COURT OF APPEAL FOR ONTARIO

CITATION: Delco Automation Inc. v. Carlo's Electric Limited, 2016 ONCA 591

DATE: 20160727

DOCKET: C59834

Feldman, Gillese and Brown JJ.A.

BETWEEN

Delco Automation Inc.

Plaintiff (Respondent/

Appellant by way of cross-appeal)

and

Carlo’s Electric Limited and Carlo Fornasier

Defendants (Appellants/

Respondents by way of cross-appeal)

AND BETWEEN

DOCKET: C59835

Delco Automation Inc.

Plaintiff (Respondent)

and

Carlo’s Electric Limited

Defendant (Appellant)

Stephen Schwartz, for the appellants/respondents by way of cross-appeal

James L. MacGillivray, for the respondent/appellant by way of cross-appeal

Heard: March 22-23, 2016

On appeal from the judgment of Justice G. Patrick Smith of the Superior Court of Justice dated December 10, 2014 with reasons reported at 2014 ONSC 7157.

Brown J.A.:

I. OVERVIEW

[1] These appeals concern a dispute over the scope of work the parties agreed to in their contracts for construction projects at two correctional institutions and issues relating to the performance of those contracts.

[2] The appellant, Carlo’s Electric Limited (“CEL”), is an electrical contracting company whose principal is the individual appellant, Carlo Fornasier. The respondent, Delco Automation Inc. (“Delco”), is an engineering firm specializing in systems integration.

[3] Correctional facilities require integrated security systems (“ISS”) that allow security officers to control an entire security system from one or more touch screens located throughout the facility. In an ISS, a central computer is linked to controllers that send electronic messages to control field devices, such as cameras, speakers, and door locks. Field devices are connected to controllers by wires contained in protective conduits running throughout the system. One of the final steps in installing an ISS is the “termination of the wire”, which is the connection of the wire at the head end, or controller, to each field device, allowing electronic messages to pass back and forth from the device to the central command centre.

[4] The disputes between the parties concern ISS work at two correctional facilities. On the first project, the Greater Toronto Area Youth Centre in Brampton (the “Brampton Project”), Delco contracted with the general contractor to provide systems integration work. Delco hired CEL as an electrical sub-contractor. Delco claimed CEL was required to supply and install wiring inside and outside the perimeter of the buildings. CEL disagreed. Delco had to retain other firms to complete the work. Delco claimed damages for CEL’s failure to perform the work; CEL counterclaimed for monies due under the contract.

[5] The second project was at the Collins Bay Correctional Institution (the “Collins Bay Project”). CEL secured the contract for certain electrical work. CEL, in turn, sub-contracted with Delco to provide the system integration work. Delco took the position that the contract required CEL to perform the work of terminating the field devices. CEL disagreed. Delco performed the termination work under protest and sued CEL for the cost of the work.

[6] As the trial judge noted, the issues in both actions were similar as they involved a determination of the scope of work agreed to by the parties under their contracts for each project.

[7] On the Brampton Project, the trial judge found CEL had contracted to supply and install the inside and outside perimeter wire, CEL had breached the contract, and the trial judge awarded Delco damages of $443,103.10. The trial judge dismissed CEL’s counterclaim.

[8] On the Collins Bay Project, the trial judge found CEL breached the contract by refusing to perform the termination work. The trial judge awarded damages of $487,941.63 against CEL, as well as against Mr. Fornasier on the basis that he had assented to, or acquiesced in, CEL’s breach of the trust provisions contained in ss. 8 and 13 of the Construction Lien Act, R.S.O. 1990, c. C.30 (the “CLA”). However, the trial judge refused Delco’s request to declare that the judgment against Mr. Fornasier survived bankruptcy pursuant to s. 178(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.

