[1990] OLRB Rep. April 399
2088-88-G International Brotherhood of Electrical Workers, Local Union 894, Applicant v. Commercial Contracting Corporation of Canada, Limited, Respondent
BEFORE: Inge M. Stamp, Vice-Chair, and Board Members W. N. Fraser and H. Kobryn.
APPEARANCES: A. I. Ahee and R. Hill for the applicant; Donald S. MacKenzie and Peter K. Hrastovec for the respondent.
DECISION OF THE BOARD; April 18, 1990
- This is a section 124 application where the applicant is seeking enforcement of its Collective Agreement, specifically Clause 1001 dealing with late payments of contributions for Health, Welfare, Pension, Vacation Pay, Union Dues and Association Funds. Clause 1001, in the appendix covering the geographic jurisdiction of the applicant, reads as follows:
Clause 1001
Payments are to be calculated, monthly and remitted by the tenth (10th) day of the following month. Every Contractor who has not made payment on or before the twentieth (20th) day of the month, following the month worked, will be subject to a one per cent (1%) penalty, for each day late, applied to the unpaid balance, until all delinquencies and penalties are paid in accordance with the above procedures.
The amount owing, $137,507.50, was paid after the first day of hearing in this matter. What remains is a penalty of one per cent per day compounded for 23 days which amounts to $35,361.85 or $1,537.47 per day.
The respondent submits that this is not a legal rate of interest and that the Board should not enforce it. The respondent cited paragraph 4 of the Interest Act as the authority for its proposition that article 1001 cannot be enforced. Article 4 of the Interest Act states:
Except as to mortgages on real property, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.
The respondent further submits that there was no evidence to show that the union, as a result of the late payment, incurred the kind of damages for 23 days that would amount to $35,361.85.
The applicant's position is that we are sitting as a Board of Arbitration under section 124 and have no power or authority to alter or disregard any clause in the Collective Agreement. Article 1307 of the Collective Agreement states:
1307 POWER OF BOARD
The Board of Arbitration shall not have any power to alter or change any of the provisions of this agreement or to substitute any new provisions for any existing provision or to give any decision inconsistent with the terms and conditions of this Agreement.
It was not disputed that the respondent is bound to the Collective Agreement between The Electrical Trade Bargaining Agency of the Electrical Contractors Association of Ontario and The International Brotherhood of Electrical Workers and The IBEW Construction Council of Ontario. The respondent became bound to the agreement when it signed a voluntary recognition agreement. By operation of statute, the respondent became bound to the provincial agreement. The relevant work is covered by the provincial agreement.
The Business Manager of the International Brotherhood of Electrical Workers, Local Union 894 testified that only twice in fourteen years did his Local have to deal with this clause. He further stated that it is a penalty clause and is intended to penalize delinquent employers.
The respondent, during cross-examination of the applicant's witness, attempted to show that there had been some attempt made to work out a repayment schedule but the applicant's witness denied any such arrangement.
The only issue put before the Board is the enforcement of Clause 1001. The applicant took the position that notwithstanding the fact that it is a penalty as opposed to liquidated damages, the Board must enforce the Collective Agreement and does not have the power or authority to disregard or alter any clause in a collective agreement.
It was the applicant's position that the clause is not designed to enable the benefit funds or the union to make money, but to ensure that employers honour their commitment. Further, the applicant submits that the respondent knew what he was getting into when he bid on the work and became bound to the Agreement.
First let us deal with the issue of the enforcement of the penalty contained in Clause 1001. The applicant argued that it was not necessary to address the issue of damages since the collective agreement clearly set out the penalty to be assessed against any delinquent employer. In the instant case, the penalty for 23 days amounts to $35,361.85 or $1,537.47 per day on the principal amount of $137,507.50.
At one per cent compounded for each day late, the annual rate is in excess of 3000% with the penalty running into millions of dollars for a twelve-month period on the original amount outstanding. This is usurious when considered in the context of the possible losses incurred by the applicant. In the instant case, even using a most generous approach., it seems unlikely that any damages as a result of late payments to the various union benefit plans could result in damages of $35,361.85 over 23 days.
Contractors who withhold substantial benefit payments for one, two or more months have an unfair advantage over contractors who make timely payments pursuant to the collective agreement. The delinquent contractor has the added benefit of the use of this money to the detriment of the union benefit funds and the other contractors. The Board in Beckett Elevator Company Limited, [19831 OLRB Rep. Sept. 1391 had the following to say about 'interest" on late payments:
... an interest component is an important aspect of the measure of damages when an aggrieved party is able to establish that a sum of money should have been paid some months or years before. The interest component is not a penalty. It is part of the compensation for the loss incurred, and that there is a cost or loss arising when money is not paid on time is obvious to anyone who has worried about the size of his accounts receivable.
