Ozz Electric Inc. v Zurich Insurance Company Ltd. et al., 2016 ONSC 6331

Court File and Parties

Court File No.: CV-15-525872 Date: 2016-10-03 Ontario Superior Court of Justice

Between: OZZ ELECTRIC INC., Plaintiff – and – ZURICH INSURANCE COMPANY LTD., THE CORPORATION OF THE CITY OF KITCHENER and MAYSTAR GENERAL CONTRACTORS INC., Defendants

Counsel: Emilio Bisceglia and Hana Tariq, for the Plaintiff Krista R. Chaytor and Graham Brown, for The Corporation of the City of Kitchener No one appearing for Zurich Insurance Company Ltd. or Maystar General Contractors Inc.

Heard: September 6, 2016

Before: M. D. Faieta J.

Reasons for Decision

Introduction

1This is a motion by a subcontractor to amend its Statement of Claim (“Claim”) in order to advance various claims against the owner of the construction project. For the reasons given below, this motion is dismissed.

Background

2The Defendant Maystar General Contractors Inc. (“Maystar”) agreed to construct a library and parking garage for the Defendant City of Kitchener (“City”) for about $49 million. Maystar obtained a Labour and Material Payment bond (”Bond”) from the Defendant Zurich Insurance Company (“Zurich”). The Bond, in the same amount as the price to be paid for the project by the City, provides that any person who has not been paid by Maystar may sue Zurich to recover under the Bond any sums as may be due to the claimant pursuant to the terms of its contract with Maystar.

3Maystar subcontracted the electrical work for this project to the Plaintiff, Ozz Electric Inc. (“Ozz”). The project was substantially completed in September 2014.

4Maystar commenced a breach of contract claim against the City, its architect and its project manager in May 2014. The claim seeks about $7.7 million for damages caused by various delays, as well as about $173,000 for damages for breach of contract. Included in Maystar’s claim are the claims of its subcontractors for delay, which amount to $2.4 million, including a claim for delay damages by Ozz of about $1.7 million.

5Ozz commenced two actions.

6First, Ozz commenced an action under the Construction Lien Act, R.S.O. 1990, c. C.30 (“CLA”), against Maystar on November 19, 2014, after it had registered a lien against the project lands (the “Lien Action”). The Lien Action was settled on October 15, 2015. Maystar agreed to pay Ozz the sum of $320,000 in exchange for a dismissal of the Lien Action and the discharge of the lien claim.

7Ozz commenced a second action on April 13, 2015, against Maystar, Zurich and the City (the “Bond Action”). Ozz alleges that:

• Maystar has breached its subcontract with Ozz as it owes Ozz the sum of $2,708,790.78 for labour and materials it provided on the project;
• Zurich has breached its obligations under the Bond as it has failed to pay a claim that Ozz submitted on October 29, 2014; and
• Maystar, Zurich and the City are liable in unjust enrichment.

8Zurich alleges that Ozz’s claim is not recoverable under the Bond as the damages claimed by Ozz are solely in respect of damages for delay. ¹

9Ozz brings this motion for leave to amend its Claim to make the following allegations:

1. The City is liable to Ozz under the Bond;
2. The City is responsible to Ozz for the actions of the City’s consultants and, as a result, the City is responsible to Ozz for delay; and
3. Ozz claims contribution and indemnity against the City for Maystar’s claim against Ozz for set-off resulting from Ozz’s alleged deficient workmanship.

Analysis

10Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, states:

On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

11The general rule is that while amendments to a pleading are presumptively approved, there is no absolute right to amend a pleading. ² However, a court may refuse to approve an amendment to a pleading when:

• It will cause an injustice that is not compensable in costs;
• It violates the rules governing pleadings (for instance, see Rules 25.06 and Rule 25.11); or
• It discloses no reasonable cause of action or defence, or it would have been struck if originally pleaded. See Rule 21.01(1)(b). ³

12On this motion, the City objected to the proposed amendments, claiming that they were untenable as they have no reasonable chance of success. Thus, the City argued, leave should not be granted to amend the Claim.

Issue #1: Should leave be granted to add a claim that the City is liable to Ozz under the Bond?

13Paragraph 12 of the Claim alleges that Ozz provided notice of claim under the Bond to Maystar and the Owner. It states that Zurich is liable for payment to Ozz under the Bond for all amounts outstanding, including interest and costs.

