COURT FILE NO.: CV-17-570705

DATE: 20190131

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

LOPES LIMITED

Plaintiff

– and –

GUARANTEE COMPANY OF NORTH AMERICA and GORF MANUFACTURING/CONTRACTING LTD.

Defendants

Kenneth W. Movat and Max Reedijk, for the Plaintiff

G. L. Sonny Ingram, for the Defendant Guarantee Company of North America

HEARD: November 15, 2018

Cavanagh J.

REASONS FOR JUDGMENT

Introduction

[1] The plaintiff Lopes Limited (“Lopes”) moves for summary judgment on its claim under a labour and materials payment bond issued by the defendant, Guarantee Company of North America (“GCNA”).

[2] Lopes’ claim under the payment bond is for the aggregate amount of unpaid invoices that it issued under a subcontract with the defendant Gorf Manufacturing/Contracting Ltd. (“Gorf”), the general contractor for a construction project. After failing to pay Lopes’ invoices, Gorf walked away from the project and a replacement general contractor was selected to complete the project. The replacement general contractor then entered into a new subcontract with Lopes for the completion of the work that remained to be performed under the original subcontract.

[3] GCNA opposes this motion and submits that Lopes fully mitigated any damages that it may have suffered as a result of non-payment of invoices by entering into the replacement subcontract to perform the services that remained to be performed under the original subcontract.

[4] For the following reasons, I conclude that Lopes did not mitigate its damages for non-payment of its invoices by entering into the new subcontract, and that it is entitled to be paid the amount of its claim under the payment bond.

Background Facts

Parties

[5] Lopes carries on business as a fabricator, supplier, and installer of industrial steel and related products.

[6] Gorf carried on business as a general contractor. Gorf has been noted in default.

[7] GCNA is in the business of providing, among other things, surety bonds for the construction industry.

The Prime Contract

[8] Cementation Canada Inc. (“Cementation”) is the owner of property in North Bay (the “Property”). On or around December 19, 2014, Gorf entered into a written contract (the “Prime Contract”) with Cementation to construct an improvement (the “Project”) at the Property.

The Bond

[9] The Prime Contract required, among other things, Gorf to provide a labour and material payment bond in respect of its work on the Project.

[10] On or around February 30, 2015, GNCA as surety, issued a labour and material payment bond in the sum of $4,508,700 naming Cementation as obligee and Gorf as principal in respect of the project (the “Bond”).

The Subcontract

[11] On or about February 9, 2015, Gorf hired Lopes to fabricate, supply and install HVAC, plumbing and controls systems and associated materials and equipment to the Project pursuant to a subcontract (the “Subcontract”).

Gorf’s Default

[12] Pursuant to the terms of the Subcontract, Lopes performed its work on the Project between approximately September 2015 and April 2016. By April 1, 2016, Gorf had failed to pay a total of four invoices rendered by Lopes totaling $251,817.83. As a result, on or about April 1, 2016, Lopes registered a claim for lien against title to the property.

[13] On or around April 21, 2016, Gorf walked off the Project and was declared in default under the Prime Contract. On or about April 24, 2016, Cementation took the work under the Prime Contract out of Gorf’s hands. At or about the same time, GCNA was called upon by Cementation (under the performance bond that GCNA had issued together with the Bond) to arrange for completion of the balance of work that remained to be done under the Prime Contract.

[14] At the time that Gorf ceased working on the Project, Lopes had performed 61% of the work under the Subcontract with a value of $744,148.22. The value of work that was remaining under the Subcontract was $483,003.53.

[15] On May 2, 2016, Lopes sent a Notice of Claim to GCNA for a claim on the Bond.

[16] On May 2, 2016 GCNA confirmed receipt of Lopes’ notice of claim on the Bond in the total amount of $326,232.66. Negotiations between GCNA and Lopes followed.

[17] On June 3, 2016, Lopes sent an email to GCNA that explained that the original Notice of Claim on the Bond did not account for a percentage of the holdback amount and an additional invoice. Lopes advised that the total amount of the claim was $441,398.73.

GCNA offer to settle the Lopes payment bond claim

[18] On June 27, 2016 GCNA offered to settle Lopes’ claim under the Bond for $326,232.63. In exchange for the payment, GCNA required, among other things, that Lopes enter into a contract with the completion contractor to complete the remaining work under the Subcontract for $483,003.53.

[19] Lopes did not accept this offer to settle.