[9] In relation to the Brampton Project, CEL appeals the trial judge’s award of damages, the quantum of damages, and the dismissal of its counterclaim. In relation to the Collins Bay Project, CEL appeals the award of damages, Mr. Fornasier appeals the trial judge’s order in relation to his liability under the CLA, and Delco cross-appeals the trial judge’s finding that Mr. Fornasier’s liability did not survive his bankruptcy.

[10] I would dismiss both appeals by CEL, allow the appeal of Mr. Fornasier in respect of his personal liability under s. 13 of the CLA, and dismiss Delco’s cross-appeal in the Collins Bay Project action.

II. STANDARD OF REVIEW

[11] Most of the grounds of appeal advanced by CEL involve either issues of contractual interpretation or specific findings of fact made by the trial judge, especially regarding what terms the contracts contained. The former are reviewable on the deferential standard set out in Sattva Capital Corp. v. Creston Molly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-52; Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] S.C.J. No. 19, at para. 21. The latter can only be set aside on appellate review by demonstrating the trial judge made a palpable and overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 10.

III. THE BRAMPTON PROJECT (C59835)

The issues

[12] CEL submits the trial judge erred in: (a) concluding the scope of work agreed upon by the parties included the supply and installation of wiring inside and outside the perimeter of the buildings; (b) finding Delco had reasonably mitigated its damages; (c) allowing Delco to recover certain damage claims; and (d) dismissing CEL’s counterclaim.

(a) The scope of work

[13] CEL submits the trial judge made three errors in concluding CEL had breached the contract by failing to install and supply the wiring:

(i) He found the parties had agreed on the scope of work under the contract, when the evidence showed they had not;

(ii) He ignored the evidence of CEL’s expert, Andre Miksys; and

(iii) He improperly drew an adverse inference against CEL on the basis that it had lost and destroyed material documents.

The evidence and the trial judge’s findings of fact

[14] The scope of work dispute turned on whether the parties had agreed CEL would supply and install the wiring for the project and perform work outside the perimeter of the buildings. At trial, certain facts about the negotiations between the parties on the scope of work were not in dispute:

(i) Delco sent a Scope of Work (“SOW”) document to CEL shortly before the December 8, 2006 bid date that showed the electrical contractor would supply and install wiring inside and outside the perimeter of the buildings;

(ii) CEL provided Delco with an oral quote on December 8, 2006 for $624,950;

(iii) When Delco learned, in March 2007, that it had been awarded the contract, it contacted CEL to confirm its bid was still good; in response, CEL provided, on March 22, 2007, a written quote that included the supply and installation of wiring;

(iv) On July 26, 2007 Delco emailed CEL that the general contractor had accepted Delco’s proposal to use CEL and told CEL to treat the email as “a Letter of Intent to proceed based on your Quotation dated March 22, 2007”; and

(v) CEL started to work on the Brampton Project before Delco issued a purchase order for the work on November 28, 2007. The Purchase Order stated it was based on the scope of work identified in Delco’s December 2006 SOW, which included the installation of the wiring. CEL immediately objected to the scope of work included in the purchase order.

[15] However, the trial judge was faced with other, conflicting evidence about whether CEL had agreed to supply and install wiring:

(i) In its statement of defence, CEL pleaded it did not possess Delco’s SOW when it made its bid in December 2006, a position Mr. Fornasier recorded on his mark-up of the November 2007 purchase order. However, at trial Mr. Fornasier admitted CEL had received the SOW, but had not paid it much attention before making its quote to Delco;

(ii) CEL relied on two documents to support its position that it had not agreed to supply and install wiring: (i) a December 8, 2006 quote for $864,800, and (ii) a March 23, 2007 quote purporting to correct and remove the inclusion of wiring from its quote of the previous day. Delco witnesses testified they did not receive either document. Delco submitted CEL had fabricated the documents; and

(iii) CEL contended that in an August 1, 2007 email Mr. Fornasier had stated work outside the perimeter of the building was not included in its quotation. Delco led evidence that it understood the email referred to underground duct bank work, not wiring.

