Court File and Parties

COURT FILE NO.: CV-15-537541 DATE: 20160512 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Brookfield Multiplex Construction Canada Limited, Plaintiff AND: 21 Avenue Road Building Group Inc. and 21 Avenue Road Investments Inc., Defendant

BEFORE: S.F. Dunphy J.

COUNSEL: Brendan Bowles, for the Plaintiff Mark St. Cyr for the Defendants

HEARD: May 3, 2016

Endorsement

[1] Modern urban construction has become an increasingly complex affair. The modern construction manager must act as conductor of an orchestra comprised of temperamental musicians continually arriving and leaving the stage while the composer re-writes the score. Whether music or cacophony emerges is the question. The gap separating skilled artist from pedestrian journeyman is the difference between symphony and cacophony.

[2] The defendants turned to the plaintiff to act as their construction manager for the conversion of the former Four Seasons hotel site into a condominium. The planned 22-month project had stretched into 44 months before smoldering complaints broke out into litigation and a parting of the ways. Each side blames the other for the delays. I have been designated case management judge to help guide the parties through the litigation process to the point where the issues can be resolved. Our journey is just beginning.

[3] The contract between the parties provided for the appointment of an expert to determine whether changes in scope of the project or services were material, a conclusion that would potentially permit the plaintiff to assert additional claims. The plaintiff wishes to resort to that expert now that litigation has begun. The proposed expert would be determining only one issue - materiality of changes in scope - out of many the parties must sort out in this litigation process. The plaintiff has brought this motion asking me to order the parties to engage the expert and obtain the determination of materiality sought.

[4] For the reasons that follow, I am rejecting the plaintiff’s motion at this time. The change in scope alleged by the plaintiff is delay itself. While the expert could opine on whether delay has reached the point of becoming material, the expert could not answer the question of whether the contract itself considers delay in and of itself to be treated as a change in scope or whether the provisions of the contract dealing with delay alone should govern. That question of law is for the court to determine as would be the economic consequences to be attributed to the delay if so considered. The expert would also have no role to play in attributing fault for the delay that has undeniably occurred. The proposed arbitration process is not likely to produce an outcome that would assist the litigation process and may interfere with or delay it by creating a bifurcation of issues of minimal utility. I find that I have jurisdiction to decline the motion and I do so. As and when it appears that an issue for the expert is ripe for determination, this question can be reconsidered.

Background Facts

Overview of Litigation and Motion

[5] The defendants 21 Avenue Road Building Group Inc. and 21 Avenue Road Investments Inc. are the developer and owner respectively of the site of the former Four Seasons Hotel in midtown Toronto. The plaintiff Brookfield Multiplex Construction Canada Limited had been engaged to provide construction management services in connection with the defendants’ project known as “Yorkville Plaza”.

[6] On December 23, 2011, the plaintiff and 21 Avenue Road Building Group entered into a Construction Management Contract in relation to the “Project” described therein being the retrofit of the former Four Seasons hotel building into a residential condominium building, related demolition work and the construction of a new underground parking structure.

[7] The Contract contemplated that changes in scope of the project would occur. It was designed to accommodate changes in scope of the project or the services to be provided by the Construction Manager without bringing the project to a halt. Fees were capped subject only to (i) additional compensation at an agreed rate in the event of delay; and (ii) additional compensation to be negotiated (or determined by the court) in the event of a change in scope of the project or services to be provided if found to be material. The issue in this case is which of the two exceptions to the fee cap applies where the delay is alleged to have been so material as to amount to a change in scope.

[8] In general terms, the Contract provided for a process to negotiate the effect on compensation of changes in scope (s. 5.5 and General Conditions Part 5). In the event of dispute as to whether a change is material, the parties agreed by s. 5.5(iii) to “appoint a suitably qualified expert from Altus Group” to make an independent assessment and determination. If a change in scope were found to be material, then the parties would be required to negotiate changes to the project schedule or compensation arising (General Conditions, Part 5). Deadlock could be resolved my mediation, arbitration or court proceedings without halting work (General Conditions, Part 7).

[9] Project delay was treated differently. The Contract provided for a prescribed increase in the fees payable in the event of a “Non Default Breach” causing the “Project Schedule” to be extended beyond the originally anticipated schedule ending January 31, 2014 (s. 5.7 and s. 5.8). The cause of the delay – whether it be a material change in scope or any other cause – is not relevant to these two provisions. The sole question is whether the delay can be attributed to the Construction Manager, in which case no compensation is payable, or whether it cannot (in which case pre-determined compensation is payable).

