Arbitration – Quicker, Yes. Cheaper, No

Author: Corbin Devlin 

I often get asked, is arbitration preferable to going to court? While the correct answer depends on the context, there are four key considerations that guide my response: 

Efficiency
Arbitration is often much quicker than litigation. The court system in Alberta is backlogged. The Rules of Court are more concerned with fairness than efficiency (mind you, that's not always a bad thing). As a result, arbitration can usually be measured in weeks or months from start to finish, but getting a lawsuit to trial can sometimes take years. 

Cost 
Arbitration is just as costly as litigation, often more. Procedural steps can sometimes be limited or omitted from an arbitration process, which can save cost (and time). But such streamlining is the exception, not the rule. Parties can create a streamlined process if they mutually agree, but more often arbitration looks very similar to the litigation process. If the process is much the same, then the cost will be much the same. Except that in arbitration, you have to pay for the private arbitrator, usually by the hour, unlike litigation, where the judge's salary is paid by the taxpayer. 

Confidentiality 
This is an important consideration that is too-often overlooked. Arbitration can be confidential (if the parties so agree); trials are public. Confidentiality can be important for many reasons, such as avoiding the creation of a precedent, shielding competitive information, and protecting corporate reputation. 

Choice 
There is very little opportunity to influence the assignment of the judge if your case goes to court. On the other hand you get to choose your arbitrator. More accurately, an arbitrator is usually selected by mutual agreement, or some process where one party nominates candidates for consideration and acceptance by the other party. This is unlikely to result in one party gaining a decision-maker that is biased in their favour. But this usually ensures that the decision-maker has highly appropriate background and qualifications. The ability to choose your decision-maker in an arbitration process can promote efficiency and predictability, and sometimes leads to a more just result. 

Other Factors There are other considerations of course. For example, litigation provides greater certainty in terms of process (through hundreds of years of jurisprudence); arbitration can allow the parties to be creative in establishing their own process. Litigation provides a right of appeal; arbitration typically does not (mind you, once again, that's not always a bad thing). But in my experience, the key considerations are efficiency, cost, confidentiality and choice. 

So what's the answer? Whether arbitration or litigation is preferable depends on the context of the dispute. Arbitration has many advantages. Just keep in mind, cost is generally not one of them.

Court Denies Coverage for Property Damage “Connected” to Faulty Workmanship

Author: Corbin Devlin 

 The Alberta Court of Appeal has issued an important decision that narrows the scope of all risks insurance coverage.  The court was grappling with the question whether damage to a project resulted from “poor workmanship” or is “resulting damage.” The “cost of making good” poor workmanship is excluded from coverage under the typical all risks policy, while resulting damage is covered.

Scratched Windows
 
The claim arose during the construction of the EPCOR Tower in Edmonton (Ledcor Construction Limited v Northbridge Indemnity Insurance Company). The subcontractor Bristol was hired to clean the exterior of the building when the project was nearly complete. Bristol scratched the windows on the tower by using inappropriate tools and methods, and the glass had to be replaced at great expense. 

The insurer denied that the replacement cost was covered by the all risks insurance policy. In 2013, a judge determined the replacement of the glass was covered.  In particular, the trial judge found that the insurance policy was not clear as to whether replacing the glass was a cost of making good faulty workmanship, or a cost of repairing resulting damage. The trial judge said that any ambiguity in the insurance policy must be resolved in favour of the claimant. The cost of replacing the glass was therefore covered.

A Reversal
 
Now, the Alberta Court of Appeal has reversed this decision by the trial judge, saying that the all risks policy is not ambiguous at all.  The court says that the “dividing line” between poor workmanship and resulting damage is determined by “physical or systemic connectedness”. Some property damage caused by faulty workmanship may still be covered. But the damage was excluded from coverage in this case because the scratched windows are too closely connected to the window cleaning work. 

The Court expresses a principle of general application as follows: “The exclusion (considered together with the exception) excludes from coverage the cost of redoing the work. But it also excludes damage connected to that work, such as any damage caused to the very object or part of the work on which the faulty workmanship is being applied. In this case, the cost of redoing the exterior cleaning of the EPCOR Tower is admittedly excluded. Also excluded is the damage to the windows being worked on at the time, which damage was directly caused by the cleaning activities that constituted the faulty workmanship. This damage was not only foreseeable, but it was highly likely (even inevitable) that this type of damage would result if the work was done in a faulty way. That type of damage is presumptively not within the scope of the insurance policy; the policy is not a construction warranty agreement.”

