Kennaley Construction Law

                                                                                                                           June 24, 2021

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The Consultant’s Authority May Be Broader Than You Think:  To What Extent Can a Contract Administrator’s Findings Actually be Challenged?  

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It is well established that a consultant acting as a contract administrator must be impartial and objective.  This was made clear by the Supreme Court of Canada in the leading case of Kamlee Construction Ltd. v. Oakville (Town), (1960), 26 D.L.R. (2d) 166, a decision which has been applied consistently over the last 50 years.   Generally speaking, under this line of cases, if the consultant was not impartial or did not act judicially in exercising its duties under the Contract, the consultant’s findings will be void against the contractor.   See the leading Ontario Court of Appeal decision in Noren Construction (Toronto) Ltd. v. Rosslynn Plaza Ltd., (1969), [1970] 2 O.R. 292 (C.A.), where the findings of an architect who had not acted judicially were set aside.  See also the Ontario Superior Court decision in Urbacon Building Groups Corp. v. City of Guelph, 2014 ONSC 3641, where the owner directed the consultant to make a finding that sufficient cause existed to declare the contractor to be in default of a CCDC2 Contract.  The Court found the consultant’s finding was orchestrated and contrived, that the owner had breached its obligations of good faith under the Contract and that the resulting termination was invalid.

 

To what extent, however, can the incorrect findings of a consultant be challenged if he or she nonetheless acted impartially?  The issue was recently addressed in relation to progress certifications in Pentad Construction Inc. v. 2022988 Ontario Inc., 2021 ONSC 824, where the contract called for civil earth-works to be certified and approved by an authorized engineer before any amounts would become due and payable.  After a number of the contractor’s interim invoices were paid, the engineer became concerned that the contractor had been over-billing, requested a topographical survey to verify quantities and then determined that the contractor had been overpaid to that point (such that no amounts were due and payable).  The contractor disagreed, suspended work and preserved a claim for lien.  Justice Boswell, for the Ontario Superior Court of Justice, held that because there was no fraud, bad faith or wilful neglect of duty, the engineer’s determination was (as per the contract) conclusive and binding on the parties.  His Honour relied heavily on the Ontario Court of Appeal’s decision in Croft Construction Co. v. Terminal Construction Co., [1959] O.J. No. 278 and McKinnon, J.’s review of “about 150 years of jurisprudence” in Federated Contractors Inc. v. Ontario Realty Corp, [2007] O.J. No. 463 (S.C.J.).  His Honour confirmed that the terms of the contract will govern holding that where payment certifications are non-binding or "provisional", they will not have the same force and effect as certifications that are intended to be final and binding.  

 

Ontario’s lower courts have similarly been held that where a payment certifier is contractually appointed, deference should be given to his or her determination of whether or not the contract has been substantially performed for the purposes of Ontario’s Construction Lien Act (as it then was).  See Cityscape Richmond Corp. v. Vanbots Construction Corp., [2001] O.J. No. 638, (S.C.J.)  and Torbear Contracting Inc. v. Haldimand (County), [2006] O.J. No. 3815 (S.C.J.) in that regard.  In Cityscape, for example, Trafford J. more particularly held, at para. 47, that: 

 

“It would be an improper step for the Court on summary applications to merely substitute its view for that of an expert who was selected by the parties under the contract to perform this important task.  A showing of significant error, legal or factual, is required to warrant the relief sought in this case.”

 

As regards substantial performance, we note that Ontario’s (now) Construction Act provides that any funds that come into the hands of an owner after the payment certifier has certified that amounts are owing become trust funds for the benefit of the contractor to the extent of the certified, unpaid amounts.  The Act does not provide a mechanism for the owner to dispute the consultant’s certification in that regard. 

