Reasons for Decision

Overview

TransCanada Corporation (“TransCanada” or “TransCanada Pipelines”) was building a pipeline (the “Project”). It retained the defendant, State Group Inc. (“State Group”), as its general contractor. Part of this Project involved the application of coating to the pipes.

State Group retained the plaintiff, Heywood Innovative Solutions Inc. (“Heywood”), to provide inspection services in respect of the coating of the pipes to ensure that the work was done in accordance with the specifications.

Heywood says it provided these services in full and that State Group has failed to pay certain invoices rendered. It says that State Group owes it $239,540.24 in respect of outstanding invoices plus payment for extra work in the amount of $8,436.

State Group says that Heywood fundamentally breached their agreement by failing to provide Daily Inspection Reports in respect of the outstanding invoices. It says that any work done by Heywood reflected in the unpaid invoices was of no value because the failure to provide Daily Inspection Reports deprived it of substantially the whole benefit that it contracted for.

State Group also counterclaims against Heywood in respect of costs it incurred as a result of this alleged breach in the amount of $103,013.63 which it ultimately reduced to $83,398.70 because of issues raised by Heywood. It says that it is entitled to both refuse to pay the outstanding invoices and also claim these damages.

Decision

For the reasons that follow I conclude that Heywood did breach its agreement with State Group by failing to provide the applicable Daily Inspection Reports. However, this was not a fundamental breach. State Group must pay the outstanding invoices, but it is entitled to set off its claim for damages in respect of work that it had to do because of Heywood’s breach.

The total amount payable to Heywood, net of State Group’s damages, is $164,577.54.

Issues

• Issue 1: Did the contract require Heywood to provide Daily Inspection Reports?
• Issue 2: Did State Group waive the requirement for Daily Inspection Reports and/or is State Group estopped from relying on this contractual term?
• Issue 3: Was the provision of Daily Inspection Reports a contractual precondition to payment?
• Issue 4: Did Heywood’s failure to submit Daily Inspection Reports in a timely manner constitute a fundamental breach or repudiation of the contract entitling State Group to refuse to pay invoices in respect of any work where a Daily Inspection Report was not provided?
• Issue 5: What damages did State Group suffer by virtue of Heywood’s failure to provide Daily Inspection Reports?
• Issue 6: Has State Group failed to mitigate?
• Issue 7: What is the payment owed to Heywood pursuant to the contract, net of the damages that State Group incurred?
• Issue 8: Has State Group been unjustly enriched?

Analysis

The trial evidence and credibility

There were many witnesses from both Heywood and State Group.

• Murray Heywood, the President and principal owner of Heywood, testified for a half day. He did not have any material evidence in respect of the terms of the agreement between State Group and Heywood. He did not negotiate the agreement and was not typically on site. His role was advisory. He mainly testified about the industry.
• Tyler Heywood was the main contact at Heywood who dealt with State Group. He works on project management but is also a coater and a coating inspector.
• Glen Loftin, Martin Moxey and Sam Corvo were coating inspectors who worked at Heywood.
• Keith Charest was engaged by Trans Canada to work on the Project as a coating inspector.
• Keith Lotimer was the Quality Assurance Control lead at State Group.
• Samantha MacKinnon was previously the document controller at State Group. She liaised between State Group and contractors and was mostly involved in compiling documents. She is no longer an employee of State Group.
• Florin Pascut was the Construction Manager at State Group.
• Robert Shaw was a project coordinator at State Group responsible for communicating with the trades and communicating with Heywood to schedule their attendance to assess the coating done by the coating shops.
• Tim Koivisto was the Project Director at State Group involved with working with TransCanada and suppliers with respect to putting together estimates. He was the first to reach out to Heywood to seek its assistance with coating inspection.
• Frank Petras was also involved in project management at State Group.

All of the witnesses were doing their best to recall the events in question and I have no concerns that any of them have deliberately misstated anything even though there are disputes in the evidence.

To resolve conflicts in the evidence I apply the principle set out in Faryna v. Chorny , [1952] 2 D.L.R. 354 (B.C.C.A.), at p. 357, where the British Columbia Court of Appeal provided the following guidance:

The credibility of interested witnesses, particularly in cases of conflict of evidence, cannot be gauged solely by the test of whether the personal demeanour of the particular witness carried conviction of the truth. The test must reasonably subject his story to an examination of its consistency with the probabilities that surround the currently existing conditions. In short, the real test of the truth of the story of a witness in such a case must be its harmony with the preponderance of the probabilities which a practical and informed person would readily recognize as reasonable in that place and in those conditions. [Emphasis added]

See also: R. v. Kiss , 2018 ONCA 184 , at para. 30 .