Connected and Foreseeable
 
Other words, the Court is saying that property damage is excluded from all risks insurance coverage if the damage is the foreseeable and direct result of faulty workmanship. Sounds straighforward? To interpret the policy in this particular case required a trial and a detailed examination of the nature of the work, the various parts of the project, the foreseeability of the damage, and other factors. The question of “physical or systemic connectedness” still leaves plenty of room for disputes over the scope of coverage.

There is no doubt the Court has endorsed a narrower interpretation of all risks insurance coverage.  But it is important to note that the specific wording of all risks policies may vary, and different circumstances might result in an interpretation more favourable to the claimant, in cases of property damage caused by faulty workmanship.

"Incorporation by Reference" – More Dangerous Than it Sounds

Author: Corbin Devlin 

 It is common, almost universal, to find a clause in a construction subcontract that incorporates the prime contract by reference. However, the effects of such a clause can vary greatly. Too often, these provisions are considered boilerplate and they not given the consideration they deserve, by general contractors and subcontractors alike.

Alternate Approaches
 
These “incorporation by reference” clauses usually leave unanswered questions, particularly whether they are effective to incorporate the general conditions of the prime contract (e.g. payment terms, liquidated damages, dispute resolution, warranty…?) and if so, just exactly how the general conditions of the prime contract apply to the subcontractor.

The most comprehensive clause is one that not only incorporates the prime contract but also expressly binds the subcontractor to all prime contract terms; e.g. “any reference to Owner in the prime contract is interpreted as a reference to the Contractor, and any reference to Contractor is interpreted as a reference to the Subcontractor.” Such language is favored by some general contractors – it is no doubt very protective of the general contractor. CCA1 uses similar language. While such a clause might seem quite explicit, the cases show that such a clause actually leaves much room for dispute when it comes to the legal effect of the prime contract general conditions on the subcontractor. The general contractor’s relationship with the subcontractor is not a mirror image of the owner’s relationship with the general contractor, and so this type of clause leaves room for ambiguity. Ambiguity eventually leads to dispute, which does not benefit the general or the sub.

Another common approach is a relatively simple clause that states, in essence, “the prime contract is incorporated by reference.” This approach is less comprehensive from the owner's perspective. There is a body of case law that indicates such a clause really just incorporates those aspects of the prime contract that have clear application to the subcontractor; i.e. the drawings, specifications and schedule – but typically not the general conditions. Such a clause is therefore less ambiguous than our first example, although it is still open to dispute.

Another approach is to reference (or attach) specific provisions of the prime contract into the subcontract. This selective approach leaves much less room for ambiguity. It requires more work at the drafting stage, and is therefore much less common.

The best practice (in strict legal terms) may be to avoid incorporation by reference completely, by writing a subcontract that reinforces and coordinates with the relevant terms of the prime contract. But such a fulsome approach is usually quite impractical.

The Subcontractor Who Never Sees the Prime Contract 
 
It is all too common that the subcontractor does not actually obtain or review the prime contract terms and conditions that are supposedly incorporated by reference. In such cases, the proper interpretation of the subcontract may depend on whether the subcontractor is in fact given access to the prime contract, or the relevant parts of it.

Sometimes a subcontractor is not given access to the prime contract. There is case authority suggesting that it will invalidate the “incorporation by reference” clause if the general contract denies the subcontractor access to the prime contract. Similarly, if a subcontractor is only given access to parts of the prime contract, the subcontractor has a good legal argument that the “incorporation by reference” is limited to those parts. 

Of course, it is a different scenario if the prime contract terms and conditions are made available to the subcontractor, but  fails to avail itself of the opportunity. Every time a subcontractor agrees to a clause that incorporates the prime contract by reference, without reviewing the prime contract terms and conditions, that subcontractor incurs a considerable legal risk.

Keeping Construction and Tendering Contracts Separate

Author: Corbin Devlin 

Tender documents are often "living" documents. A problem arising on one project prompts a construction owner to insert a new contract term to address the problem on subsequent projects. This is good practice in itself, a sort of continuous improvement process. But a common result of this process is that contract terms are put in the wrong place. In particular, there is a recurring problem with tender documents that intersperse construction terms with proper tendering terms. For example, it is common to see conditions such as "Contractor will use only materials ABC in performing the Work" or "Installation by XYZ certified installers" right in the invitation to tender. These terms and conditions belong in the construction agreement, not in the invitation to tender.