[10] The defendants take the position that the subject of project delay has been comprehensively dealt with in s. 5.7 and s. 5.8 of the Contract and these are to be treated as a “complete code”. The plaintiff, on the other hand, takes the position that the concept of the project schedule is inextricably intertwined with the concept of scope. While “minor” project delay could be dealt with by s. 5.7 and s. 5.8 of the contract, the plaintiff claims that project delay in this case reached the point where it amounts to a change of scope in and of itself. It seeks to have the issue of the materiality of that delay determined by the expert to form the foundation of an additional claim it wishes to advance over and above the amounts authorized by s. 5.7 of the Contract.

[11] The Project Schedule as originally contemplated was for a twenty-two month project to be completed by January 31, 2014. That proved optimistic. The parties exchanged written allegations of default and denials thereof thereto in late 2014/early 2015 and again in June 2015. Each blamed the other for the delay. However, the project continued.

[12] The Contract provided for a fixed fee ($1.2 million) and monthly payments of $220,605 (plus certain additional amounts) subject to a cap on these billings of $5.8 million. The cap was reached by July 2014. The plaintiff continued to bill and the defendants continued to pay the monthly amounts beyond the cap. There is a dispute between the parties as to whether those payments were under protest or not. That is not material to the questions before me.

[13] The defendants decided to stop making the monthly payments altogether starting with the month of April 2015. Nevertheless, work continued on the project.

[14] On July 29, 2015, the plaintiff brought an application seeking to enforce the provision of s. 5.5(iii) of the Contract requiring the parties to appoint a suitably qualified expert from Altus Group to determine whether there has been a material change. The application (CV-15-533374) did not specifically plead the Arbitration Act, 1991, S.O., 1991, c. 17. At the same time, the plaintiff placed a lien upon the property.

[15] On August 13, 2015, the defendants terminated the Contract. The validity of that termination is one of the issues in this action. The defendants ultimately succeeded in posting a bond to have the lien removed. Having invoked the Construction Lien Act, R.S.O. 1990, c. C.30, the plaintiff found itself under deadlines to commence its lien action. Thus, notwithstanding the pending application to appoint an expert to determine the materiality of the alleged change in scope, the plaintiff also commenced this action seeking damages for, among other things, that same change in scope (i.e. delay). This action was commenced on September 30, 2015.

[16] The statement of claim pleads (in paragraph 19) that the extension of the project schedule from 22 months to more than 42 months was the fault of the defendants. It also pleads that this extension was a material change in scope that entitles the plaintiff to make a claim to additional compensation notwithstanding the cap in fees.

[17] In this motion, the plaintiff seeks an order authorizing it to bring the motion pursuant to s. 67(2) of the Construction Lien Act, and a declaration that the parties are required to jointly appoint a suitably qualified expert from Altus group to make an independent assessment of whether there has been a material change under s. 5.5(ii) of the Contract.

The Contract

[18] The Contract is a very thick document of several hundred pages, comprising a very general “Contract” document to which are attached a variety of more detailed terms and conditions in the “General Conditions”, as well as a variety of amendments contained in the “Supplementary Conditions”. For simplicity’s sake, I identify provisions of the General Conditions with the prefix “GC” and those of the Supplementary Conditions with the prefix “SC”.

[19] It might be worth the while of the parties to produce a consolidated copy of the contract itself minus all of the schedules and construction details that are not of any immediate relevance. A reference document of a dozen pages would be far kinder to Canada’s forests than the hundreds of pages that must be reproduced with each motion record now.

[20] Article 5 of the Contract provides that the Contract Manager’s compensation is the “Contract Fee” plus certain reimbursable expenses (Contract, s. 5.1) that are not material. The term “Contract Fee” is defined to mean the “Fixed Fee” of $1.2 million plus the “Capped General Conditions” amount fixed at a maximum of $5.8 million (Contract, s. 5.4). Pursuant to s. 5.6, the Contract Fee can only be increased in the event of a material change in scope (s. 5.5) or in the event of Non Default Delay (s. 5.7).

[21] Section 5.4(b) of the Contract (as amended by SC-3) contains an acknowledgement that “the Capped General Conditions is based on a total Project construction schedule of Twenty-two (22) months from April 1, 2012 to January 31, 2014 (the “Project Schedule”) and a scope of work as contemplated in the proposal issued by the Construction Manager to the Owner on October 20, 2011”.

