Last week’s Legal Notes outlined a complex dispute between Walsh Construction and the Toronto Transit Commission (TTC) centred on significant project delays and resultant additional costs, both for Walsh as general contractor and its subcontractors.
It was determined the TTC-provided design was incomplete when the contract was signed and that Walsh did not have full site access. Combined with what Walsh described as the TTC’s improper administration of the contract, the result was delays and acceleration efforts.
At trial, the Ontario Superior Court under Justice Kenneth Hood found the TTC responsible for all 1,047 days of delay claimed by Walsh.
Walsh’s monetary claims totalled about $193 million. However, the Court ruled Walsh was entitled to a lien amount of $57,697,627. Part of the missing difference was $55,672,419 claimed by Walsh’s subcontractors on the project, representing flow-through claims for the delay costs and resultant acceleration costs they suffered.
As is not uncommon in large projects, Bruce Reynolds and James Little, partners with Singleton Reynolds LLP, and associate Nicholas Reynolds, write Walsh had entered into agreements with its subcontractors that released Walsh from liability. These were in the form of assignment and non-assignment liquidating agreements.
Sahil Shoor, partner with Gowling WLG, explained to the Daily Commercial News, the TTC argued at trial that the subcontractor claims were not new causes of actions but were subcontractor claims against Walsh. Furthermore, the TTC argued the subcontractors and Walsh had entered into agreements that removed Walsh’s liability to the subcontractors, and thus any flow-through to the TTC.
The court agreed and determined the subcontractors were not parties to the action and Walsh could not flow-through these subcontractor claims.
“Justice Hood reasoned that TTC’s contract was with Walsh, not with any subcontractor, and therefore their direct cause of action was only against Walsh,” said Shoor.
The justice referred to several precedent rulings that held, “a general contractor cannot flow-through a subcontractor’s claim against an owner if the general contractor has no liability to the subcontractor for the damages at issue. For Walsh to pass any liability to TTC on a flow-through claim, the liability (or at a minimum, the potential liability) must remain as between Walsh and its subcontractors.”
However, this was not the case. The court noted Walsh already settled with most of its subcontractors for which it was advancing a claim. Furthermore, Justice Hood wrote, “the attempt to place liability upon the owner for the subcontractor’s damages, where the owner has not contracted with the subcontractor and where the contractor has effectively removed itself from the picture, is not right. This makes these claims untenable.”
Therefore those claims were dismissed.
The ruling is regarded as “challenging” by the Singleton Reynolds lawyers.
“It arguably creates a tension between the existing case law and the practicalities of managing large claims on construction projects. It is not uncommon for the contractor to resolve the subcontractor claims and then take an assignment of those claims, in order to streamline the overall litigation and put some funds into the pockets of the subcontractors notwithstanding the fact that payment still remains disputed as between owner and subcontractor.”
They point out this can help avoid large, complex court actions, and the possibility that some contractors might suffer or fail financially over the course of a lengthy dispute.
“One of the key purposes of the Construction Act is to ensure the flow of funds down the construction pyramid to subtrades, suppliers,” the Singleton lawyers continue. “Accordingly, it would seem that Walsh exposes a more fundamental tension between the first principles of contractual liability in relation to flowing through subcontractor claims, and the first principles of the Construction Act.”
Walsh has appealed this portion of the ruling related to the flow-through claims, alleging several errors by Justice Hood, including “ordering that the active subcontractor delay claims, which were properly before him and litigated at trial, be determined at three separate trials at an unknown date before a different judge.”
John Bleasby is a freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.
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