DATE: 20050729

DOCKET: C42075

COURT OF APPEAL FOR ONTARIO

ROSENBERG, SIMMONS and GILLESE JJ.A.

B E T W E E N :

SCHAIBLE ELECTRIC LTD.

Irwin A. Duncan and Michael A. van Bodegom for the appellant

Plaintiff (Respondent)

• and -

Matthew G. Moloci for the respondent

MELLOUL-BLAMEY CONSTRUCTION INC. and THE HAMILTON-WENTWORTH DISTRICT SCHOOL BOARD

Defendants (Appellant)

Heard: June 2, 2005

On appeal from the judgment of Justice John Cavarzan of the Superior Court of Justice dated May 28, 2004.

GILLESE J.A.:

[1] The Hamilton-Wentworth District School Board awarded Melloul-Blamey Construction Inc. the contract to construct the Waterdown Elementary School. General contractors submitting tenders for the project were required to carry electrical and mechanical bids from companies who had been pre-qualified by the School Board. Schaible Electric Ltd., one of the pre-qualified electrical subcontractors, submitted the lowest bid for the electrical work for the project. Melloul-Blamey carried Schaible Electric’s bid in its tender. However, based on serious concerns that it later had about Schaible Electric’s ability to complete the electrical work competently and expeditiously, Melloul-Blamey demanded 100% performance and labour and materials bonds, which Schaible Electric was unable to obtain. Melloul‑Blamey then refused to use Schaible Electric as the electrical subcontractor on the project. Instead, it contracted with the electrical company that had submitted the second lowest electrical bid.

[2] Schaible Electric sued Melloul-Blamey and the School Board.

[3] At trial, Cavarzan J. found that Melloul-Blamey had failed to establish that it reasonably objected to using Schaible Electric as the electrical subcontractor and that it had breached its duty to act fairly and in good faith with Schaible Electric. He granted judgment in favour of Schaible Electric against Melloul-Blamey for $45,000, for loss of profits due to breach of contract, plus prejudgment interest and costs. He dismissed the action against the School Board.

[4] Melloul‑Blamey appeals. It submits that the trial judge erred in finding that Melloul-Blamey did not have a reasonable objection to contracting with Schaible Electric and in holding that it was not entitled to demand performance and labour and material bonds from Schaible Electric in the full amount of the subcontract price. Melloul‑Blamey also seeks leave to appeal the trial judge’s award of costs.

[5] For the reasons that follow, I would dismiss the appeal.

BACKGROUND

[6] Melloul-Blamey is an established general contractor with particular experience in institutional construction, including construction of schools. In September 1999, Melloul-Blamey submitted a tender for a contract to construct the Waterdown Elementary School for the School Board.

[7] All contractor and subcontractor tenders were to be submitted through the Hamilton Construction Association Bid Depository. The parties agree that the Ontario Bid Depository Standard Rules and Procedures, Ninth Edition, applied to tendering on the project.

[8] General contractors were required to carry a bid from electrical and mechanical subcontractors who had been pre-qualified by the School Board. Pursuant to the rules, bids from the pre-qualified subcontractors were disclosed to Melloul-Blamey before it submitted its tender. Schaible Electric, a pre-qualified electrical subcontractor, submitted the lowest bid for the electrical work for the project. Melloul‑Blamey carried Schaible Electric’s bid in its tender to the School Board.

[9] The School Board awarded Melloul-Blamey the contract on September 30, 1999. A formal contract for construction of the school was entered into on October 6, 1999, for $6,193,000 plus GST (the “prime contract”). The prime contract specified that the work was to commence by October 15, 1999, and be substantially completed by August 11, 2000. Article 3.8.5 of the prime contract gave Melloul-Blamey the right to reasonably object to contracting with a subcontractor.

[10] Melloul-Blamey was required to, and did, provide a performance bond and a labour and materials bond, each in the amount of 50% of the total contract price tendered. The face amount of each of the bonds was $3,096,500.

[11] On October 27, 1999, Schaible Electric received a fax from Melloul-Blamey stating that Melloul‑Blamey required it to provide a performance bond, and a labour and materials bond, each in the full amount of the subcontract price, by November 1, 1999. Melloul‑Blamey claimed that concerns about Schaible Electric’s ability to obtain materials from suppliers, and to complete the project in a timely manner, underlay its demand.

[12] By letter dated October 27, 1999, Kurt Schaible, the president of Schaible Electric, advised Melloul-Blamey that he could not get a bond within the required time frame and offered, instead, to give a personal guarantee backed by certain properties.