The applicant's benefit plans should be compensated for any losses incurred due to the respondent's failure to make timely payments. However, the applicant did not address the issue in terms of damages but emphasized that the clause was intended to punish as well as discourage other employers from behaving in a similar fashion. The question of whether payments required under a clause such as 1001 are penalties or enforceable pre-estimates of losses arising from an employer's violation of the collective agreement was addressed in the Board's decision in Parlay Construction Ltd.,[1984] OLRB Rep. Aug. 1120. Paragraphs 5 and 6 of that decision states:
The general approach of the civil courts is to enforce an amount stipulated for breach of a contract if the amount in question is a genuine pre-estimate of damages, but not to enforce it (at least not beyond the amount of any actual damages) if it is, in fact, a penalty. The courts have also made it clear that the use of the terms 'penalty" or "liquidated damages" in a contract is not conclusive. In the leading case of Clydebank Engineering v. Don Jose Ramos Yzquierdo Y Castaneda [1905] AC. 6 a clause specified that for each week that a ship's delivery was delayed, a "penalty" of 500 pounds would have to be paid. The Earl of Hallsbury L.C. analyzed the clause in question as follows:
"The first objection is one which appears upon the face of the instrument itself, namely, that it is a penalty, and not, therefore, recoverable as a pactional arrangement of the amount of damages resulting from the breach of contract. It cannot, I think, be denied - indeed, I think it has been frankly admitted by the learned counsel - that not much reliance can be placed upon the mere use of certain words. Both in England and in Scotland it has been pointed out that the Court must proceed according to what is the real nature of the transaction, and that the mere use of the word "penalty" on the one side, or "damages" on the other, would not be conclusive as to the rights of the parties."
- In ascertaining whether amounts referred to in a collective agreement are a penalty or a preestimate of liquidated damages, a helpful guide is the reasoning of the United States 7th Circuit Court in United Order of American Bricklayers and Stone Masons Union No. 21 v. ThorleifLarsen & Sons, Inc. 89 LRRM 3113. In that case, a collective agreement contained a clause that made the employer liable for an additional 10% payment on failure to remit welfare and benefit fund contributions in a timely fashion, as well as for payment of all these monies. In construing this clause, the court carefully considered the question of penalties vis-a-vis liquidated damages in the context of an agreement arrived at under a collective bargaining regime. Pell C. J. set out the requirements of liquidated damages as being two-fold:
"(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and
(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation'~.
It was the view of the court that the union's anticipated damages would go beyond mere loss of the use of funds, but would also include increased administrative costs from collection efforts, the cost of attempts to forecast receipts, possible loss of benefits to employees and harm to labour-management peace. In the circumstances, the Court concluded that it would be just and equitable to regard the collective agreement provision as a genuine pre-estimate of damages and to enforce it. The essential part of the Court's award is set out below:
"It is clear that the defendant contractually agreed to make the contributions and to pay an additional 10% if the payment was not made in time. This would appear to be a part of the consideration which [the appellee] agreed to pay for services performed by his employees.
An underlying purpose of a labor agreement is to provide for a period of industrial harmony between labor and management. It is in keeping with the spirit of our federal relations policy that labor contracts are to be enforced as negotiated by the parties. While the difficulties of the advance accurate estimation of damages are otherwise adequately demonstrated in the present case, we do note the difficulty, if not impossibility, of quantifying the intangible damages to labor-management harmony resulting from failure to comply with the provisions which have been hammered out in bargaining sessions.
We are satisfied that the plaintiff has clearly established that the harm caused by the breach is one that is very difficult of accurate estimation. That having been established, we are unable to say under the particular circumstances of this negotiated labor contract that the amount so fixed is not within the range of reasonable forecast of just compensation for the harm caused by the breach."
- A penalty is "a sum that is fixed in advance as being subject to forfeiture or payment in the event of non-performance of a contract, or some kind of misperformance" (Fridman, The Law of Contract in Canada (Carswell, 1986, 2nd ed.)). The common law draws a distinction between penalty clauses (which are unenforceable) and "genuine pre-estimates" liquidating damages for a breach of contract (which are enforceable). As stated in Canadian General Electric Co. v. Canadian Rubber Co. (1915), 1915 CanLII 45 (SCC), 27 D.L.R. 294, at 295 (S.C.C.):
A penalty is the payment of a stipulated sum on breach of the contract irrespective of the damage sustained. The essence of liquidated damages is a genuine covenanted pre-estimate of damage.
Mere use of the words "liquidated damages" or "penalty" is not conclusive (Shatilla v. Feinstein, 1923 CanLII 62 (SK CA), [1923] 3 D.L.R. 1035 (Sask. C.A.)). Rather, the courts will consider the whole agreement in an effort to discern whether the sum stipulated is a penalty or liquidated damages. In Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co. [1915], A.C. 79 at 86 (H.L.), Lord Dunedin laid down the following general rules for determining whether a clause is penal in nature:
(1) The sum in question will be a penalty if it is extravagant and unconscionable in amount in comparison with the greatest loss that could possibly follow from the breach.
