A Forest of Fees and Rights and Principle Trees – A sad but common tale of small money construction litigation outstripping its own value

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There’s nothing particularly new or ground-breaking about the recent Ontario Superior Court Decision in Sierra Excavating v. Olszewski and TD Bank, 2012 ONSC 2271 (CanLII) but it is an interesting little case that highlights the importance of seeing the forest for the trees early in the litigation process.  What forest? The legal costs. What trees? The legal principles at play and the parties’ perceived rights.

The facts are a bit lengthy but not complicated and are, in summary form, as follows:

  • As a result of water intrusion into their basement, the owners of a single family house in Caledon, Ontario hired an excavation contractor to excavate around portions of the foundation of their home and carry out some work to waterproof the foundation and stop the leaks.
  • The contract price was $19,576.13.
  • The contractor carried out the work but leaks persisted.
  • A couple of subsequent attempts by the contractor to repair the leaks failed, the owners refused to pay, and the contractor registered a construction lien and sued for the $14,576.23 claimed to be owing under the contract.
  • The owners had another contractor remove and re-do the work (successfully – the leaks were fixed) and the owners counterclaimed for $40,000 for the higher cost of the second repair.
  • The Judge found largely in favour of the owners, ruling that the contractor had not done what it was hired to do and so was not entitled to a lien (or further payment) and would have to pay the owners $21,466.20 in damages for their cost to have the work re-done and done properly.

What I find important enough about this case to write this little blurb has almost nothing to do with the facts or the Judge’s decision – it has to do with highlighting how easy it can be for litigants to end up in a four-ish year legal battle (capped off with a three-ish day trial) that must have cost tens-ish of thousands of dollars in litigation costs (lawyers and experts) over what was never realistically more than a $20,000-ish fight, regardless of which side won or lost.  That is not, in my opinion, a happy outcome, even for the “victorious” owners.  At the end of the day, I would imagine that most, if not all, of what the owners were awarded will probably be gone in litigation costs and, between paying the Judgment, its own lawyer and expert, and some amount of the owners’ legal costs, the contractor is probably out somewhere north of $40,000 (on a $14,000 claim!).  Would either side have predicted its financial outcome in 2008 when the lawsuit was commenced?  I don’t know for sure but I doubt it.

This case, and countless others like it, exemplifies the need for both prospective Plaintiffs and Defendants in construction litigation to think very hard before they “dig in” for a long fight over what is, in the context of litigation, not a lot of money.  Some people and companies are rich enough to have the privilege of throwing economics out the window in favour of principle – most, however, are not.

From a lawyer’s perspective, this case bolds, underlines, and then highlights the need to have very frank and very clear discussions with our clients about the potential course and costs of litigation – particularly when there are relatively small amounts of money is dispute – so that our clients can make informed decisions about how they want to proceed and how aggressive they want to be in trying to settle their disputes.  Sometimes “small money” litigation will still go the long, expensive distance but at least the end result will then be no surprise to our clients.

On a closing note: I am not being in any way critical of the parties’ lawyers in this case – I don’t know either of them and obviously have no idea about how the litigation proceeded, whether there were attempts at settlement, or as to the overall dynamics of the litigation over its four year course.  To the contrary, my point is that the economics of virtually any “small money” construction litigation has the potential to get away from the parties over time and this case is just yet another example of this all too common problem.

New “Process Enhanced” Performance Bond coming soon. Should owners put on their party hats and break out the Champagne?

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Probably not but time will tell.

In December 2011, the Surety Association of Canada (the “SAC”) approved a new form of performance bond that has several new provisions. In its press notice, the SAC says that the objectives of the changed language of the performance bond are:

  1. To bring a greater level of certainty and responsiveness to the claims process; and
  2. To encourage better and more frequent communication between the Surety and the owner (the “Obligee”) in the event of a contractor (the “Principal”) default.