14Ozz seeks leave to amend paragraph 12 to plead that the City and Zurich are liable for payment under the Bond for all amounts outstanding.

15The purpose of a Labour and Material Bond is as follows:

Labour and Material Payment Bonds provide that the surety must pay labour and material suppliers on the project who are owed money by the principal. As with other Surety Bonds, there is a penalty amount which limits the surety’s liability. The standard form of Labour and Material Payment Bond provides that notice must be given within a certain time and that an action must be commenced within a certain time.

This bond is different from other types of bonds in that while it refers to the contract between the principal and the obligee, it is conditioned upon the payment by the principal of the accounts of labour and material suppliers on the contract. If those accounts are not paid, the surety’s obligation arises. The standard bond wording constitutes the owner, who is the obligee, as a trustee for the labour and material suppliers. This “trustee” wording is designed to get around the third party beneficiary rule which says that strangers to a contract cannot enforce it. …

There has always been concern that the Labour and Material Payment Bond, even with the trustee wording, might be unenforceable by reason of the third party beneficiary rule. … Of course, the “trustee” wording provides that the claimant/beneficiary may join the obligee/trustee in its action to enforce the Labour and Material Payment Bond. Also, it has been held that the Trustee under the bond may bring an action itself to enforce the bond to the benefit of the claimants. … In practice, the third party beneficiary issue rarely arises. In Ontario, the issue has been put to rest by s. 69(1) of the Construction Lien Act … : Kenneth W. Scott and Bruce Reynolds, Scott and Reynolds on Surety Bonds (Scarborough: Carswell, 1993) (loose-leaf 2008 – Rel. 1, and 2001 – Rel. 2), vol 1, “Labour and Material Payment Bonds” at pp. 11-10.8 to 11-11.

16Subsection 69(1) of the CLA states:

Where a labour and material payment bond is in effect in respect of an improvement, any person whose payment is guaranteed by that bond has a right of action to recover the amount of the person’s claim, in accordance with the terms and conditions of the bond, against the surety on the bond, where the principal on the bond defaults in making the payment guaranteed by the bond.

17Ozz relies upon the following statement, cited with approval in Crane Canada Inc. v. Titan Holdings Ltd. (1989), 36 C.L.R. 69 (Nfld. S.C.), at p. 76, as support for its view that the City is a property party:

[B]eneficiaries are entitled to have their rights enforced: if the trustee will not enforce them for them the beneficiaries can come before the Court but they must bring before the Court the trustee also.

18However, unlike the case in Crane, the proposed amendment does not purport to require the City to enforce the trust for the benefit of Ozz. Such a step is unnecessary given s. 69(1) of the Act.

19The proposed amendment goes further and asserts that the City is liable for all amounts owed to Ozz under the Bond. There is no basis for such a claim under the terms of the Bond. Ozz has provided no case law where an obligee has been held liable under a Bond. Such claim is not contemplated by the Bond, which provides that a claimant shall indemnify and save harmless the obligee against all costs, charges, and expenses or liabilities incurred thereon, and any loss or damage resulting to the obligee by reason of any proceeding commenced against the obligee by a claimant to enforce the Bond.

20Accordingly, I refuse to grant leave to Ozz to amend paragraph 12.

Issue #2: Should leave be granted to add a claim in negligence by Ozz against the City for damages due to delay in the construction project?

21Ozz seeks to amend its Claim to include claims against Maystar and the City. The allegations are as follows:

(1) The City is responsible to Ozz for the actions of the City’s consultants (see proposed paragraph 3.a); and (2) The City is liable in negligence for any of Ozz’s damages that were caused by delay in the construction project (see proposed paragraphs 11.a-11.n).

22The amendments are as follows:

3.a. The Owner retained consultants on the Project, including, but not limited to, LGA Architectural Partners Ltd. (formerly known as Levitt Goodman Architects Ltd.), The WalterFedy Partnership, Phillip H. Carter Architect, and MHPM Project Managers Inc. The Owner is responsible for the actions of the consultants.

Delays to Project

11.a. The Project experienced significant delay.

11.b. The original date of substantial completion of the Project as per the Subcontract was March 1, 2013.