[22] As amended, section 5.5 of the Contract is as follows:

“The parties confirm:

(i) That the Fixed Fee and the Capped General Conditions (collectively the “Contract Fee”) has been established by negotiation between the parties, and are based upon the Construction Manager’s estimates as to the program of work and the time and resources which the Construction Manager will have to devote to the Project in fulfilling its obligations as contemplated in the Cost Estimate Proposal dated October 20112 and based upon the Project Schedule;

(ii) The Contract Fee shall not be subject to adjustment unless there is a material change in the scope of the Project and the Services to be provided by the Construction Manager under the Contract Documents, recognizing the factors which have been taken into account in the Cost Estimate Proposal dated October 2011, but exclusive of the cost estimate values (a “Change in Scope”).

(iii) If the Owner and Construction Manger are unable to agree that a change is material under item 5.5(ii), then the parties jointly appoint a suitably qualified expert from Altus Group (or equivalent organisation) and instruct them to make an independent assessment and determination which will be binding on the parties.

(iv) That if there is a Change in Scope, refer to GC 5.1 as amended by SC-21 of the Supplementary Conditions”

[23] Changes to the Project Schedule that result in delay are addressed in sections 5.7 and 5.8 of the Contract. Section 5.7 provides for compensation to be paid to the Construction Manager if the Project Schedule is exceeded by reason of a “Non Default Delay” as defined. Section 5.8 by contrast provides that no additional compensation beyond the Capped General Conditions is payable in the event of a Default Delay (as defined).

[24] Part 5 of the General Conditions is entitled “Changes to the Project” and provides as follows [1]:

“5.1.1 The Owner, without invalidating this Contract, may make changes in the Project provided they are within the general scope of the Project and of the Services.

5.1.2 The Construction Manager shall promptly advise the Owner if a change contemplated by the Owner under paragraph 5.1.1 will change the Construction Manager’s compensation or the Project-in-Use Date. The Construction Manager shall provide comprehensive and suitable evidence and substantiation to demonstrate the additional compensation or time required. The Construction Managers’ claim for additional compensation shall not exceed 2% of the total construction costs associated with the contemplated change (excluding Value Added Taxes) and such compensation may be offset by 2% of any reduction in construction costs resulting from a Change in Scope.

5.1.3 If the Owner and the Construction Manager agree on an adjustment to the Construction Manager’s compensation or Contract Time, such agreement shall be recorded in writing.

5.1.4 If the Owner and Construction Manager cannot agree on the change in Construction Manager’s compensation, the matter shall be determined in accordance with Part 7 of the General Conditions – DISPUTE RESOLUTION”

[25] Part 7 of the General Conditions contains a dispute resolution process. There is provision for the parties to make efforts to resolve disputes including by way of mediation or arbitration. However, GC s.7.1.4 provides that “if no agreement is made for mediation or arbitration as described in paragraph 7.1.3, the parties may refer the unresolved dispute to the courts or to any other agreed form of dispute resolution”.

[26] The affidavit of Steve Crosby has been filed by the plaintiff in support of this motion. It simply states in paragraph 8:

“Due to various reasons, including but not limited to the volume and nature of Project changes directed by Avenue Road and instructed to trade contractors under contract with Avenue Road, the Project Schedule was extended from 22 months to more than 42 months. BMCC claims that such extension of the Project Schedule constitutes a material change in scope, thus entitling BMCC to an increased in the Capped General Conditions”.

[27] This paragraph of Mr. Crosby’s affidavit largely repeats paragraph 19 of the statement of claim.

Issues to be Decided

[28] The issue to be determined on this motion is whether the plaintiff is entitled to require the appointment of an expert pursuant to section 5.5(iii) to determine whether there have been any material changes in scope of the Contract. This in turn requires me to decide:

a. Whether s. 5.5(iii) of the Contract is an agreement to arbitrate within the meaning of the Arbitrations Act; b. Whether there is a dispute between the parties to which s. 5.5(iii) of the Contract applies; and c. Whether the conditions for granting leave to bring this motion under s. 67(2) of the Construction Lien Act have been satisfied in this case.

Analysis and Discussion

(i) Arbitration agreement under s. 1 of the Arbitration Act

[29] In my view, s. 5.5(iii) satisfies all of the requirements of an “arbitration agreement” under the Arbitration Act.

[30] The Arbitration Act defines an “arbitration agreement” as “an agreement by which two or more persons agree to submit to arbitration a dispute that has arisen or may arise between them”: Arbitration Act, s. 1.