The Completion Contract and the Completion Subcontract

[20] On or around July 27, 2016, Lopes sent a quote to M. Sullivan & Sons Ltd. (“Sullivan”), the likely completion contractor for the Project, to perform the HVAC work which would be required under the completion contract for the total price of $932,000. On or around August 1, 2016, Cementation formally entered into a contract with Sullivan, as general contractor, for the completion of the portion of the work on the Project that had been left outstanding by Gorf (the “Completion Contract”).

[21] Lopes’ bid was successful, and it entered into a subcontract with Sullivan for the completion of the outstanding HVAC work on the Project (the “Completion Subcontract”). The Completion Subcontract provided for payment to Lopes of $1,054,177. The scope of work remaining under the Subcontract was the same as the scope of work under the Completion Subcontract. Therefore, the amount paid to Lopes under the Completion Subcontract substantially exceeded the amount that Lopes would have received if it had performed the remaining work under the Subcontract ($483,003.53).

Payment of the Holdback Amount

[22] As a result of Gorf’s default, several subcontractors on the Project, including Lopes, commenced lien actions against Gorf and Cementation. These lien actions were settled and, as a result of the settlement, on April 23, 2018 Lopes obtained a consent order directing the Accountant of the Superior Court of Justice to pay Lopes’ share of the holdback amount, plus accrued interest. On or around May 1, 2018, Lopes received payment of $145,356.43.

Amount claimed by Lopes

[23] As a result of receipt of payment of the holdback amount, Lopes claims that it is owed the amount of $183,824.23 under the Bond. The calculation of this amount is based upon four unpaid invoices ($251,817.83) together with holdback amounts ($65,853.85) and less the payment received on May 1, 2018 ($142,408.45, net of interest). This calculation is shown in Appendix I to Lopes’ factum (replaced with a corrected version by letter dated November 27, 2018).

[24] Although GCNA opposes Lopes’ claim, it does not challenge these calculations.

Analysis

[25] Under Rule 20.04 (2) of the Rules of Civil Procedure, the court shall grant summary judgement if it is satisfied there is no genuine issue requiring a trial.

[26] There is no genuine issue requiring a trial when the motions judge is able to reach a fair and just determination on the merits. This will be the case when the process (i) allows the judge to make the necessary findings of fact, (ii) allows the judge to apply the law to the facts, and (iii) is a proportionate, more expeditious and less expensive means to achieve a just result: Hryniak v. Maudlin, 2014 SCC 7 at para. 49.

[27] The scope of GCNA’s liability under the Bond is set out therein. The Bond provides, in part, as follows:

The Condition of this obligation is such that, if [Gorf] shall make payment to all Claimants for all labour and material used or reasonably required for use in the performance of the [Prime Contract], then this obligation shall be null and void; otherwise it shall remain in full force and effect, subject, however, to the following conditions:

[Gorf] and [GCNA], hereby jointly and severally agree with [Cementation], as Trustee, that every Claimant who has not been paid as provided for under the terms of his contract with [Gorf], before the expiration of a period of ninety (90) days after the date on which the last of such Claimant’s work or labour was done or performed or materials were furnished by such Claimant, may as a beneficiary of the trust herein provided for, sue on this Bond, prosecute the suit to final judgement for such sum or sums as may [be] justly due to such Claimant under the terms of his contract with the Principal and have execution thereon.

[28] Section 69(1) of the Construction Lien Act, R.S.O. 1990 c. C.30 provides:

69(1) 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.

[29] Lopes has a right of action against GCNA, the surety on the Bond where, as here, the principal, Gorf, defaults in making a payment guaranteed by the Bond.

[30] In order to successfully make a claim on the Bond, Lopes must show that it:

a. falls within the definition of “Claimant” contained in the Bond;

b. provided appropriate notice to GCNA of its claimant; and

c. commenced an action against GCNA to enforce its claim within one year of the date that Gorf ceased work under the Prime Contract.

[31] GCNA does not dispute that Lopes has satisfied these requirements.

[32] GCNA submits that there is a genuine issue requiring a trial in relation to Lopes’ damages. GCNA submits that Lopes failed to provide the evidence that is necessary to substantiate its claimed damages by refusing, on the examination for discovery of its representative, to provide information concerning Lopes’ costs of performing the Completion Subcontract. GCNA submits that this information is necessary in order for me to determine whether Lopes suffered damages because of Gorf’s failure to pay Lopes for the work performed under the Subcontract. GCNA submits that this refusal raises a genuine issue requiring a trial.

