the general contractor. Indeed, attempts by subcontractors to advance claims directly against owners have generally been resisted by the courts on favour of the scheme of relatively strict privity of contract contemplated by the Act and by contracts such as the CCDC2 … In my view the interpretation of the contract and of the impact of the law of limitations which the defendant advocates on this motion would be an interpretation that fosters disputes, litigation and lien claims by subtrades. Subtrades would be required to initiate legal proceedings against a general contractor even if the G.C. is in fact complying with its obligation to attempt to recover those additional costs on behalf of the subtrades.”

The judge agreed with that statement – and so do we. The judge therefore held that the lack of a contractual relationship was no bar to the general suing the owner on behalf of the subs. The judge also found no problem with the general denying liability to the subs and still arguing that the liability rested with the owner. After all, the claims of the subs were to be funnelled through the general.

 

Problems

Regardless of this decision, we would never advise a subcontractor to allow a limitation period to slip by without commencing an action against the general. Also, the concept of funnelling through the general is effective if it leads to a full trial dealing with all of the issues. However, how often is there a full trial for a constructions dispute? What happens when the general settles with the owner? Usually the settlement amount is a lump sum amount, including interest, HST, and costs, and, usually, the owner and general do not know what was allocated, if anything, to the various claims, including the sub’s claim? The sub certainly does not know. If the sub has not brought its own action, how can the sub enforce its claims? Too many questions; not enough answers.