[31] While s. 5.5(iii) of the Contract does not employ the usual language of an arbitration clause, it contains in substance all of the required elements of an arbitration agreement required by s. 1 of the Arbitration Act. The Contract is an agreement between two or more persons. It identifies the dispute that is subject to resolution in accordance with a defined process outside of court. The process is described in mandatory language (“the parties jointly appoint…”). The result is binding upon the parties. These are all of the components of an arbitration agreement. The intention of the parties to submit the question of materiality of a change in scope to an expert appointed in the fashion described is clear and unambiguous.

(ii) Is there a “dispute” to which the Arbitration Act applies?

[32] In the presence of an arbitration agreement, the Arbitration Act applies and the court’s role is constrained. The court shall not intervene in matters governed by the Act except to assist in the conducting of arbitrations, to ensure that they are conducted in accordance with arbitration agreements, to prevent unequal or unfair treatment of parties to arbitration agreements or to enforce awards: Arbitration Act, s. 6.

[33] Where a party to an arbitration proceeding commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court shall, on motion of another party to the arbitration agreement, stay the proceeding subject to certain limited exceptions: Arbitration Act, s. 7.

[34] The plaintiff in this case commenced an application seeking to enforce the arbitration agreement contained in s. 5.5(iii) of the Contract (although it did not plead the Arbitration Act). The plaintiff subsequently commenced the present action that includes a claim for damages premised, at least in part, upon a determination of the existence of a change in scope that has been found to be “material”. While the plaintiff has arguably commenced a proceeding in respect of a matter subject to an arbitration agreement, neither party seeks a stay of this action. Nevertheless, the fact that the plaintiff has invoked the Construction Lien Act (and thus has the benefit of a lien or, in this case, funds paid into court in lieu thereof), is a relevant fact that I shall return to below.

[35] The only question that would be remitted to the expert for determination by s. 5.5(iii) of the Contract is the question of whether a particular change in scope of the project or services to be provided by the Construction Manager is “material”. There are a number of legal and factual disputes between the parties in this litigation that are not within the province of the expert appointed mentioned in s. 5.5(iii) of the Contract but that are nonetheless related to the matters that would be before the expert if appointed as asked by the plaintiff in this motion. These related issues include:

• Is s. 5.7 of the Contract a “complete code” dealing with the subject of delay or can some delay also be characterized as a “Change in Scope” under s. 5.5(ii)?
• If Change in Scope can include a change to the Project Schedule, are the consequences nevertheless determined by reference to s. 5.7 of the Contract?
• Is any of the delay that in fact occurred “Non Default Delay”?
• If any delay is “Non Default Delay”, what is the compensation to which the plaintiff is entitled?

[36] The plaintiff has not alleged that a particular change to the project was a “change in scope”. Rather, it is the sum of the circumstances mentioned in paragraph 8 of Mr. Crosby’s affidavit – itself paraphrasing paragraph 19 of the statement of claim - that has created delay that is said to amount to a change in scope. The plaintiff seeks to have the expert opine on whether this alleged change in scope is material.

[37] The plaintiff concedes that “some” delay would not be a change in scope and is already dealt with in s. 5.7 of the Contract. However, the plaintiff submits that delay at some point crosses the threshold of being “simple” delay to becoming a change in scope of the Contract. The plaintiff accepted the Contract and the fixed Contract Fees provided for therein on the basis of the common assumptions of the parties stipulated in s. 5.5(i) of the Contract, one of which was the Project Schedule. The plaintiff submits that a doubling of the project schedule crosses that threshold and can be characterized as a change in scope of the project as described in s. 5.5(ii) of the Contract that it is entitled to submit to an expert to assess whether it is also “material” pursuant to s. 5.5(iii) of the Contract.

[38] The plaintiff’s argument is essentially tautological. Its argument amounts to saying that while all delay is not a change in scope, material delay is. If only material delay can be considered to be a change in scope, there would be little point in submitting such a “change in scope” to an expert. This would amount to asking the expert to determine whether a material delay is material. The question answers itself.

[39] In my view, delay in the Project Schedule is not per se a change in scope as defined by the Contract. Delay is a consequence of a change in scope and a factor in assessing whether a change in scope is material. This conclusion follows from a consideration of the Contract as a whole as well as an examination of s. 5.5(ii) and (iv) and s. 5.7 of the Contract.

[40] Where there has been a change in scope, the expert is directed by s. 5.5(ii) of the Contract to examine the assumptions underlying the project – including the Project Schedule – in assessing whether the change in scope is material. It would be circular for the s. 5.5(ii) to refer to the same circumstance (delay) to determine whether there is a change in scope at all and whether the particular change is material.