11.c. The Owner issued Change Order No. 9L, revising the date of substantial completion to April 3, 2013.

11.d. The Certificate of Substantial Performance for the Project was issued on September 2, 2014.

11.e. Ozz states that it did not cause any delay to the Project.

11.f. Ozz states that the Owner and/or Maystar were responsible for the delays to the Project, including, but not limited to: (a) Late awarding of subcontracts; (b) Failure to make construction site and critical work areas available; (c) An excessive number of changes, resulting in work being performed out of sequence; (d) Deficiencies in the design; (e) Deficiencies in the construction drawings; (f) Failure to review and respond to requests for information in a timely manner; (g) Failure to review and respond to submittals in a timely manner; (h) Disruptions to the construction schedule; (i) Failure to adhere to the construction schedule; and (j) Failure to coordinate the trades, resulting in work being performed out of sequence.

11.g. Ozz states that, in particular, additional shoring in the southeast corner of excavation for Phase 2A of the parking garage delayed the Project. This delay was caused by the Owner and/or Maystar.

11.h. Ozz states that, in particular, revised steel framing for Phase 2B of the library delayed the Project. This delay was caused by the Owner and/or Maystar.

11.i. Full particulars of the delays caused by the Owner and/or Maystar will be provided prior to trial.

11.j. The Owner and/or Maystar owed a duty of care to Ozz, including, but not limited to, the following: (a) The duty to disclose material information to prospective bidders, including accurate specifications; (b) The duty to provide access to the construction site in a timely manner; (c) The duty to review submittals and requests for information in a timely manner; (d) The duty not to hinder, delay, and/or interfere with the timely completion of work; (e) The duty not to issue an excessive number of changes; and (f) The duty not to deny valid requests for time extensions.

11.k. Ozz pleads that the Owner and/or Maystar breached the duties of care through acts and/or omissions, including, but not limited to, the following: (a) Failed to disclose material information to prospective bidders, including accurate specifications; (b) Failed to provide access to the construction site in a timely manner; (c) Failed to review submittals and requests for information in a timely manner; (d) Hindered, delayed, and/or interfered with the timely completion of work; (e) Issued an excessive number of changes; and (f) Denied valid requests for time extensions.

11.l. As a result of the breaches by the Owner and/or Maystar, Ozz has suffered damages, including, but not limited to, the following:

Description	Cost
Direct Site Costs	$98,584.00
Site Facilities	$2,478.00
Office Overhead	$149,240.16
Labour Escalation	$121,096.31
Parking	$22,392.42
Site Management	$122,400.00
Productivity Loss - Coordination	$904,340.18
Additional Insurance Costs	$6,000.00
Interest Lost on Holdback	$7,432.00
Cumulative Impact of Changes	$194,730.00
Material Escalation	$4,618.00
Damaged & Stolen Fixtures	$4,372.00
Subtotal:	$1,637,683.08
Overhead/Profit - 15%	$245,652.46
H.S.T.	$244,833.62
Total	$2,128,169.16

11.m. Full particulars of the damages suffered by Ozz will be provided prior to trial.

11.n. The Owner and Maystar have breached their duties in failing to provide compensation to Ozz notwithstanding Ozz submitting its claim for delay.

23The amendments do not specify what cause of action is relied upon by Ozz against the City; however, in oral argument counsel for Ozz advised that the claim against the City is based in negligence for economic loss.

24In Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860, the Supreme Court of Canada stated, at paras. 35 and 37-38:

As a cause of action, claims concerning the recovery of economic loss are identical to any other claim in negligence in that the plaintiff must establish a duty, a breach, damage and causation. Nevertheless, as a result of the common law’s historical treatment of economic loss, the threshold question of whether or not to recognize a duty of care receives added scrutiny relative to other claims in negligence. …

The circumstances in which such damages have been awarded to date are few. To a large extent, this caution derives from the same policy rationale that supported the traditional approach not to recognize the claim at all. First, economic interests are viewed as less compelling of protection than bodily security or proprietary interests. Second, an unbridled recognition of economic loss raises the spectre of indeterminate liability. Third, economic losses often arise in a commercial context, where they are often an inherent business risk best guarded against by the party on whom they fall through such means as insurance. Finally, allowing the recovery of economic loss through tort has been seen to encourage a multiplicity of inappropriate lawsuits. …

In an effort to identify and separate the types of cases that give rise to potentially compensable economic loss, LaForest J. in Norsk, supra, endorsed the following categories (at p. 1049):

1. The Independent Liability of Statutory Public Authorities;
2. Negligent Misrepresentation;
3. Negligent Performance of a Service;
4. Negligent Supply of Shoddy Goods or Structures;
5. Relational Economic Loss.