What's the difference where these terms are placed? Isn't the invitation to tender incorporated by reference into the construction agreement anyhow?

The legal problem is that the invitation to tender (Contract A) creates a binding agreement between each bidder and the construction owner. Each bidder (and the construction owner) has a contractual obligation to respect the terms of the invitation to tender – and a contractual right to enforce the terms of the invitation to tender. On the other hand, the construction agreement (Contract B) is binding on only one bidder - the successful bidder - and construction owner. The terms that should bind each and every bidder are terms such as “Bids submitted later than 4 p.m. on closing date will be rejected.” But the owner only requires the successful bidder – not each bidder - to actually perform the work. So it is only the successful bidder that requires to comply with construction specifications such as, for example, "only materials ABC to be used in construction" or "materials to be installed by XYZ certified installers."

What is the harm in binding all bidders to such terms? After all, the owner wants to ensure that all bidders are bidding on the same thing. Frankly, the harm is that this practice causes lawsuits. A few years ago the Double N Earthmovers case (Double N Earthmovers Ltd. v. Edmonton (City of), 2005 ABCA 104) went all the way to the Supreme Court of Canada because of a related problem. The City of Edmonton prescribed certain equipment specifications for the work – and this requirement was found in the tender documents. One of the unsuccessful bidders sued when the City ultimately entered a construction agreement that allowed for different equipment specifications. The City was held not liable. But if the equipment specifications were not embedded in Contract A (the invitation to tender), but instead placed in Contract B where they belong, then this lawsuit might have been avoided.

I'm writing this article because the Double N case does not illustrate an isolated incident. I have seen numerous disputes that could have been avoided but for the confusion caused by construction agreement terms embedded in tendering documents. The owner who specifies "XYZ certified installers" probably does not contemplate that an unsuccessful bidder might have the right to enforce this specification. But placing that specification in the invitation to tender may have that effect.

Of course, the fix to this problem is relatively simple. As mentioned, the proper place for construction terms and conditions is in the construction agreement. Something like the requirement to provide “XYZ certified installers" should be located in the scope of work appendix. The proposed construction agreement, or maybe (depending on circumstances) just the scope of work appendix, should be an attachment to the invitation to tender. The invitation to tender should specify that the successful bidder will enter a contract on the attached terms and conditions, or for the attached scope of work. And the invitation to tender should expressly reserve the owner’s right to negotiate the construction agreement terms with the successful bidder.

Top 3 Ways Project Documentation Fails

Author: Corbin Devlin 

Documentation is key to resolving construction disputes. Was there a change in site conditions? What instructions were given on site? Was a change approved? Was the owner given notice?  This is just a small sample of the issues that come into dispute – and that depend on proper documentation to resolve. Here’s the top 3 reasons project documentation fails:

1. No documentation habit: Construction companies – and construction owners - have personalities just like people do. It still surprises me when small companies have excellent documentation habits, and large companies have weak documentation habits. But I have learned it is not a question of financial resources; it is a question of human resources. Personnel well-educated regarding construction disputes – and in particular personnel who have lived through a number of disputes – come to learn the importance of documentation, and how to properly document a project, event or dispute.
2. No systems: Not all personnel involved in a project are going to have the aforementioned training and experience. So it is key to have systems in place to ensure that documentation is maintained, even by those who may not understand the reasons for it, and even when there is no dispute in sight. Many sophisticated construction contractors and owners have excellent (albeit complex) management systems in place. Remarkably, some don’t. But even smaller or less sophisticated contractors and owners can implement good systems; e.g. designating who is responsible for what project documentation, setting standards for documenting site conditions and events, and recording (and retaining) all project communications.
3. Not reading the contract: No documentation habit or system is going to save the owner or contractor who does not read or understand the contract requirements. One of the best practices I recommend is to ensure that key personnel (e.g. project managers and superintendents) create a summary of every significant contract – in other words, reduce the contract to a page or two of bullet-points. This ensures that key personnel actually read the contract, and provides a useful reference throughout the project. Notice requirements and timelines should be a highlight of any such contract summary.

Sometimes there is no documentation of a disputed event. This puts the parties on a level playing field. But it is far more challenging to resolve disputes without documentation; if it comes down to “he said, she said,” then outcomes may be unpredictable. Sometimes both parties have excellent documentation. In such cases disputes are more likely to come down to technical issues or issues of contract interpretation – they can still be contentious, but much easier to resolve. Sometimes one party has excellent documentation and the other has none. This tilts the playing field. Don’t lose the war of documentation.