These are, of course, laudable objectives and, to these ends, the new form includes:

  • The availability (at the Obligee’s option) of a “Pre-Demand Conference” to be held between the Obligee, the Principal, and the Surety prior to a Demand being made on the bond;
  • Some requirements regarding the Surety’s time to investigate and respond to a Demand made by the Obligee;
  • Some tightly prescribed rights of the Obligee to take limited steps to protect public safety and preserve and protect the Principal’s work under the contract from deterioration and damage;
  • A Post-Demand Conference to be held between the Obligee, the Principal, and the Surety to discuss what work (if any) under the contract should proceed while the Surety carries out its investigations; and
  • Clearer contact information for any Demand, notice, and other communications between parties to the bond.

Unfortunately, I’m rather underwhelmed by the new language. I can see the potential for modestly better communication through the claims process; however, I can also see the potential for very little practical change and benefit to the Obligee. For example, the new language requires the Surety to investigate and report its position on liability to the Obligee within 21 days of receiving all information from the Obligee and carrying out a site visit (should it decide to do one) following a Demand being made on the bond. However, the new language doesn’t impose a time limit for the Surety’s site visit to trigger the 21 day period and it goes on to say that if the Surety can’t complete its investigation and report its position on liability to the Obligee within 21 days – it can simply write to the Obligee and tell it that it needs more time (and say when it expects to be able to complete its investigation and report). So, the 21 day investigation and reporting requirement sounds OK until one considers that there is no set time within which the Surety must complete its site visit to trigger the commencement of the 21 days and, further, the Surety can, in any case, unilaterally extend the 21 days by simply writing the Obligee a letter stating as much. One can easily imagine this so-called “21 day” period commonly (and without consequence) turning into several months.

It will take some time after the new wording is put into use before its practical benefit (or lack thereof) to Obligees becomes apparent. However, based on my own past experiences representing clients that have made Demand on a performance bond, coupled with the soft language and lack of stated consequence to the Surety, I have my doubts that the new form will translate into a significantly better experience and outcome for Obligees.

Maybe throw the Champagne in the fridge but keep the cork in and the party hats can probably be left in the closet for the time being.

“I said ¾ of an inch. Look – it’s right there in the contract”

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D’Urzo Demolition Inc. v. Damaris Developments Inc., 2012 ONSC 1912 (CanLII), released by the Ontario Superior Court of Justice on March 26, 2012, serves as a good reminder to owners and contractors of the importance of ensuring a mutual understanding of the specifications and other requirements of the work and then properly incorporating those documents and requirements into the construction contract.  For litigation lawyers, it also serves as a good reminder of the importance of ensuring that adequate and flexible evidence of damages (whether Plaintiff’s damages or a Defendant’s claim for set-off) is obtained and brought to trial.

Basic Facts

In a nutshell, D’Urzo Demolition Inc. (“D’Urzo”) was the successful bidder to demolish structures on a property in Toronto and then mechanically reduce the rubble into smaller crush.  The owner, Damaris Developments Inc. (“Damaris”), took the position that the contract required D’Urzo to crush the concrete to ¾ inch and to also demolish curbs and asphalt and remove same from the site. D’Urzo took the position that it only had to reduce the rubble to size of 3 inches (and that a smaller crush would constitute an extra) and that demolishing the asphalt and curbs and removing same from the site was not included in the scope of work and, again, constituted an extra.  At the end of the day, D’Urzo was substantially successful at trial – Damaris succeeded only in achieving a finding that the asphalt and curbs had to be demolished – D’Urzo succeeded in convincing the Court that the contract only required a 3 inch crush, that the asphalt should not have been required to be removed from the site and disposed of, and that Damaris was in breach of the contract for failing to pay.

Take Away Notes

Of note for contractors and owners – the work was put out for tender, there were competitive bids, and the parties used a standard form (CCDC2) contract and they still ended up in protracted litigation (the lien was filed in May, 2007 and trial did not conclude until December, 2011 – almost 5 years!) arising from a failure to clearly and properly set out what work was required by the contract.  If you are going to go to the trouble of putting a job out for tender and then use a detailed and established form of contract, spend the time and money to make sure that the specifications and drawings that establish the scope of work are both clear and properly incorporated by the contract.