[16] The trial judge reviewed the conflicting evidence at some length and noted credibility was central to determining the issue. The trial judge gave several reasons for preferring Delco’s evidence:

(i) He accepted the evidence of Delco’s expert that CEL could have quoted on supplying wire for the project without referring to Delco’s SOW because CEL had the information it required to do so in other project documents in its possession;

(ii) CEL witnesses testified that after making an oral quote to Delco, they followed up by sending a written quotation to Delco and two other bidding system integrators on December 8, 2006. However, the trial judge noted CEL did not lead any evidence from those integrators to counter Delco’s allegation that CEL had fabricated the written quotation;

(iii) The trial judge regarded CEL’s position that the reference to “c/w wiring” in the March 22, 2007 quote sent to Delco was a mistake as “neither credible nor plausible”;

(iv) Delco had produced its fax logs for the period and they supported its position that it had not received the December 8, 2006 and March 23, 2007 documents CEL contended it had sent; and

(v) CEL did not produce its fax logs and certain other documents. The trial judge held CEL’s evidence that many or most of its records were lost during a computer upgrade was not believable.

Analysis

[17] The trial judge was faced with conflicting evidence about the course of negotiations between the parties concerning the scope of work contained in their contract for the Brampton Project. It is clear from his reasons the trial judge accepted Delco’s evidence that the contract’s scope of work required CEL to supply and install the wiring and perform outside the perimeter work, as confirmed by CEL’s written quote of March 22, 2007.

[18] In the course of reaching that conclusion, the trial judge rejected the evidence of the CEL witnesses that they had sent other quotes to Delco which excluded the supply and installation of wiring. One finding made by the trial judge was that “CEL deliberately destroyed hard copy files and/or concealed documentation that was unfavourable to their case”: para. 101. CEL submits the trial judge erred in reaching that conclusion because Delco did not plead the spoliation of documents and only raised the issue at trial. Further, CEL contends the trial judge erred in using a finding of spoliation to draw adverse inferences about the credibility of CEL’s witnesses.

[19] With respect, that submission takes too narrow a view of the trial judge’s reasons. When they are read as a whole, it is apparent he gave several reasons for preferring the documentation adduced by Delco: (i) whereas Delco had produced its fax logs for the period, CEL had not; (ii) notwithstanding the parties were in a dispute over the scope of work by the time of the November 2007 purchase order, Mr. Fornasier testified CEL had shredded most of its project file within a few years after the project’s completion, with the result CEL could not establish it had sent its contested documentation to Delco; (iii) it was open to CEL to adduce evidence from other integrators in support of its assertion that it had sent a written December 8, 2006 quote both to them and to Delco, but it did not; and (iv) having listened to the explanations of the CEL witnesses that the March 22, 2007 quotation that included the wiring work in the scope of work was a mistake, he rejected their explanation as “neither credible nor plausible.” That evidence provided ample support for the trial judge’s findings about which documents CEL had or had not sent to Delco and the agreed upon scope of work under the contract.

[20] Finally, I would not accept CEL’s submission that the trial judge failed to consider the evidence of its expert, Mr. Miksys, of Dejabe Construction Services.

[21] Mr. Miksys’s report focused on whether Delco’s December 2006 SOW formed part of the Brampton Project’s “Contract Documents”, in the sense that the SOW was prepared by the Project architect or engineer. He opined it did not, and concluded CEL was not required to refer to it in its quotes. The trial judge considered the evidence of Mr. Miksys: para. 35. However, as he was entitled to do, the trial judge preferred and relied on other evidence in concluding the parties had agreed to a scope of work that included the supply and installation of wiring.

(b) Mitigation of damages

[22] At the end of July 2008, the parties met to discuss several items in dispute concerning the Brampton Project, including the supply and installation of wiring. Delco insisted CEL perform the wiring work; CEL refused. However, by email dated August 6, 2008, CEL offered to quote on the installation of wiring as an extra as long as Delco provided certain drawings.