[33] Alternatively, if I conclude that a trial is not required, GCNA submits that I should use the enhanced powers under rule 20.04(2.1) and draw an inference that Lopes’ refused to provide evidence of its cost increases because such evidence would confirm that Lopes did not, in fact, suffer any damages; rather, it benefited from Gorf’s breach of the Subcontract. GCNA relies upon the evidence that the value of the work that was remaining under the Subcontract at the time that Gorf ceased working on the Project ($483,003.53) is substantially less than the amount that was paid under the Completion Subcontract ($1,054,177) for completion of the same work.

[34] Lopes does not disagree that the amount that it received for the services performed and materials supplied under the Completion Subcontract exceeds the amount that it was entitled to be paid for work that remained to be done under the Subcontract, had it been completed. Lopes’ position is that its earnings under the Completion Subcontract are not relevant to its claims in this action and, therefore, it was justified in refusing to answer these questions.

[35] Given Lopes’ position, there is no genuine issue requiring a trial in relation to Lopes’ costs in respect of the Completion Subcontract.

[36] GCNA also submits that Lopes has not proven that it suffered any damages and, for this reason, its motion for summary judgment should be dismissed.

[37] GCNA submits that the jurisprudence is settled that following a breach of contract, a person who suffers a loss is entitled, so far as money can do it, to be placed in the position in which he or she would have been had the contract being performed, provided the plaintiff can prove, on a balance of probabilities, what damages have been suffered. However, the wronged person cannot sit idle and must take all reasonable steps to mitigate the loss related to the breach. Where a plaintiff has taken steps to mitigate its loss, even by taking actions beyond the reasonableness required by the law, any benefit that has reduced or even eliminated its loss must be accounted for in considering the amount of damages that the plaintiff has suffered.

[38] In support of these submissions, GCNA relies upon a decision of the House of Lords in British Westinghouse Electric and Manufacturing Company v. Underground Electric Railways Company of London, [1912] A.C. 673 (H.L.) in which certain general principles with respect to mitigation of damages were set out:

Subject to these observations, I think that there are certain broad principles which are quite well-settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed.

The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and the bars him from claiming any part of the damage which is due to his neglect to take such steps. …

As James, L.J. indicates, this second principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent person would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss which he has suffered may be taken into account even though there was no duty on him to act.

[39] These principles were cited with approval in the decision by the Supreme Court of Canada in Cockburn v. Guarantee Co., 1917 CarswellOnt 24 (S.C.C.) at paras. 9-12. Although the facts in Cockburn are not fully set out in the Supreme Court of Canada decision, they are set out in S.M. Waddams, The Law of Damages, Fifth Edition (Canada Law Book, 2012) at p. 15-33. In Cockburn, the appellant was an employee who lost his employment upon the liquidation of his employer. The appellant made a claim against his former employer for damages for breach of his employment contract based upon the salary that he would have been paid had his employment continued for two more years. The appellant bought goods at the liquidation sale of his former employer’s goods, which he resold for a profit. It was held that the appellant’s claim for damages must be reduced by the profit he made on the sale. In his concurring reasons, Sir Charles Fitzpatrick C.J.C. referred to examples of amounts that, hypothetically, the appellant may have received that would have accrued to his benefit whether or not the breach of contract had occurred. The receipt of these amounts would not have affected the appellant’s claim for damages. The Supreme Court of Canada held, however, that the appellant’s gain was directly dependent on the breach of contract and would not have been made if the breach had not occurred. The appeal was dismissed: Cockburn, at paras. 2-4; 9-13; and 17-20.

[40] In Karas v. Rowlett, 1943 CanLII 53 (SCC), [1943] S.C.J. No. 46, Rand J. explained these principles of mitigation of damages at paras. 8-10:

It is well settled that the person who has suffered from such a wrong is entitled, the far as money can do it, to be placed in as good a position as if the contract had been performed. With this there is the parallel duty on his part to take all reasonable measures to mitigate the loss consequent upon the breach. The latter rule has been dealt with in a number of clarifying decisions, and the considerations to be taken into account are now well settled: [citations omitted].