The Top Ten Things That Go Wrong With Lien Registration

Author: Corbin Devlin 

Missing the lien deadline – This is number one because lien rights evaporate if a lien is not registered on time.  It is not always straightforward to determine the lien deadline.  The Alberta Builders’ Lien Act says correcting something improperly done, or doing something omitted to be done earlier, does not extend the lien period; as a consequence, the lien period can start running before the last day of work.  And a Certificate of Substantial Performance can affect the timing of lien rights.

Leaving it too late –  A related but distinct problem.  Although there may be good business reasons to postpone the decision to register a lien until close to the deadline, this is risky.   For example, it can take some time and effort to determine the proper legal land description for some industrial and infrastructure projects.  And sometimes the registry office will reject lien registrations for unexpected technical reasons; when this happens on the last day of the lien period, it may be too late to submit another lien for registration.

Liening the wrong lands – It is often necessary to rely on information supplied by others to determine the legal description of the lands.  Experience tells us  such information is not always reliable.

Liening the wrong interest in land – If the work is being performed for a tenant, or anyone other than the true (fee simple) owner of the lands, it is necessary to clearly indicate on the Statement of Lien not only the proper description of the lands, but also which interest in those lands is being liened.  (See Marco Baldasero’s blog post of 10-Sep-2014 for additional comment on lien rights when work is done for a tenant.)

Missing a transfer of lands – A sale of the project lands during construction can jeopardize lien rights.  Unregistered lien rights may be lost when the title is transferred, unless the purchaser meets the statutory test to qualify as an “owner” for lien purposes.

Naming the wrong owner – A simple but too common error.  For example, it is quite common for a contractor to think that the company they are dealing with is the landowner when in fact the lands are owned by a separate, related company.

Failing to fully exercise lien rights – Lien rights may extend to multiple parcels of land associated with an integrated project: Smoky River Coal Ltd. (Re), 1999 ABQB 492. Liens may attach to minerals if the construction work relates to the recovery of a mineral.  But these issues have to be addressed before the lien deadline.

Claiming too little – It is another common mistake to register a Statement of Lien for only the amount currently due.  The holdback and other contract amounts not yet due can and usually should be included in a lien.  And interest may be claimed in a Statement of Lien if the relevant contract provides for it.

Failing to consider the business consequences of lien registration – Registering a lien can disrupt project financing and damage customer relations.  I sometimes see lien claimants scramble to discharge the lien they just registered, when they realize the real world repercussions of lien registration.

Ignoring lien rights – On the flip side, lien rights are often the only form of security for payment available to a contractor, subcontractor or supplier.  In the right circumstances, lien rights are invaluable and must not be overlooked.

Liening the Landlord for Tenant Improvements

Author: Marco Baldasaro

When a tenant requests work from a contractor, there are two ways in which the registered owner of the lands in question can be called upon for payment, even though the registered owner was not the person making the direct request for the work done: the lien claimant can provide notice pursuant to s. 15(1) of the Builders’ Lien Act, RSA 2000, c B-7 (“BLA”) or the lien claimant can show that the registered owner is an owner as defined in s. 1(j) of the BLA.

Section 15(1) Notice

Section 15(1) of the BLA states as follows:

15(1) When the estate on which a lien attaches is a freehold estate for a life or lives or a leasehold estate then, if the person doing the work or furnishing the material gives to the person holding the fee simple, or that person’s agent, notice in writing of the work to be done or materials to be furnished, the lien also attaches to the estate in fee simple unless the person holding the estate, or that person’s agent, within 5 days after the receipt of the notice, gives notice that the person holding that estate will not be responsible for the doing of the work or the furnishing of the materials.

K & Fung Canada Ltd v NV Reykdal & Associates Ltd, [1997] AJ 741, aff’d 1998 ABCA 178 (“NV Rykdal”) is the leading case on the meaning of notice in writing for the purposes of s. 15(1). In NV Rykdal, a tenant entered into a contract with a contractor, who agreed to provide all work, labour, services and materials necessary for leasehold improvements and exterior renovations. All invoices were directed to the tenant. The tenant subsequently ceased carrying on business, leaving over $250,000 in invoices unpaid. The landlord terminated the lease and took possession of the premises. The contractor filed a lien against the premises without giving any written notice to the landlord under the BLA. It argued, however, that correspondence collectively received and sent by the contractor and its agent to and from the landlord and the tenant could be construed as requisite notice for the purposes of s. 15(1).