[23] Delco responded on August 18, 2008, reiterating CEL had agreed on March 22, 2007 to supply and install the wiring and, if it failed to do so, Delco would seek to recover from CEL any costs Delco incurred to do the work.

[24] CEL argues that since Delco did not give it the opportunity to quote on the disputed work, it acted unreasonably in retaining third parties to perform the work. Accordingly, the trial judge erred in finding Delco acted reasonably to mitigate its damages.

[25] Although a plaintiff is entitled to recover damages for the losses it suffers from the defendant’s breach of contract, the extent of those losses may depend upon whether it has taken reasonable steps to avoid their accumulation: Michaels v. Red Deer College (1975), 1975 CanLII 15 (SCC), 57 D.L.R. (3d) 386 (S.C.C.), at p. 390. Where, after the breach of a commercial contract, a defendant makes an offer to the plaintiff that would reduce the losses incurred, the plaintiff is generally required to accept a reasonable offer by way of mitigating its damages. However, it is always a question of fact whether it is reasonable for the plaintiff not to accept the breaching defendant’s offer: Payzu Ltd. v. Saunders, [1919] 2 K.B. 581 (C.A.), at p. 589; Nashville Contractors Ltd. v. Middleton, [1984] O.J. No. 99 (C.A.).

[26] In the present case, the trial judge found Delco acted reasonably in not accepting CEL’s offer to quote, in part because it had lost confidence in CEL: paras. 108 and 110. The trial judge also found CEL had adduced no evidence that it would have charged less for the disputed work than what Delco ended up paying third parties to complete the work: para. 109. Those findings were open to the trial judge on the record before him. Accordingly, I see no basis to interfere with his conclusion that Delco had reasonably mitigated its damages.

(c) Particular damage claims

[27] CEL submits the trial judge erred in allowing Delco to recover damages for certain claims: (i) the cost of releasing a labour and material bond; (ii) the costs of an audit to ascertain the amount of conduit CEL had installed; (iii) overhead and profit on additional labour hours; and (iv) the additional costs of supplying and installing masts.

[28] The trial judge found: (i) the bond premium was justified because CEL had acted unreasonably; (ii) the audit costs were reasonably necessary; (iii) the overhead and profit costs were standard in the industry; and (iv) the masts fell within the scope of work CEL had contracted to perform. CEL has not demonstrated any palpable or overriding error in respect of any of those findings. I would not give effect to this ground of appeal.

(d) Counterclaim

[29] CEL counterclaimed for some work it had performed outside the perimeter of the buildings that it contended was an extra to the contract. The trial judge found the work performed outside the perimeter fell within the contract’s scope of work and dismissed the counterclaim. CEL acknowledges that if this court does not interfere with the trial judge’s conclusion on the scope of work, this ground of appeal fails. Given that I see no error in the trial judge’s conclusion on the scope of work, I would dismiss CEL’s appeal in respect of its counterclaim.

(e) Summary

[30] For the reasons set out above, I would dismiss CEL’s appeal in the Brampton Project action.

IV. THE COLLINS BAY PROJECT (C59834)

A. The issues

[31] CEL engaged Delco as a sub-contractor to perform systems integration work on the Collins Bay Project. CEL submits the trial judge erred in finding the scope of work in the contract did not require Delco to perform the task of terminating the field devices. In addition, Mr. Fornasier submits it was an error for the trial judge to hold him jointly liable with CEL for damages to Delco on the basis that he was liable under s. 13(1) of the CLA for CEL’s breach of its trust obligations under s. 8 of the Act.

B. The scope of work

[32] CEL submits the June 15, 2005 purchase order it issued to Delco was the best evidence of the scope of work agreed to by the parties for the Collins Bay Project and therefore the trial judge erred in holding the purchase order did not delineate the scope of work between them. I would not accept this submission.

[33] The trial judge was faced with a situation in which there was no document signed by both parties setting out the terms of their agreement. In those circumstances, he was required to review all the evidence – both documentary and testimonial – to determine, on a balance of probabilities, whether the parties reached an agreement on the scope of work and, if they did, the terms of that agreement.

