Canada: A Cautionary Tale On The Necessity Of Strict Compliance With Contractual Terms In Construction Agreements Before Refusing To Proceed With Work Unless Paid

INTRODUCTION

The recent decision by the Ontario Superior Court of Justice in Campus Contracting Inc v. Torbear Contracting Inc., 2023 ONSC 6782 ("Campus v Torbear") is a compelling reminder of the dangers associated with abandoning a construction project for non-payment as well as the necessity, and benefits, of strict compliance with contractual terms, including in respect of payment, notice and termination.

In this case, and in the context of competing positions (and competing expert evidence) with respect to the reason for the failure of pressure testing, failure of water main pipes and failure of four couplings/joints connected to the subject pumping station, the court was asked to consider the scope of work of each of the respective parties and to determine which party breached the subject agreement between them.

In particular, and in considering the payment and notice regimes (among other terms) enshrined under the subject contract governing the parties and the plaintiff's demand for payment and refusal to proceed unless paid, the court was asked to determine whether the plaintiff subcontractor abandoned the subject project, or whether the defendant contractor unlawfully terminated the subject contract.

BACKGROUND

In 2007, Campus Contracting Inc. ("Campus") entered into a fixed-price contract with a general contractor, Torbear Contracting Inc. ("Torbear"), to connect and install four watermains for transporting water throughout the York Region (the "Project").

The Project proceeded amicably until pressure tests performed on intake pipes installed by Campus failed repeatedly (despite remedial efforts by the parties).

At this point, Campus began threatening to stop work if Torbear did not make payment on progress draws allegedly due for the months of June and July. Torbear disagreed that any amount was owed. Three days later, Campus stopped work on the Project. Torbear issued Campus a notice of default the same day (in the mandated format) and, three days later, declared Campus in default pursuant to the termination procedure specified in the contract.

Campus brought an action for breach of trust and a claim under the posted labour and material bond for Torbear's failure to pay it for work performed. Torbear counterclaimed for damages for deficient and incomplete work along with damages for delay.

ANALYSIS

The trial before Justice Sutherland was bifurcated into the issues of liability and damages.¹ In this trial on liability, the issues were: (i) whether Torbear breached the contract for non-payment of progress draws; and (ii) whether Campus abandoned the Project or Torbear unlawfully terminated the contract.

1. WHETHER TORBEAR BREACHED THE CONTRACT FOR NON-PAYMENT OF PROGRESS DRAWS

Justice Southerland found that Torbear did not breach the contract by dismissing Campus' demands to pay its June and July progress draws. Pursuant to the parties' contract, payment applications by Campus were due by the 25^th day of each month, with payment to follow by the end of the following month. Campus was late in submitting its payment applications, which were submitted on June 30^th and August 3^rd, respectively. Accordingly, Torbear was under no obligation to make payment to Campus until August 31^st and September 30^th, respectively, especially without evidence that the subject invoices were approved by the payment certifier, accepted by Torbear and that Torbear received money from the project owner to pay the subject invoices².

2. WHETHER CAMPUS ABANDONED THE PROJECT OR TORBEAR UNLAWFULLY TERMINATED THE CONTRACT

On the second issue, Justice Sutherland found that Campus had abandoned the Project and therefore breached its contract with Torbear when it walked away from the Project demanding payment before payment was due and before Campus completed the performance of its contractual obligations. The court's ruling on this point is neatly encapsulated in the following passage:

Campus was not contractually entitled to payment when it stopped work and therefore was not justified in abandoning the Project. Moreover, this was not a situation, in the court's view, where the contract could not be performed for reasons outside Campus' control such that it could be justified in failing to complete the contract.

KEY TAKEAWAYS

For parties considering withholding or withdrawing services for non-payment, Campus v Torbear is a cautionary tale. In a fixed-price contract, a party refusing to complete the contract due to non-payment does so at its own peril, without the necessary parameters in place to justify such a position. In addition to compliance with notice obligations, one must be certain that payment is genuinely due under the contract and that the non-payment goes to the root of the contract. Without such certainty and without the requisite parameters in place, a party who withdraws construction services in respect of construction improvements might face liability for breach of contract and be accountable for damages resulting from the failure to fulfill the mandated work.

While Campus v Torbear recognizes that walking away from a project before completion may be excused where the contract cannot be performed for reasons outside a sub-contractor's control, these circumstances are likely limited. According to the court, the exercise of a sub-contractor or contractor's lien rights under the Construction Act, R.S.O. 1990, c.C.30 is preferred over the cessation of work, which risks bringing the entire project to an abrupt standstill.

The Campus v. Torbear decision is also a lesson in the benefit of strict compliance with contractual terms, and contract administration realities (e.g., with respect to requests for payment and notice obligations). Campus' late payment applications not only delayed its receipt of payment but also jeopardized its other contractual remedies, including its ability to stop work for non-payment. Conversely, Torbear was rewarded for its strict contractual compliance, not only in payment but also in the exercise of its termination rights.

Finally, the case illustrates the possible procedural benefits of bifurcating liability and damages issues in complex construction disputes. Subject to applicable circumstances, separating these issues allows for a focused examination of each aspect of the case.

Should you have any questions, please feel to reach out to a member of Miller Thomson's Construction Litigation Group.

Footnotes

1. The parties agreed to a bifurcated trial. The first trial was to determine who breached the subject contract. The second trial was to determine who was responsible for any damages flowing from the breach of the contract and the assessment of those damages. This decision dealt solely with the issues for the first trial.

2. It is also important to note that there was no evidence contesting the accounting summary provided by Torbear which indicated that Torbear had overpaid Campus.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.