Of note for lawyers – Damaris claimed $50,400.00 as its back charge to remove and dispose of the asphalt and curbs and provided evidence that this was what it cost.  But Master Albert found at trial that D’Urzo only had to remove the asphalt, not dispose of it.  Because Damaris’ evidence didn’t breakdown the back charge between removal and disposal, Master Albert had only D’Urzo’s evidence that the cost to remove the asphalt was $2,643.75 and he awarded that amount. This outcome highlights the risk of evidence limited to global amounts that aren’t broken down into component parts in case of divided findings at trial.

Two recent Court Decisions affirming that the Ontario New Home Warranty Plan is for the protection of new home buyers

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The courts in Ontario have held, on a number of occasions, that the Ontario New Home Warranties Plan Act (“ONHWPA”) is legislation established to protect and provide additional remedies to buyers of new homes.  These Decisions have normally arisen in the context of disputes between homeowners on one side and their builder and Tarion on the other.  Two interesting Decisions recently came down from the Ontario Court of Appeal that have, albeit in a completely different context, affirmed that the ONHWPA is remedial, consumer protection legislation. The first of these Decisions is Tarion Warranty Corporation v. Boros, 2011 ONCA 374 (CanLII) (leave to appeal to the Supreme Court of Canada refused) and the second is Tarion Warranty Corporation v. Kozy, 2011 ONCA 795 (CanLII).  In both cases, the issue before the Court of Appeal was whether the homebuilders were “builders” under the ONHWPA such that they were caught by the registration (and other) requirements of the legislation.

From a residential builder’s perspective, these cases are primarily of significance because there is now clear and strong authority that the ONHWPA can’t be circumvented or avoided by simply leaving a small portion of construction out of the contract for the buyer to complete.

From a homeowner’s perspective, there are two noteworthy things about these cases:

  1. I believe that this is the first time the Ontario Court of Appeal has so clearly and unequivocally affirmed that the ONHWPA is remedial consumer protection legislation and that it is to be interpreted broadly and liberally as such; and
  2. Under the circumstances of these cases, it appears to have been Tarion, not new homeowners, arguing for this purposive, broad, and liberal interpretation of the ONHWPA.

It will be very interesting to see what the courts do with this purposive, broad, and liberal interpretation of the ONHWPA (and Tarion’s corresponding purpose and obligations) when a good case comes along within which to test and question how Tarion assesses and handles homeowners’ claims regarding deficiencies and “unauthorized substitutions”.  Having read many, many License Appeal Tribunal and court Decisions, I’ve yet to see one that gives a comprehensive and satisfactory treatment on this important aspect of the warranty.

Tarion providing protection to Ontario’s new homebuyers?

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I watched an interesting little piece on CTV’s W5 last night that dealt with several Ontario homeowners’ difficulties surrounding the heating systems installed in their new homes and their frustration in dealing with Tarion.  Click here for a link to the online article on the same piece.

Tarion provides and administers Ontario’s mandatory new home warranty program under the Ontario New Home Warranties Plan Act (“ONHWPA”) and its regulations.   Based on the W5 story and others I’ve seen, Tarion still seems to be really struggling with the concept that the ONHWPA is consumer protection legislation and that, as such, protecting homeowners is Tarion’s primary (if not sole) mandate.  There have been at least a couple of cases decided by the Ontario Courts where the Court has expressly stated that the ONHWPA is consumer protection legislation and yet the piece on W5 is just the most recent of many, many stories and articles in the media telling a very similar story.  The message – even when delivered by the Courts – just doesn’t seem to be getting through.

I’m skeptical by nature and, a few years ago, I might have chalked these media stories about problems with Tarion up to whiny homeowners and/or overzealous reporters. However, as the purchaser of two (consecutive) new homes in the last four years, I’ve had the personal displeasure of tangling with Tarion not once, but twice.  I won’t bore you with the details but I will tell you that, with both houses, I had several substantial and legitimate deficiencies that Tarion deemed “Not Warranted”.  If you’ve ever received a Warranty Assessment Report from Tarion, you will be entirely too familiar with these two words.  I’ve been litigating construction deficiency claims for more than a decade and I have a pretty good sense for what should be covered by a warranty and what probably isn’t.  Tarion knew I was a construction lawyer and I was still treated by Tarion as though I had no idea what I was talking about and would just placidly accept its patently wrong decisions.  It was a real eye-opener and I remember feeling extremely sympathetic to folks that are trying in vain to get help from Tarion and don’t have the skills or resources to take Tarion to task when it determines some of their very legitimate complaints to be “Not Warranted”.