[34] As in the case of the Brampton Project, the trial judge was faced with conflicting evidence from the parties about the terms of the scope of work for the Collins Bay Project. Prior to the close of tenders in early January 2005, Delco had sent several versions of a scope of work document to CEL (and to eight other electrical contractors who were bidding on the project) that specified the electrical contractor would be responsible for terminating the field devices (the “SOW”). Before the close of tenders, Delco provided CEL with two price quotes for the work described in the SOW. Delco’s evidence was that the deal it struck with CEL for the work just before the close of tenders was based on CEL accepting Delco’s proposed SOW.

[35] Mr. Fornasier testified that before the close of tenders he spoke with Grant Lagimodiere at Delco to advise that CEL would only work with the company if Delco supplied and installed a complete ISS, including the termination of field devices. Mr. Lagimodiere denied the conversations took place.

[36] The parties met in May 2005, after the general contractor informed CEL it had accepted CEL’s bid. The CEL witnesses testified the scope of work was discussed at the meeting, with Delco responsible for the termination work. Mr. Lagimodiere denied any such discussion had taken place.

[37] Finally, on June 15, 2005, CEL issued a purchase order to Delco “to supply and install fixed point alarm system, door control and card access system, CATV system, PA communication system, CCTV system and guard tour system.” The document did not indicate whether it included termination work.

[38] Delco began to work on the Collins Bay Project. A dispute about the scope of work did not arise until May 2006, when CEL told Delco it was required to perform the termination work. Delco did so, but under protest.

[39] The trial judge preferred the evidence of Delco and concluded the scope of work for Collins Bay Project did not require Delco to perform termination services. He noted the evidence from both parties was consistent on a key point: the terms of the contract were finalized before the close of tenders in January 2005, several months before CEL issued its purchase order. After considering the contents of Delco’s SOW and CEL’s purchase order, as well as the circumstances surrounding their creation and issuance, the trial judge concluded Delco’s documents more reliably described the scope of work.

[40] The trial judge gave several reasons for this conclusion: (i) the Delco documents explicitly dealt with the division of work between the integrator and electrical contractor, whereas the purchase order did not; (ii) three witnesses, including a CEL employee, Thierry Segers, testified the scope of work was that set out in Delco’s SOW; (iii) it was “inconceivable” that Mr. Fornasier would not have documented any discussed changes to the scope of work before the close of tenders; and (iv) CEL performed work that should have been done by Delco according to its own purchase order, indicating the parties did not consider the work described in the purchase order accurately reflected their agreement.

[41] The appellant submits the trial judge misapprehended the evidence of Thierry Segers concerning his discussions with Delco prior to the close of tenders. I do not agree. The trial judge’s reasons accurately summarize Mr. Segers’ evidence on cross-examination that Delco’s reduced price quotations were based on Delco’s SOW that had been emailed to CEL: para. 146. He then accurately summarizes Mr. Segers’ evidence in chief about his understanding of the parties’ respective work responsibilities: para. 164. The trial judge held the best evidence about the terms of the contract was found in Delco’s SOW, which was supported by the evidence of Delco’s witnesses and Mr. Segers. That conclusion was open to the trial judge to make in light of Mr. Segers’ evidence.

[42] The trial judge considered the relevant evidence, made findings of credibility, and explained why he preferred Delco’s evidence over that of CEL. The appellant has not demonstrated that the trial judge made any palpable or overriding error in concluding the terms of the scope of work agreed to by the parties did not require Delco to perform the termination work. I see no basis upon which to interfere with that finding or the trial judge’s further conclusion that CEL breached the agreement by refusing to undertake the termination work.