[41] If a change in scope is found to be material, then s 5.5(iv) directs the parties to determine the consequences by reference to s. 5.1 of the General Conditions. The entire substance of s. 5.1 of the General Conditions is to prescribe how the parties are to deal with a contemplated change in scope. Section 5.1.2 requires the Construction Manager to determine whether the contemplated change in scope requires a change in price or in the schedule. Section 5.1.2 also limits the Construction Manager’s claim for additional compensation to “2% of the total construction costs associated with the contemplated change”. Absent a change in scope that can be traced to increase in construction costs, there would be no object to determining whether the change in scope is material.

[42] Finally, s. 5.7 prescribes particular consequences for delay depending upon whether the cause of the delay is attributable to the fault of the Construction Manager. Section 5.7 contains no outside limit on the amount of delay to be addressed by its provisions.

[43] Delay in this project did not occur randomly. It had a cause. The cause may turn out to be faulty estimates in advance, it may be due to faulty execution of the project, it may arise from external causes, it may be a consequence of various design and other changes made along the way or it may be due to a combination of some or all of these. If the plaintiff is able to attribute increased construction costs to a particular cause, it may well be that a live issue will arise as to whether the particular change or number of changes is material. The evidence before me today does not establish the existence of any dispute with respect to any particular change or group of changes. The plaintiff has relied solely upon delay itself as a change in scope and has not alleged any particular changes in scope as being responsible and possibly material. The plaintiff’s motion is thus premature.

[44] In my view, there is not yet a “dispute” between the parties on the narrow question of whether a change in scope – if one has occurred – is “material”. Were such a dispute to become crystallized as the litigation unfolds, it may well be that resort to the expert prescribed by s. 5.5(iii) will become necessary.

(iii) S. 67(2) of the Construction Lien Act

[45] The defendants urge me to reject this motion on the basis of s. 67(2) of the Construction Lien Act since leave must be sought for any interlocutory steps not provided for in the Act.

[46] The plaintiff has chosen to invoke the Construction Lien Act. This was not mandatory. It has advantages for a claimant, not least of which are access to summary procedures and the prospect of security before judgment.

[47] The plaintiff cites the decision of Master Short in Advanced Construction Techniques Ltd. v. OHL Construction Canada, 2013 ONSC 7505 for the proposition that a court should rely on s. 6 of the Arbitration Act and give effect to arbitration agreements even in cases where a party seeks, in effect, to stay its own court proceeding.

[48] I do not find it necessary to determine at this stage whether the plaintiff can be considered to have waived the benefit of arbitration by commencing this action. It seems to me that the conflict between s. 67 of the Construction Lien Act (that mandates summary proceedings to determine lien claims under the control of the court) and s. 6 of the Arbitration Act (that limits the court’s jurisdiction in the face of an arbitration agreement) is more apparent than real.

[49] The strong public policy in favour of enforcing bargains – including bargains to refer matters to arbitration – will certainly weigh in the balance on any application for leave pursuant to s. 67(2). In the present case, only a very narrow question has been referred to arbitration and that issue has not yet matured to the point of being a “dispute”.

[50] I would decline to grant leave under s. 67(2) of the Construction Lien Act, R.S.O. 1990, c. C.30 for this motion in the present circumstances. However, should the plaintiff determine – by amendment to the statement of claim or otherwise – that there are particular identified changes to the terms of its engagement that qualify as changes in scope the court can determine at that time whether to refer the question of the materiality of those changes in scope to the expert as provided under s. 67(4) of the Construction Lien Act.

Disposition

[51] I dismiss the plaintiff’s motion at this time without prejudice to it being re-formulated in future as provided for in my reasons.

[52] I am reserving the matter of costs. The parties are urged to settle costs between them. This will not likely be the only motion in this proceeding. However, failing agreement, short costs submissions (three pages maximum exclusive of outlines) may be submitted to me in writing within 15 days of the release of these reasons, a further 7 days being granted for the response.

[53] I am directing the parties to confer with each other over the next three weeks. The issues appear to me to be gelling and there is no reason why the process of identifying the “real” issues cannot proceed quickly. I expect to have a case timetable agreed for moving this case forward on a swift time-line and to have it in place before the summer break performs its usual magic on litigation schedules. The issues here are fairly discrete and I expect the parties to collaborate to fashion a common-sense and summary means of getting to the bottom of them. Either side may schedule a case conference by telephone call at 9:00am with my assistant if needed to assist in breaking any logjams.

S.F. Dunphy Date: May 12, 2016

[1] The text as cited includes amendment to GC s.5.1.2 effected by SC-21