(2) If the obligation of the promisor is to pay a certain sum of money and it is agreed that if he fails to do so he will pay a larger sum, this larger sum is a penalty.
(3) If there is only one event, on which the sum agreed is to be paid, the sum is liquidated damages.
(4) If a single lump sum is made payable upon the occurrence of one or more or all of several events, some of which may occasion serious and others only trifling damages, there is a presumption, but no more, that the sum is a penalty. But not necessarily if it is difficult to prove actual loss.
- Courts and commentators alike have acknowledged that in relieving against penalty clauses, the courts are interfering with freedom of contract (see Corbin, Contracts para. 1055; Waddams, The Law of Contracts, 2nd ed., at 334). In Elsley v. J. G. Collins Ins. Agencies Ltd (1978), 1978 CanLII 7 (SCC), 83 D.L.R. (3d) 1, the Supreme Court of Canada (at 15) said:
It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression.
In view of the fact that a refusal to enforce a penalty clause potentially encroaches on the principle of freedom of contract, Waddams, supra (at 336) suggests that:
The question in issue should not be the accuracy of the pre-estimate, but the reasonableness of the agreement. These are not always the same. Certainly, the genuineness of the pre-estimate is an important consideration in determining the reasonableness of the agreement but it should not be conclusive.
- The Supreme Court of Canada decision in Dimensional Investments Ltd. v. R. 1967 CanLII 85 (SCC), [1968] S.C.R. 93 (at 101) demonstrates that a clause which is penal (in the sense that it commands a sum wholly disproportionate to the damage suffered) will not necessarily be unenforceable if it is not also "unconscionable". In this regard, Ritchie J. stated:
Whether a provision in a contract is penal or not depends upon the construction of the contract but the question of unconscionability must depend upon the circumstances of each case at the time when the clause is invoked.
The penalty payment for the 23 day late payment of the principal sum of $137,507.50 is $35,361.85 or $1,537.47 per day. This clause in the union's own view is designed to punish and deter delinquent contractors. A one per cent daily compounded interest rate in the circumstances of this case appear to be out of proportion to any possible damages suffered. The benefit funds should be compensated for any losses due to late payments. This decision is not to be interpreted to say that a clause in a collective agreement cannot reflect a genuine pre-estimate of damages incurred by late payments. In this particular case, the interest rate of one per cent per day compounded is penal in nature as well as unconscionable. As a result, the Board declines to enforce the penalty of one per cent per day compounded.
Having regard to the foregoing, the Board finds that the respondent has failed to comply with the terms of the collective agreement. As a result of this failure, the applicant's benefit plans were deprived of the use of these funds for 23 days. In order to compensate the benefit plans, the Board, having regard to Beckett Elevator Company, supra, awards interest on the late payment on the basis of the chartered banks' prime time rate at the time the application was filed. The respondent shall pay forthwith to the applicant on behalf of the benefit plans interest at the applicable chartered banks' prime time rate for 23 days on the late payment.
In view of the conclusions we have reached on the penalty clause, it is not necessary to address the issue of the applicability of the Interest Act in these circumstances.
CONCURRING OPINION OF BOARD MEMBERS H. KOBRYN AND W. N. FRASER; April 18, 1990
When the Board has to adjudicate on this type of clause which is the subject of this dispute, we have to consider why such a clause was negotiated by the parties into this collective agreement and why it is so stringent.
When you look to the reasons you find they are two-fold:
One, from the Union's point of view, it's there primarily to protect their members who are employees of the various employers bound by this collective agreement. The fringe benefits negotiated by the parties are submitted to the respective funds by employers within the time period specified in the collective agreement, so that the employees will realize the full benefit of these earned contributions when they are due.
Two, from the employer's point of view, especially those employers who live by the letter of the collective agreement and submit the negotiated fringe benefit monies on time, they are in a competitive disadvantage to their competitors who do not make contributions on time and have the use of these monies over a lengthy period.
The facts of life in the construction industry are that subcontractors who are successful bidders have to finance the project by buying the necessary material for the project up front and paying the labour costs. This is almost always financed by loans from financial institutions. The high rates of interest of those loans cause financial costs which are quite substantial and must be included in their bid price. Added to this cost is the fact that it may be a lengthy period before they receive payment for the work performed from the Owner or the General Contractor. The cost of money borrowed to finance the project becomes a major cost item to the employer's operations. Anyone who can avoid this cost by using the monies which are due to the fringe benefit funds for a lengthy period has a definite competitive advantage over contractors who make timely contribution payments.
This sort of advantage must be avoided at all costs so that every contractor bound by this collective agreement plays from a level playing field. That is why these types of clauses in construction industry collective agreements are so important to the parties who negotiated them and must be acknowledged and protected to the full extent of the law.