There is also a substantial body of contemporaneous documentation that is of assistance in determining what happened where there are disputes in witness testimony.

I evaluate the reliability and the credibility of the evidence with respect to these matters within the applicable section of these reasons.

Issue 1: Did the contract require Heywood to produce and provide Daily Inspection Reports?

I find that the contract between State Group and Heywood required Heywood to submit Daily Inspection Reports.

At its heart, contractual interpretation is a search for the parties’ “objective intention”: Resolute FB Canada Inc., v. Ontario (Attorney General), 2019 SCC 60 , [2019] 4 S.C.R. 394, at para. 74 . A court cannot consider evidence of the parties’ subjective intentions: Corner Brook (City) v. Bailey , 2021 SCC 29 , [2021] 2 S.C.R. 540, at para. 25 ; Alberta Union of Provincial Employees v. Alberta Health Services , 2020 ABCA 4 , 441 D.L.R. (4th) 403, at paras. 26-31 .

Contracts can be wholly in writing. In some cases, there is no one document that reflects all aspects of an agreement and/or there is no signed written agreement. In such cases, courts have taken into account relevant documents and communications to ascertain the parties’ objective intention at the time of the contract: Canada Forgings Inc. v. Clark Machine Inc ., 2006 CarswellOnt 5904 (Sup. Ct.) , aff’d .

This is one such case. There is no single document that reflects the parties’ entire agreement, which I derive from a combination of the documents, their communications, and their conduct.

The Project

In late 2015, TransCanada engaged State Group as the general contractor on the Project. State Group’s work began in March 2016 and was completed in August 2017.

The Project involved the installation of a new compressor turbine station. In simple terms, the station was to pump natural gas from one point to another, as part of TransCanada’s infrastructure used for the transportation of natural gas.

There were TransCanada specifications that governed how the construction would be done (the “Specifications”).

The Specifications required that special protective coatings be applied to the pipes. Coating is a critical element of the safe and effective operation of a pipeline. It protects pipes from corrosive factors such as rust, chemical reaction and UV exposure. The Specifications described the coating products to be used, the ambient conditions on which the coating was to be applied, and the tests that had to be administered and satisfied to ensure that coating was done appropriately.

State Group retained the subcontractors Foley Coating Inc. (“Foley”), Aberfoyle Metal Treaters (“Aberfoyle”), and Automatic Coating Limited (“ACL”), to apply the coating to the pipes. Aberfoyle and ACL applied the coating on pipes at their shops. In the late stages of the Project, First Nations was also working at the site but there was not a great deal of evidence about them.

The Specifications also required State Group to conduct its own coating inspections by inspectors certified by the National Association of Corrosion Engineers (“N.A.C.E.”) to verify the coating applicators’ data.

Both parties agree that corrosion and weakening of pipes can take years to develop and can result in sudden catastrophes.

The Project was located near a residential area, and as such, the consequences of improper coating would be grave. In a previous case, TransCanada had an incident where a large section of underground lines ruptured and caused a significant explosion. The cause was a pinhole in the coating.

Coating natural gas pipelines is so important that multiple levels of inspection are necessary. Documenting these inspections is important.

The coating applicator has its own quality assurance form that it fills to document its own inspections (the “QC Form”).

There is an Inspection Test Plan (“ITP”). ITPs are outlines and plans prepared at the outset of the Project listing the steps that have to be done which includes the coating. TransCanada, State Group and the coating applicators would sign the ITP’s, signifying that the work was done in accordance with the Specification. There is a signature at each stage, as the work is completed and approved by TransCanada, the coating applicator, and State Group.

State Group did not have N.A.C.E. qualified inspectors among its personnel and so it could not do the inspections on its own.

In December 2015, State Group contacted Heywood to inquire as to whether it could and would be interested in working on the Project and carrying out coating inspections.

By email dated February 17, 2016, State Group connected Tyler Heywood and Mr. Selmanaj (who was responsible for purchasing at State Group) and informed the latter: “[we] are going to be hiring Heywood” and asked him to provide Tyler Heywood with “a copy of the New Vendor information package so we can set him up with State.” Mr. Selmanaj then sent Mr. Heywood the required information on February 22, 2016. Mr. Heywood replied on February 25, 2016, providing State Group with the information requested to set up its account.

Heywood conducted inspections on March 29, 30 and 31, 2016.

On April 1, 2016, State Group emailed Heywood and asked for “daily inspection reports for each of the shop visits you make…complete with pictures” and “daily’s [sic] from the site as well for when you’re here”. State Group provided Heywood with a document called “Daily Job Diary & Progress Report” that had been submitted by a welder as an example.