Seeing this W5 story has renewed my interest in trying to help to educate homeowners and I will, in the near future, post some information here that Ontario homeowners dealing with Tarion might find helpful.

“Recent” amendments to the Ontario Construction Lien Act

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In the age of Twitter and electronic media, it’s old news by now (the last of the amendments came into force last summer) but, in the interest of one-stop-shopping, I figured I ought to throw up a brief post summarizing the “recent” amendments to the  Construction Lien Act.

Definition of “improvement”

The definition of  “improvement” at section 1 of the Construction Lien Act has been amended and now expressly includes the installation of industrial, mechanical, electrical or other equipment on the land where the equipment is essential to the normal or intended use of the land.

It will be very interesting (for construction law nerds like myself, anyway) to see how far the courts will go in extending lien rights to installed equipment.  See my other post on this here.

Condominiums

Under this amendment (new section 33.1 of the Construction Lien Act), condominium developers will be required to publish notice of their intention to register the condominium declaration in accordance with the Condominium Act in a construction trade newspaper (the Daily Commercial News) five to fifteen days prior to registration.

This amendment will provide unpaid persons having liens notice of the pending registration of the condominium declaration so that they can preserve their lien rights before the lands and premises are legally divided into separate condominium units and title is transferred to homebuyers.

Prior to the registration of the declaration, the condominium improvement can be liened in the normal manner, even if the work of the person having a lien is to parts of the project which, after registration of the declaration, will be common elements. This amendment will provide an opportunity to avoid the much more expensive and time consuming requirement of liening the common elements of a condominium after the declaration has been registered.

Check out one of my colleague’s comments on this change here.

Affidavit of Verification

Prior to these amendments (to sections 34 and 40(1) of the Construction Lien Act), a claim for lien had to be verified by an Affidavit of Verification which was typically sworn by the lien claimant. In an effort to keep pace (or at least not fall out of sight) with the new(ish) electronic registration system for land titles documents, verifying a claim for lien by Affidavit will no longer be required.

Also, instead of cross-examining the deponent of the Affidavit of Verification, the lien claimant, the agent or assignee of the lien claimant, or a trustee of the workers’ trust fund (as the case may be) will be subject to cross examination.

Sheltered Liens

Under these amendments (to sections 44(9) and 47(2) of the Construction Lien Act), a lien claimant whose lien is sheltered under a certificate of action that has been vacated from title by Court Order will still be able to proceed with an action to enforce its sheltered lien as if the Order to vacate had not been made.

These amendments were introduced to facilitate the vacating of liens by Court Order while, at the same time, protecting the rights of sheltered lien claimants.

Still waiting to see what the Court does with the new definition of “improvement” under the Construction Lien Act?

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In 2010, the Ontario Legislature passed the Open for Business Act, 2010, which included several changes to the Construction Lien Act.  When I learned of the coming amendments, the one that interested me the most was an amendment to the definition of what is an “improvement” under the Construction Lien Act.

In 2007 (and under the former definition), the Ontario Court of Appeal upheld a trial judge’s ruling that the transporter and installer of a 100,000 square-foot, 500,000 ton automotive assembly line (built off-site, disassembled, transported, reassembled on-site, and fastened to the building with 2,000 to 3,000 bolts) did not have lien rights, because the installation of the assembly line did not fall within the old definition of an “improvement” as it was “portable”.  The Court of Appeal refused to interfere with the trial judge’s finding that the assembly line was portable and the appeal was dismissed.  I’m not kidding. (See Kennedy Electric Limited v. Dana Canada Corporation, 2007 ONCA 664 (CanLII) and Kennedy Electric Ltd. v. Rumble Automation Inc., 2004 CanLII 47787 (ON S.C.)).

The construction industry (and more than a lawyer or two) was surprised by the Court’s interpretation and so too, it seems, did the Ontario Legislature disapprove because the definition of “improvement” at section 1 of the Construction Lien Act was amended to now expressly include the installation of industrial, mechanical, electrical or other equipment on the land/building/structure/works where the equipment is essential to the normal or intended use of the land/building/structure/works.