C. Construction Lien Act breach of trust

[43] Under s. 8(1) of the CLA, all amounts received by a contractor on account of the contract price of an improvement constitute a trust fund for the benefit of sub-contractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor. Section 8(2) prohibits a trustee contractor from appropriating or converting any part of the fund to the contractor’s own use, or to any use inconsistent with the trust, until all sub-contractors are paid all amounts owed to them by the contractor related to the improvement. Any officer, director or person who has effective control of a corporation is liable, under s. 13(1), for the corporation’s breach of trust if the person “assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust.”

[44] The trial judge found CEL failed to protect or pay to Delco trust funds relating to the Collins Bay Project. As well, he found that Mr. Fornasier, CEL’s principal, knew or reasonably ought to have known that CEL’s withholding of funds from Delco amounted to a breach of trust by CEL.

[45] CEL submits the trial judge erred in making those findings because Delco did not call evidence about whether the general contractor, Bondfield, had paid funds to CEL that CEL then failed to pay to Delco.

[46] A plaintiff alleging a breach of the s. 8 trust bears the initial onus of proving the existence of the trust by showing the contractor received monies on account of its contract for the project and the plaintiff supplied services or materials to the improvement. The onus then shifts to the contractor to show its payment of trust funds complied with the CLA: Emco Corp. v. Ontario Trenchless Construction Ltd. (2007), 65 C.L.R. (3d) 33 (Ont. S.C.), at para. 9. The party seeking to attach liability to the individual director or officer must demonstrate the elements required by s. 13(1): Belmont Concrete Finishing Co. v. Marshall, 2012 ONCA 585, 15 C.L.R. (4th) 1, at para. 10.

[47] The evidence before the trial judge on this issue was brief: Mr. Fornasier admitted the general contractor, Bondfield, paid CEL for the work specified in their contract; CEL was not able to obtain from Bondfield any additional funds for the termination work that Delco claimed was an extra; and CEL paid Delco all the money it received from Bondfield in connection with the Delco SOW. In sum, the evidence showed CEL paid to Delco all funds it received from the general contractor for the work covered by the sub-contract between CEL and Delco.

[48] The trial judge’s reasons do not explain the basis for his findings of a breach of trust under s. 8(2) of the CLA or Mr. Fornasier’s personal liability under s. 13(1). In my view, although the funds received by CEL from Bondfield were impressed with a trust pursuant to s. 8(1) of the CLA, the evidence did not amount to Delco demonstrating, on a balance of probabilities, that Mr. Fornasier had assented to, or acquiesced in, conduct that he knew, or reasonably ought to have known, amounted to a breach of trust by CEL.

[49] Consequently, I would allow Mr. Fornasier’s appeal in respect of his personal liability under s. 13 of the CLA. It follows that I would dismiss Delco’s cross-appeal from the refusal of the trial judge to grant a declaration that the judgment against Mr. Fornasier survives a bankruptcy pursuant to s. 178(d) of the Bankruptcy and Insolvency Act.

V. DISPOSITION

[50] For the reasons set out above, I would dismiss the appeals of CEL. I would allow the appeal of Carlo Fornasier and would set aside the judgment against him in the Collins Bay Project action. I would dismiss Delco’s cross-appeal in the Collins Bay Project action.

[51] At the hearing, counsel agreed the successful party on the appeals was entitled to costs of $21,000 for the Brampton Project appeal and $12,500 for the Collins Bay Project appeal, both inclusive of HST and disbursements.

[52] As Delco was successful on the Brampton Project appeal, I would award it costs of $21,000.

[53] On the Collins Bay Project appeal, Delco successfully resisted CEL’s appeal, but Mr. Fornasier succeeded on his appeal. Counsel advised they had not discussed the quantum of costs in the event only part of an appeal was allowed. In his notice of appeal, Mr. Fornasier did not seek costs. In those circumstances, I would award Delco costs of the appeal, but fixed at a reduced amount of $10,000, payable by CEL.

Released: “KF” (July 27, 2016)

“David Brown J.A.”

“I agree K. Feldman J.A.”

“I agree E.E. Gillese J.A.”