25The categories of recoverable economic loss are not closed. A duty of care can be established by showing: (1) there was a sufficiently close relationship between the plaintiff and defendant so that, in the reasonable contemplation of the defendant, carelessness on its part might cause damage to a party such as the plaintiff; and (2) there are no policy considerations that negative or limit the scope of the prima facie duty of care, the class of persons to whom it is owed, or the damages to which a breach of it may give rise. See Martel, at paras. 45, 48, and 54.

26I note that Ozz has not provided the court with any cases where a subcontractor has pursued a claim for the recovery of economic loss in negligence against the owner of a construction project. In Martel, the Supreme Court of Canada left open the issue of whether a duty of care arises between a subcontractor and an owner. Such a case arose in Design Services Ltd. v. Canada, 2008 SCC 22, [2008] 1 S.C.R. 737, where the Supreme Court of Canada found that an owner in a tendering process did not owe a duty of care in tort to subcontractors of a contractor who should have been awarded a construction contract. Instead, Ozz relies upon Ledcor Construction Ltd. v. Canada (Attorney General), 2013 ONSC 2407, 20 C.L.R. (4th) 263, and Ledcor Construction Ltd. v. Carleton University, 78 C.L.R. (3d) 213. However, in neither of those cases did the subcontractor pursue a claim in negligence against the owner.

27In my view, the proposed amendments based in negligence should be struck with leave to bring a further motion to amend the Claim in order that Ozz may plead the requisite elements of a claim in negligence for the recovery of economic loss. Without such material facts being pleaded, it is premature to consider whether the amendments are tenable in law.

Issue #3: Should leave be granted to add Ozz’s claim for contribution and indemnity against the City?

28Ozz proposes to seek the following relief by the addition of paragraph 1(d.1) to the Claim:

“… contribution and indemnity from the [City] for all damages, costs, expenses, and interest which the Plaintiff may be ordered to pay [Maystar], pursuant to the Negligence Act, R.S.O. 1990, c. N.1"

29Ozz’s claim for contribution and indemnity against the City is with respect to Maystar’s claim against Ozz for set-off resulting from Ozz’s alleged deficient workmanship.

30A claim for contribution and indemnity is a statutory claim founded on principles of restitution and unjust enrichment to ensure that all responsible parties are before the court. It is not a damages claim arising out of a tort. See Placzek v. Green, 2009 ONCA 83, 307 D.L.R. (4th) 441, at paras. 35 and 38. Further, a claim for contribution and indemnity can only be sought if the damages could have been directly claimed against that third party by the plaintiff.

31In my view, there is no tenable basis in law for the claim for contribution and indemnity against the City as it could never have been found to have jointly contributed to the loss that Maystar alleges in its claim for set-off.

32Accordingly, leave to amend the Claim to add a claim for contribution and indemnity is denied.

Conclusions

33For the above reasons, I dismiss the Plaintiff’s motion without prejudice to the Plaintiff once again seeking leave to amend its Claim to add a claim in negligence for economic loss against the City.

34I encourage the parties to resolve the issue of costs, failing which the City shall provide its costs submissions within one week and Ozz shall provide its costs submissions within two weeks. Such submissions shall be no more than three pages.

Mr. Justice M. D. Faieta Released: October 3, 2016

Footnotes

Footnotes

1. 1See paragraph 7 of the Statement of Defence.
2. 2Marks v. Ottawa (City), 2011 ONCA 248, [2011] O.J. No. 1445, at para. 19.
3. 31317424 Ontario Inc. v. Chrysler Canada Inc., 2015 ONCA 104, [2015] O.J. No. 711, at para. 7; Kassian Estate v. Canada (Attorney General), 2014 ONSC 844, [2014] O.J. No. 2716 (Div. Ct.), at para. 219; Mastercraft Group Inc. v. Confederation Trust Co., [1997] O.J. No. 3451, at para.7.