This amendment came into force in October, 2010 and I’ve been keeping an eye on the reported caselaw but have yet to see a decision that gives a meaningful interpretation to the new definition and that tests the boundaries of what sort of “other equipment” might constitute an improvement and what “essential to the normal or intended use” means. At one extreme, the new definition could be interpreted to extend to, for example, dishwashers or water softeners installed in homes. At the other extreme, the Courts might be more conservative and the new definition might be fairly narrowly applied to large scale, purpose built equipment (like the equipment in the Kennedy Electric case).  It’s something to think about.  As soon as I see something on this, I’ll put something up here.

Top 10 (or 11) Suggestions for Homeowners Considering a Renovation or Residential Construction Project

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For most people, long gone are the days where a house is purchased in early adulthood and is lived in, virtually unchanged, for 20, 30, even 40, years.  We are, more and more, a society and culture that encourages “upgrading” and “improvement”.  Many of us will, at some point, hire a contractor to carry out some kind of construction project – whether for a small bathroom renovation all the way up to a large six figure renovation.

There are a lot of fantastic contractors and builders out there that do excellent work and this article is, in no way, a slag on contractors generally.  Unfortunately, when trying to tell the good from the bad, one thing you can count on is that they will all – good ones and bad ones – tell you how skilled, professional, and “detail” and “quality” oriented they are.  However, another thing you can count on is that, when it’s your home and hard earned money is at risk, a two month delay, a 30% or 40% budget overrun, or an un-level floor/poor paint job/etc. (you get the idea), will test your anger management limits.  If the contractor then refuses to acknowledge the problem and stops communicating with you, you’ll quickly see those limits as little dots in your rear-view mirror.

Seasoned and experienced owners or developers undertaking large construction projects or working in new construction usually take steps to get the proper “legalities” taken care of – they negotiate contracts that are either standard form or are drafted by their lawyers, they hire consultants to oversee and review the work as it progresses, they make sure they are complying (more or less) with the Construction Lien Act, and so on. However, on smaller projects and renovations, and for less experienced homeowners, these safeguards and up-front precautions are far too often overlooked and it amazes me how little legal protection and planning many people seek even when there are tens or hundreds of thousands of dollars at stake.

Sometimes a project goes well and the homeowner gets what he or she bargained for without any conflict. These are the happy stories. However, too often, homeowners are getting into costly disputes with their contractors and either get a poor finished product or spend a small fortune in legal fees fighting for what they feel they are entitled to.  Fortunately, while construction can be a risky game for the uninformed and uninitiated, there are some things that homeowners can do to reduce the chances of things going sideways and improve their position if they do.

If you are a homeowner and are considering embarking on a renovation or construction project, the following are a few things you should think about before you sign on the so-called “dotted line”:

  1. Budget some amount of money for legal advice and assistance when you are in the early stages of planning your project.  The amount of your budget will probably depend on the overall cost and nature of the project.  You should consider this as part of the actual construction budget. If things go well (the happy story) and some of this money doesn’t get used,  great!  However, if things begin to capsize (the unhappy story), you’ll be glad to have the funds available to deal with the problem.
  2. Research the contractor(s) you are considering using.  The internet is a great resource for this (Google, chat rooms, the Better Business Bureau, etc) and your lawyer can also carry out searches to investigate whether there has been past litigation involving the contractor. Ask the contractor for two or three references for previous clients and call them (before agreeing to anything) – if people were unhappy, they’ll be eager to tell you about it.  If the contractor can’t (or won’t) give you a reference, run, don’t walk.
  3. Make sure that you have a well drafted contract in place that clearly sets out each party’s rights and obligations. There are many different project delivery methods available (fixed price, cost plus, project management, and so on), each with its own advantages and disadvantages. Regardless of which delivery method you choose, it should be clear as to who does what and when and for how much, and what the consequences will be if things that have been agreed upon do not happen.  Note: “well drafted” does not necessarily mean “long” or “complicated”.  Depending on the type and size of the project, an adequate contract might only be a page or two long.
  4. Consider having a schedule to the contract (unless it is set out right in the body of the contract) that clearly expresses exactly what is (and is not) included in the price. Too frequently, disputes arise because the homeowner thinks she is getting, for example, premium quality paint in an eggshell finish and the contractor plans on using standard builders’ grade flat paint.  If the contract is silent on this, the contractor is going to charge the homeowner more to use the paint that she thought was included.  A contract that sets these sorts of things out in detail can avoid this very, very common problem.
  5. Once you have that well drafted contract in place, follow it!  If a dispute arises, it is more difficult to earn the sympathy of the court if the other party is not the only one that has not abided by the agreed terms.  More than one lawsuit has been lost because both parties completely disregarded the terms of their contract.
  6. Get some advice on your rights and obligations under the Construction Lien Act. In many cases, knowing (and following) what the Construction Lien Act says about what you have to do (i.e. retaining a proper holdback for the appropriate amount of time and performing some due diligence searches before releasing the money) can save you from significant liability at the end of the project if workers, suppliers, or trades are not paid (whether directly by you or by your contractor).  This legislation is there, in part, to protect owners.
  7. If the size of the project warrants it, either work some terms into your contract(s) for third party reviews of the work and spend a bit of money on a consultant (i.e. an architect or engineer) to do periodic reviews to point out any deviations from the specifications, design, or the Building Code, or hire someone to do this outside the contract but for your own benefit and protection.  If a dispute arises, this third party can provide valuable evidence. If no dispute arises, the third party reviews can provide you with almost as valuable peace of mind
  8. Make sure that either you or the contractor is taking care of whatever permits are required. building permits add to the cost and “red tape” of the project but for many projects they are required and, for the most part, they are there to protect you. That said, do not assume that the building permit or inspection process will act as a general quality control for the work being done.  Inspectors are generally only inspecting for general compliance with the Building Code’s minimum standards – not to ensure that everything is being done properly or in accordance with the contract. There’s a big difference.
  9. Consider whether you want a dispute resolution clause in your contract. Sometimes there is no such clause, sometimes there is a mandatory mediation or arbitration clause, and sometimes there is a clause making mediation or arbitration optional. I am generally not a fan of mandatory arbitration clauses for smaller projects primarily because of the potential cost involved, but there are times where it might be appropriate. This is something to raise and discuss with your lawyer.
  10. If you have a lawyer retained from the outset of the project, he or she will be familiar with the project and contract and, in the event that a dispute arises, will be able to jump right in without nearly as much briefing to assist in resolving things. Let your lawyer know if you sense that a problem might be on the horizon (i.e. if your contractor seems to be falling behind, the materials on site don’t match what you requested, etc). Sometimes an early letter can help keep things on the rails when they might otherwise go off (potentially saving you a lot of money if a full-scale dispute can be averted).
  11. Most construction litigation is won and lost on the “paper trail”.  Keep a very accurate and complete project file where you keep everything to do with the project (i.e. contracts, drawings, quotes, documents supporting agreed changes to the scope of work, etc). Where things are discussed orally on site or in meetings, confirm what was discussed or agreed in writing (the speed and ease of e-mail makes this a no brainer). Keeping a comprehensive project file will:
    • keep you better organized in dealing with the contractor(s) and other involved parties throughout the project (never a bad thing);
    • only take a little more time than not doing it; and
    • if a dispute arises during the course of the project and arbitration or litigation is required, possibly mean the difference between winning or losing the dispute and will invariably save you money in legal fees because your lawyer will have better evidence to work with.

While I strongly believe that the above suggestions can go a long way toward reducing problems and putting you in a better position if problems arise, they will not guarantee you 100% protection.  Even where sophisticated owners and contractors make heroic efforts to protect themselves and negotiate detailed contracts believed by everyone to be clear and  bullet-proof, long and costly litigation can still occur.

Taking the time to follow the above suggestions and, perhaps, investing couple of thousand dollars for legal advice and services at the outset of a smaller project may be a hard pill to swallow for the eternal optimist who can’t imagine that a serious dispute could arise on his or her project (“My contractor seems like a really nice guy. I trust him.”), but most clients that I’ve represented over the years, after things went wrong and where they didn’t exercise this sort of up front effort and diligence, would almost certainly say that, with the benefit of hindsight, they would have done things differently.