Our Ongoing Review and Summary of the Construction Act:
Section 39 Requests and the Written Notice of Lien
The predecessor Acts also allowed those with un-expired construction liens to give a ‘written notice of lien’ which will have, essentially, the same impact as would a preserved claim for lien. It was, and is, a mechanism that can be used to exert pressure up the construction pyramid without incurring the costs of preservation. Previously, the ‘written notice’ could be provided by a letter, in any form (so long as it included minimum required information) and in a number of different ways. Now, under the Construction Act, written notices of lien must include more information, be on a predetermined form and be served in the same formal way that legal proceedings are commenced.
For more information on these and other construction law issues, please visit our blog page: Kennaley Construction Law Blog
As did the predecessor Mechanics Lien Act and Construction Lien Act, the Construction Act gives suppliers of services and materials a right to make requests for information – from mortgagees, owners, contractors and subcontractors above them in the construction pyramid. These are intended to provide information which will assist the supplier to better understand their rights and obligations under the legislation. These rights have now been expanded under the new Act. They now include a right to much more detailed information about the status of the accounts on the contracts and subcontracts above them, information about the sale of the premises (if one is intended) and about the role of any landlord in the improvement. Those involved in construction should understand the scope of these requests, to take advantage of them and, also, be prepared to answer them. Those who receive requests must answer them within a reasonable time, not to exceed 21 days.
This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.
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July 31, 2018
Can a Termination for Convenience clause be exercised in bad faith?
In Ontario, the answer appears to be ‘yes’.
A termination for convenience clause allows a party (generally the ‘hiring’ party) to terminate a contract or subcontract for any, or no, reason -- where he or she believes the decision is most convenient for it (and it alone). The clauses were originally intended to provide public sector entities with the ability to terminate if the commitment is no longer in the interest of tax payers. They have, however, quickly moved into private sector contracts as well. Even though they generally provide that the ‘hired’ party will be paid for the services and materials provided to date, they can be problematic for the hired party -- who may have turned down other work and made commitments to employees, overheads, subtrades and suppliers.
Questions abound over whether or not the hiring party can exercise the clause in bad faith. Can they be used to punish the hired party for relying on its contractual rights or to prefer another contractor after the ‘heavy lifting’ of pricing the job and completing more difficult tasks has been completed, for example? The U.S. courts have come down, to varying degrees, on different sides of the argument. In Ontario, our Court of Appeal has recently weighed in on the issue, in Atos IT Solutions and Services GMBH et al. v. Sapient Canada Inc. where a contractor terminated a subcontractor for cause (and not for convenience). The subcontractor successfully sued at trial over whether or not the termination for cause was proper, and was awarded over $6 million in damages.
The Ontario Court of Appeal reduced the award based on the “minimum performance principal”. This provides that if a party wrongfully terminates, its damages will be the minimum of what it would have had to pay had it not terminated. In this case, the minimum performance was what would have happened had the termination for convenience clause been exercised. The Court of Appeal held that bad faith was not a factor to be considered. It held that, although the Supreme Court of Canada had recognized “an overarching duty of good faith and honest performance of contracts” in Bhasin v. Hrynew, [ [2014] 3 S.C.R. 494 ] it’s own Court had already previously decided, in 2011, that “the application of the minimum performance principle did not depend upon good faith conduct by the breaching party”. It further held that “Bhasin did not purport to alter the existing principles concerning the proper measure of expectation damages in the event of a breach of contract”. The decision is favourable to those who hire contractors or subcontractors, and problematic for those on the receiving end of such clauses.