The court observed that while the notice requirement under s. 15(1) must be in writing, it is not necessary that the notice be in a specific form. As such, the statutory requirement may be satisfied by the delivery of certain documents, the cumulative effect of which is to put the landlord on notice. The court cited the Alberta Court of Appeal in Beyersbergen Construction Ltd v Edmonton Centre Ltd (1977), 78 DLR (3d) 122) as authority for the proposition that even the submission of detailed plans and specifications to the landlord will not constitute notice unless the necessary implication of giving such information is to give written notice that the landlord would be liable pursuant to s. 15(1). Courts will consider whether the notice in writing expressly or by necessary implication informs the landlord or its agent that the lienholder will claim a lien against the fee simple estate.

Landlord as Owner

The test for whether a landlord constitutes an owner for the purposes of s. 1(j) of the BLA was summarized by the court in Royal Trust Corporation of Canada v Bengert Construction Ltd, Coyes and Coyes (1988), 85 AR 210 (CA) (“Royal Trust Corp”) as follows:

To bring the person sought to be charged within the definition of owner, the lien claimant must establish three elements. First it must be shown that the person has “an estate or interest” in the land, and secondly that he has requested, expressly or impliedly, that the materials be furnished or the work done and finally at least one of the remaining elements must be present: the work must have been done or the materials furnished on his credit, on his behalf, with his privity and consent or for his direct benefit.

Whether the conduct of a landlord constitutes an implied request to have the work done has been canvassed extensively by Alberta courts. In Royal Trust Corp, the court observed that whether a request has occurred must be decided on the facts of each individual case. The court noted that a request does not necessarily involve direct communication by the owner to the contractor. It does, however, involve something more than mere knowledge or consent. The court observed that in ordinary language the word ‘request’ indicates the idea of an active or positive proposal, as contrasted with mere passivity or acquiescence.

In Lighting World Ltd v Help-U-Build (Edmonton) Inc, 1998 ABQB 930 the court observed that in order for there to be an implied request for the purposes of s. 1(j), there must be some active participation by the owner in the construction. In that case, the court noted that the parties to the agreement to lease had come to an understanding that the tenant would be responsible for the improvements that it required in order to utilize the premises in the intended manner. While the landlord was aware that the construction was ongoing and a representative of the landlord occasionally visited the premises to observe the state of construction, the representative did not provide any direction to any contractor or the tenant as to how the construction should be done. Neither the landlord nor its representative participated in in the drawing of any plans or the approval of any work. Though the landlord loaned money to the tenant for the purposes of the renovations, there were no terms or conditions attached to those loans dictating who was to perform the renovations or how they were to be done. The court concluded that the landlord was not an owner within the meaning of the BLA, observing at para 22 that

the mere fact of knowledge that construction will ensue when a landlord leases premises does not constitute an implied request that the construction be done by any particular trade, sub-trade or contractor.

Conversely, the Alberta Court of Appeal observed in Acera Developments Inc v Sterling Homes Ltd, 2010 ABCA 198 (“Acera Developments”) that active participation by a liened party in the work being done can operate to bring that liened party within the definition of “owner” through demonstrating an implied request to do work. In Acera Developments, the court found that there was sufficient interaction between the builder and the developer to support the conclusion that the construction proceeded at the owner’s implied request. The court found that the landowner was actively involved in the supervision of the construction and that the lien claimant was contractually bound to construct improvements to a specific standard and scope contractually determined by the landowner. Based on this involvement of the landowner, the court concluded that the work in question could be implied to have been performed at the request of the liened party.

Based on the foregoing, the determination of whether a landlord will constitute an “owner” for the purposes of the BLA will turn on whether it can be demonstrated that the landlord actively participated in the work performed by the lien claimant. The court can be expected to examine the extent to which the landlord approved plans, selected contractors and subcontractors, controlled funding, and provided supervision or inspection.

Conclusion

The contractor or supplier working for a tenant should consider its lien rights against the landlord as a routine matter of due diligence. There are lots of situations where the right to lien a lease (the tenant’s interest) provides inadequate security for payment. Since the right to lien the landlord’s interest is not automatic (unless the landlord is very actively engaged in the construction), the contractor or supplier should use a s. 15(1) notice when appropriate.

On the other hand, the landlord should be cautious regarding the extent of its involvement with contractors hired to perform work for their tenants. The landlord can unwittingly expose itself to lien liability, even though the landlord usually has no control over the risk (i.e. no control over the lien holdback).