[13] On October 28, 1999, at the instigation of Mr. Schaible, the Christian Labour Association of Canada (CLAC) sent a letter to Melloul-Blamey stating that it understood that Melloul‑Blamey was considering looking for another subcontractor to do the electrical work on the project because of “false rumors and innuendo”. The letter assured Melloul‑Blamey that Construction Workers, Local 6, of the CLAC had had a good working relationship with Schaible Electric for more than 25 years and had always found the company to be reliable and able to meet deadlines and budgets.

[14] On October 29, 1999, Melloul-Blamey sent Schaible Electric a letter stating that it would award the subcontract to another subcontractor. On November 26, 1999, Melloul-Blamey entered into a contract for the electrical work on the project with C. Wallingham Electric Inc., the second lowest electrical bidder.

THE TRIAL DECISION

[15] The central issue at trial was whether Melloul-Blamey had reasonably objected to contracting with Schaible Electric.

[16] At trial, Melloul-Blamey’s project manager, David Coulter, testified that within a week of Melloul-Blamey entering into the prime contract, he telephoned Mr. Schaible to introduce himself and ask for references. He claimed that on October 26, 1999, after Mr. Schaible failed to respond to his request for references, he had two separate conversations about Schaible Electric. The first was with Maurice Graff, the architect for the project, and the other with Duane O’Connor, the site representative for the School Board. Both men expressed concern about Schaible Electric’s ability to undertake the project in a timely manner.

[17] Based on these conversations, Melloul-Blamey personnel contacted various electrical suppliers on either October 26 or 27, 1999, to enquire about Schaible Electric. Tim Henhoeffer, a site supervisor for Melloul-Blamey, testified that not one of the suppliers that was contacted gave a positive response about Schaible Electric. As a result, Melloul-Blamey decided to require Schaible Electric to provide bonding in the amount of the full price of the subcontract. A fax to that effect was sent to Schaible Electric on October 27, 1999.

[18] Mr. Schaible claimed that he never received the call from Mr. Coulter asking for references and that the first time he heard from the project manager was when he received the fax dated October 27, 1999, informing him of the requirement to provide bonding. He testified that of the suppliers that Mr. Coulter contacted, some he had never heard of and he had a good relationship with the others.

[19] The trial judge found that Mr. Melloul, the president of Melloul-Blamey, had a conversation with John Klassen of Bromac Construction on October 27 or 28, 1999, in which Mr. Klassen told Mr. Melloul that Schaible Electric had “botched jobs”, would not be able to perform the subcontract work and that Melloul-Blamey should not use Schaible Electric if it could avoid doing so.

[20] The trial judge also found that Mr. Coulter had not contacted Mr. Schaible before sending the fax dated October 27, 1999. He further found that Melloul‑Blamey had not conducted appropriate due diligence into Schaible Electric’s ability to perform the subcontract and, instead, relied on rumour in coming to its conclusions about the subcontractor.

[21] The trial judge noted that Schaible Electric was a longstanding business that had previously worked successfully on projects for the School Board. He found that although Melloul-Blamey knew Schaible Electric could not obtain bonding for the full price of the subcontract, it did not give serious consideration to any alternative form of guarantee.

[22] The trial judge accepted that Melloul-Blamey had the right to reasonably object to contracting with Schaible Electric. However, he held that Melloul-Blamey failed to establish that it reasonably objected to contracting with Schaible Electric, and that it had breached its duty to act fairly and in good faith with the subcontractor.

[23] The trial judge also considered whether Melloul-Blamey had the right to demand 100% bonding from Schaible Electric. Pursuant to the Supplementary Conditions to the prime contract, Melloul-Blamey had to post a performance bond, and a labour and materials bond, both in the amount of 50% of the total contract price. The prime contract provided that its terms and conditions were incorporated into the subcontractors’ contracts. Based on that, the trial judge held that Melloul-Blamey was limited to requiring Schaible Electric to post bonds for 50% of the accepted bid price of the electrical subcontract. Consequently, he held that Schaible Electric’s failure to obtain the bonding required by Melloul-Blamey did not give Melloul-Blamey a reasonable objection to employing Schaible Electric.

[24] He rejected Schaible Electric’s claims that a fiduciary relationship existed between the parties and that Melloul-Blamey’s conduct warranted an award for punitive or aggravated damages. He awarded Schaible Electric damages of $45,000 for lost profits due to breach of contract.