 

Some Courts have gone so far as to hold that a consultant’s decisions should be entitled to deference wherever he or she is made the interpreter of the contract documents at first instance, as is the case, under CCDC standard form contracts.  In Lawhill Ltd. v. Ontario, [2007] O.J. No. 4825, Master Sandler held as follows for  Ontario’s Construction Lien Court at para 621:

 

… a contractor has to show that a significant legal or factual error was made by the consultant to warrant relief being granted by the court.  I recognize that in Torbear, and in Cityscape … the relief sought was a statutorily-provided remedy under s. 32(1) 7. of the C.L.A. which is not what the present case is about, but I believe that the principle of deference to the consultant’s decision is applicable and I apply it here because I find no significant error … and no failure to act “judicially”.

 

The same rationale was also applied by the Alberta Queen’s Bench in ASC (AB) Facility Inc. v. Man-Shield (Alta) Construction (2018), 90 C.L.R. (4th) 159, where Justice Antonio was required to assess “the level of deference to be shown to the determinations made by the Consultant under the contract”.  Her Honour referenced Heintzman and Goldsman on Canadian Building Contracts, which states that a consultant’s decisions will be "persuasive in the absence of compelling evidence to the contrary" and binding "at least absent demonstrable and significant error, legal or factual".  Her Honour held that the rationale of Federated Contractors (which we have referenced, above) applies “to other decisions within the Consultant's authority” even though Federated only dealt with payment certification.  She went on further explain her reasons, at para 19-20 of her decision:

 

“The Consultant had access to the work site and the expertise to evaluate the work he saw. He was regularly involved with the parties, the work, the contract, and the parties' interactions under the contract. He has expertise in relevant areas. The parties chose this person, equipped with these advantages, to make decisions about the state of completion of the work and any resulting contractual obligations. This Court lacks those advantages. Therefore, as a matter of contractual interpretation, precedent, academic rationale, and practicality, this Court will defer to the Consultant's determinations on questions of fact, unless they reveal significant errors.”

 

Justice Antonio went on to hold (correctly in our view) that if a contractually appointed consultant is required to make determinations of law, the standard of correctness should apply (such that no deference would be given).

 

In summary, it is well established that the decisions of a consultant acting as contract administrator will be set aside if they were not made impartially and objectively.  In addition, if the parties have contractually agreed that a consultant’s certification or approval is a condition precedent to payment, well-established case law holds that the consultant’s determinations in that regard will only be interfered with if fraud, bad faith or wilful disregard of duty can be found.  In addition, in Ontario, a construction trust is established over funds received by the owner after, and to the extent that, amounts the payment certifier has certified as owing remain unpaid.  Also in Ontario, non-appellate Courts have held that a payment certifier’s determination as regards the substantial performance will be binding absent “significant” error.  Finally, lower-level courts in both Ontario and Alberta have held that where the consultant is the interpreter of the contract documents at first instance, deference should be granted to his or her findings of fact absent significant error or a failure to act judicially.  It remains to be seen whether appellate courts will apply the same level of deference called for in these decisions.

 

In the end, both owners and contractors should understand that, depending on the issue at hand, a court, tribunal, arbitrator or adjudicator may defer to the decisions of a consultant appointed to administer a contract, absent a lack of impartiality or, depending on the circumstances, fraud, bad faith, wilful disregard of duty or substantial error.  Owners should pick their consultant’s carefully and avoid taking steps to direct the consultant as doing so could invalidate the consultant’s decisions.  Contractors, on the other hand, should consider the role of the consultant in bidding for contracts and ensure they have the right to dispute the consultant’s findings.  Contractors should also take care to document any circumstance where the consultant may be exceeding its authority or acting without being impartial or objective, as doing so may be the only way of truly disputing a consultant’s findings in many circumstances.  Finally, both parties need to take care to ensure that they meet any notice requirements set out in the contract for disputing a consultant’s authority, as a failure to do so may result in any claims in that regard being waived or barred under the contract.

 

Rob Kennaley and Effi Sidiropoulos[1]

Kennaley Construction Law

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[1] law student