Under the rules so enunciated, the steps which ought to be taken by an injured party must arise out of the consequences of the default and be within the scope of what would be considered reasonable and prudent action. There are obviously limitations to the class of venture, for instance, in respect of which the duty would arise, but, where there has been an actual performance within those consequences, whether or not within the duty, the benefit derived must be taken into account. When, however, it is a question of future action, we must keep in mind that the limitation to be put upon that duty towards undertakings involving more than ordinary risks and have regard to the fact that losses might be suffered which could not be added to the burden of the wrongdoer.

It is settled, also, that the performance in mitigation and that provided or contemplated under the original contract must be mutually exclusive, and the mitigation, in that sense, a substitute for the other. Stated from another point of view, by the default or wrong there is released a capacity to work or to earn. That capacity becomes an asset in the hands of the injured party, and he is held to a reasonable employment of it in the course of events flowing from the breach.

[41] GNCA relies upon the fact that Lopes entered into the Completion Subcontract and that it received payment thereunder for a sum that was substantially greater, by $571,173.47, than the value of the work that remained to be done under the Subcontract.

[42] GNCA submits that the Completion Subcontract serves as the “subsequent mitigating transaction”, and that it resulted entirely from the breach of the Subcontract that is at the root of Lopes’ claim. GCNA submits that but for Gorf’s breach, there would be no Completion Subcontract and, accordingly, the amount that Lopes received from the Completion Subcontract must be taken into account when determining what amount, if any, is required to put Lopes into the position in which it would have been had the Subcontract been completed. GCNA submits that when this is done, it is clear that Lopes has, in fact, benefited from Gorf’s breach of contract (by virtue of the Completion Subcontract) and, therefore, Lopes has not suffered any damages.

[43] In British Westinghouse and in Karas the House of Lords and the Supreme Court of Canada, respectively, held that a plaintiff has a duty to take all reasonable steps to mitigate the loss “consequent on the breach”. It is important to recognize that Lopes does not make any claim against GCNA in relation to its damages for lost profits arising from the fact that it was deprived of the opportunity to perform the remaining work under the Subcontract. Lopes mitigated this loss by entering into the Completion Subcontract. The breach of the Subcontract upon which Lopes relies for its claim under the Bond is Gorf’s failure to pay invoices for services performed and materials supplied. This breach is separate from Gorf’s abandonment of the Project which deprived Lopes of the opportunity to earn profits through fulfillment of its obligations under the Subcontract. By entering into the Completion Subcontract, Lopes did not mitigate a loss that was consequent on Gorf’s failure to pay invoices. This loss had already crystallized.

[44] In Cockburn, the opportunity for the appellant to buy goods at a liquidation sale would not have arisen were it not for the wrong complained of (the plaintiff’s dismissal upon the liquidation of his employer). In this case, in contrast, the opportunity for Lopes to bid for and profit from the Completion Subcontract did not arise from non-payment of its invoices. This opportunity arose as a result of the abandonment of the Project by Gorf after liens were filed by subcontractors, including Lopes, and after the solicitation of bids by Sullivan, the completion general contractor. In my view, the opportunity for Lopes to earn a profit from the Completion Subcontract was separate from and collateral to the breach of contract by Gorf through non-payment of Lopes’ invoices. Lopes’ successful bid for the Completion Subcontract was not, using the language of Sir Charles Fitzpatrick C.J.C. in Cockburn, “directly dependent” on Gorf’s failure to pay its invoices. Accordingly, in my view, GCNA is incorrect in its submission that the Completion Subcontract flows entirely from the breach of the Subcontract that is at the root of Lopes’ claim.

[45] For these reasons, the principle of mitigation of damages described in British Westinghouse and in Cockburn does not apply in respect of Lopes’ claim under the Bond.

[46] I conclude that this is an appropriate case for summary judgment and that Lopes should be awarded judgment against GCNA for the amount of its claim under the Bond.

Disposition

[47] For the foregoing reasons, Lopes’ motion for summary judgment is granted and GCNA is ordered and adjudged to pay to Lopes the amount of $183,824.23.

[48] If the parties are unable to agree on costs, Lobes may make written submissions within 15 days. GCNA may make written responding submissions within 15 days thereafter. If so advised, Lopes may make brief written reply submissions within five days thereafter.

Cavanagh J.

Released: January 31, 2019

COURT FILE NO.: CV-17-570705

DATE: 20190131

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

LOPES LIMITED

Plaintiff

– and –

GUARANTEE COMPANY OF NORTH AMERICA and GORF MANUFACTURING/CONTRACTING LTD.

Defendants

REASONS FOR JUDGMENT

Cavanagh J.

Released: January 31, 2019