REASONABLE OBJECTION TO SUBCONTRACT

[25] Melloul-Blamey submits that the trial judge erred in determining that it failed to establish that it reasonably objected to contracting with Schaible Electric. In essence, Melloul-Blamey argues that the trial judge determined the issue of reasonable objection by holding Melloul-Blamey to the standard of investigation expected in a judicial hearing. Whatever standard the trial judge held it to, Melloul-Blamey submits that the trial judge failed to give proper consideration to the circumstances and context within which Melloul-Blamey operated and took into consideration a number of irrelevant factors.

[26] Melloul-Blamey argues that the trial judge should have found that its investigation and resulting objection were reasonable in light of the circumstances it faced in the period immediately after tenders closed. Those circumstances included the following:

▪ the extremely tight timeline within which the project had to be completed;

▪ the critical role that the electrical subcontractor played in the contractor being able to meet the deadline for project completion;

▪ the information that it had received from Mssrs. Graff and O’Connor and the suppliers contacted by Mr. Henhoeffer, all of whom suggested that Schaible Electric was unable to competently complete the electrical work on the project;

▪ the letter from the CLAC, which it says confirmed the existence of rumours about the subcontractor;

▪ Schaible Electric’s inability to obtain bonding;

▪ Schaible Electric’s inability to provide proof of its financial ability when requested; and

▪ based on after-acquired information, Schaible Electric’s insolvency.

[27] The parties agree that the principles governing the issue of whether Melloul-Blamey raised a reasonable objection to contracting with Schaible Electric were enunciated by the Supreme Court of Canada in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943. At para. 50, Binnie J. writing for the court, states:

The prime contractor is protected by Article 10 of the General Conditions of the Stipulated Price Contract that would eliminate a subcontractor if the owner had “reasonable cause” to object (Article 10.3) or if the prime contractor itself “may reasonably object” (Article 10.5). The prime contractor’s protection lies in the contractual right to object. The subcontractor’s protection lies in the concept of “reasonableness”.

[28] The court went on to state that what constitutes a “reasonable” objection depends upon the facts of each case. Accordingly, this court is to afford considerable deference to the trial judge’s determination of whether the general contractor reasonably objected. That determination is not to be set aside, absent a palpable and overriding error.

[29] In my view, there was evidence upon which the trial judge could find that Melloul-Blamey had not acted in good faith and did not reasonably object to contracting with Schaible Electric. While a general contractor has the right to refuse to use a subcontractor when it believes the subcontractor will be unable to perform competently or on time or both, that right is not unfettered. There must be a legitimate basis for the general contractor’s concerns. Here, although Melloul-Blamey had information that called into question Schaible Electric’s capabilities, there was conflicting evidence on the matter. Schaible Electric had been pre-qualified by the School Board, had successfully completed other projects for the School Board, and had a lengthy history of operation in the area.

[30] The trial judge concluded that Melloul-Blamey’s due diligence in investigating Schaible Electric amounted to “perfunctory window-dressing”. Given the speed with which Melloul-Blamey acted, it can scarcely be said that the trial judge was holding it to judicial standards of investigation. On the trial judge’s findings, Melloul-Blamey first became concerned about Schaible Electric’s capabilities on October 26, 1999, after conversations with the project architect and School Board representative. Conversations with suppliers took place in a one or two day period thereafter. Melloul-Blamey’s first communication with Schaible Electric took place by way of the fax sent on October 27, when it asked Schaible Electric to provide 100% bonds. On October 29, Melloul-Blamey sent another fax to Schaible Electric in which it stated that it would award the electrical subcontract to another subcontractor. All of these events occurred in a period of approximately four days but the electrical subcontract with C. Wallingham Electric Inc. was not entered into until November 26, 1999.

[31] The haste with which Melloul-Blamey acted does not stand alone. Melloul-Blamey did not notify Schaible Electric of the nature of its concerns and give it the opportunity to meet or resolve those concerns. Nor did Melloul-Blamey consider possible solutions to its concerns, apart from requiring 100% bonding. For example, there was evidence that Melloul-Blamey’s concern that Schaible Electric would fail to pay its suppliers could have been met had letters of direction been used. When a letter of direction is signed by a subcontractor, any advances are made payable to the subcontractor and its supplier. In that way, suppliers have some assurance of being paid. Further, as explained below, the trial judge held that Melloul-Blamey did not have the right to require Schaible Electric to provide 100% bonds.

[32] The trial judge gave lengthy, thoughtful reasons that reflect the governing legal principles and a full appreciation of the evidence and the circumstances in which Melloul-Blamey was operating. In my view, on the record, it cannot be said that the trial judge made a palpable and overriding error in concluding that Melloul-Blamey had not established that it reasonably objected to contracting with Schaible Electric.

THE RIGHT TO REQUIRE BONDING FOR THE FULL SUBCONTRACT PRICE

[33] The terms of the prime contract were incorporated into the contracts with the subcontractors. As the prime contract provided for bonding well in excess of the amount of the electrical subcontract bid price, Melloul-Blamey argues that it was entitled to demand bonding for the full amount of the subcontract price. Thus, Melloul-Blamey submits, the trial judge erred in capping the amount of bonding it could require from Schaible Electric to 50% of the subcontract price. Melloul-Blamey also submits that the trial judge interpreted the bid and tender documents in such a way as to lead to an unreasonable commercial result because, in effect, it allowed the owner to direct how much bonding it could require of a subcontractor.

[34] The trial judge noted that the School Board did not require, in the tender documents, that subcontractors provide bonds and that the prime contract required Melloul-Blamey to post a 50% performance bond and a 50% labour and materials bond. He rejected Melloul-Blamey’s contention that, as a consequence of the bonding requirement that it faced, it could demand 100% bonding from its sub-trades. He held that, by virtue of having incorporated the terms of the prime contract into the subcontract, Melloul-Blamey was limited to requiring bonding of 50% of the subcontract price. He noted that it was contrary to the terms of Melloul-Blamey’s own form of contract with subcontractors to require that subcontractors pay for bonding in circumstances where bonding was not called for at the time of tendering. He also noted that Schaible Electric was given only five days, including a Saturday and a Sunday, to obtain such bonds. The trial judge concluded that, in the circumstances, Schaible Electric’s failure to obtain bonding did not constitute a reasonable objection.

[35] I see no basis upon which to interfere with the trial judge’s determination. He correctly interpreted the contractual documents and the record amply supports his determination that, in the circumstances, Schaible Electric’s failure to obtain bonding did not constitute a reasonable objection. To require the subcontractor to provide bonding for the full amount of the subcontract, in the circumstances of this case, would be to allow the general contractor to make unilateral, material changes to the terms and conditions of the subcontract. It is not commercially unreasonable to limit general contractors to the terms of the contract that they have entered into with the owner.

COSTS

[36] Melloul-Blamey seeks leave to appeal the trial judge’s costs award. It argues that the trial judge erred in: failing to include counsel fees when determining the full amount of the offer to settle, and therefore erroneously finding that the offer to settle was higher than the amount awarded at trial; failing to attribute any of Schaible Electric’s costs to its action against the School Board, which was dismissed; and, allowing for two counsel fees at trial.

[37] Schaible Electric made a written offer to settle on May 29, 2001, concurrent with service of its statement of claim. It offered to settle for $30,000, inclusive of prejudgment interest, plus costs on a party and party basis to the date of the offer and solicitor and client costs thereafter. The offer expired five minutes after the commencement of trial. The appellant did not accept the offer. The trial judge calculated the value of the offer at $48,717.03. This consisted of $30,000 (including prejudgment interest) plus $13,984 for substantial indemnity costs for all matters prior to trial and in accordance with Schaible Electric’s bill of costs plus disbursements of $4,733.03. The trial judge compared that to the judgment that Schaible Electric had obtained of $45,000 plus prejudgment interest and concluded that the result exceeded Schaible Electric’s offer to settle, without any assessment of costs. While the appellant contends that a comparison of substantial indemnity counsel fees to partial indemnity counsel fees would mean that the offer to settle was actually less than the amount awarded at trial, the material filed on appeal does not permit us to make that determination.

[38] The trial judge refused to penalize Schaible Electric by way of a costs award in favour of the School Board because: while the School Board was a necessary party to the action, its presence did not extend the trial in any significant way; there were no issues advanced in relation to the School Board, the failure of which caused additional or unnecessary expense; and, Melloul-Blamey and the School Board were represented by the same counsel. In the circumstances, I see no error in the trial judge’s decision to not attribute any of Schaible Electric’s costs to its action against the School Board.

[39] A recent decision of this court makes it clear that an award for two counsel fees at trial is permissible, provided that the aggregate of the two fees does not exceed the maximum counsel fee permitted under the costs grid. See Walker v. Ritchie (2005), 2005 13776 (ON CA), 197 O.A.C. 81. The appellant provided an insufficient evidentiary record to determine whether the two counsel fees exceeded the permitted maximum. Therefore, I would not give effect to this ground of appeal.

DISPOSITION

[40] Accordingly, I would dismiss the appeal, grant leave to appeal the costs order but dismiss it, with costs to the respondent fixed at $11,000, inclusive of disbursements and GST.

RELEASED: July 29, 2005 (“MR”)

“E. E. Gillese J.A.”

“I agree M. Rosenberg J.A.”

“I agree Janet Simmons J.A.”