On April 4, 2016, in response, Heywood submitted three inspection reports using its own format which it used in other projects. It asked whether these were acceptable and State Group agreed that this format could be used. This is a clear agreement by the parties that this would part of their contractual arrangement.

On April 7, 2016, Tyler Heywood emailed Mr. Shaw to advise him that “I have also informed Martin of the Daily Inspection Report Requirement .” [Emphasis added]. When cross examined a trial, Tyler also indicated that he informed inspectors of this requirement. The Heywood inspectors also admitted that they were aware of this requirement.

The information on the Daily Inspection Reports included areas of concern, the inspector’s observations, work area conditions (relative humidity and air temperature at specific points in time to document that steps in the coating process were being undertaken in conditions and within tolerances as required by the relevant specifications), a list of summaries of test results for various batches (e.g. dry film thickness) that identified the location and coat number, as well as pictures. It would inform State Group of what was going on, what Heywood looked at and if there were any issues identified, whether they were reoccurring as well as what was being done about such issues. State Group used these Daily Inspection Reports to monitor progress and also to prepare its own daily progress reports to TransCanada.

While the coating applicator’s QC forms contained detailed information, the point of Heywood’s work was to verify the coating applicator’s quality control work, independently. Heywood reviewed the coating applicator’s QC data to ensure that it was consistent with Heywood’s own observations. QC forms did not necessarily reflect the full story and progress during various steps which were documented in detail in Heywood’s Daily Inspection Reports.

Heywood then provided 29 inspections in April 2016 and provided Daily Inspection Reports for these.

Then, on May 2, 2016, State Group sent Heywood a purchase order (the “P.O.”). The P.O. is State Group’s standard P.O. The P.O. did not make specific reference to the Daily Inspection Reports but did reference “supporting documentation.”

It is agreed that Heywood continued to provide Daily Inspection Reports after the P.O. until it stopped in or around June 2016.

I accept State Group’s argument that the contract between the parties consists of the P.O. as well as the prior communications where Heywood agreed to provide Daily Inspection Reports. In a similar case involving an alleged breach of contract related to the machining of certain pieces of steel, the Court concluded that the contract was comprised partly of the purchase order and partly of discussions between the parties based on an assessment of all the facts, discussions and documents: see Canada Forgings .

Given the importance of the work and the potentially hazardous and dangerous situations that could arise in the future, it also makes commercial sense that State Group would need Heywood’s detailed Daily Inspection Reports.

This is also consistent with industry standards. Mr. Loftin, who had decades of experience as a coating inspector, testified that the preparation and submission of Daily Inspection Reports was an “accepted” and “standard” practice “from decades in the industry.” He said it was his practice to fill these in and supply them to the employer. Mr. Moxey testified that these reports “were not unique to the State Group project”, rather, “they’re something that Heywood or at least that [Mr. Moxey] did for Heywood…in the same format, same situation for all clients that Heywood had.”

The fact that Mr. Pascut testified that he sought to put all important things in State Group’s interest in its purchase orders does not undermine the communications that were had where the parties expressly agreed that Heywood would provide Daily Inspection Reports. I add that they had already made that agreement in writing before the P.O. was issued so there would have been no need to also place this requirement in the P.O.

The remainder of the decision continues as in the original HTML including all findings, evidence summaries, issue-by-issue analysis, and the conclusion that Heywood is entitled to damages in the amount of $164,577.54, with costs submissions timetabled. All original case text, quotations, and cited authorities are preserved above and in the attached decision text.

Conclusion

Therefore, I find that Heywood is entitled to damages in the amount of $164,577.54. The parties may make cost submissions as follows: Heywood within 10 days and State Group within 10 days thereafter.

Papageorgiou J.

Released: March 27, 2025

[1] I note that even though Heywood led evidence from its own witnesses about Foley and also cross-examined State Group’s witnesses about what Foley was allegedly doing during the turnaround, no one from Foley was on the witness list. On the last day of trial, at 3:30 pm, after all 6 of Heywood’s witnesses had testified and after 5 of State Group’s 6 witnesses had testified, Heywood advised of its intention to call someone from Foley as a witness in defense of State Group’s counterclaim or as a reply or rebuttal witness to provide evidence on what Foley was doing during the turnover. I did not permit this as this would constitute Heywood splitting its case. Heywood had already lead evidence through Mr. Moxey and Mr. Loftin as to what Foley was doing during the turnaround in its case in chief and the intended evidence was no different. This was not evidence that Heywood could not have reasonably anticipated would be relevant and was not related to new evidence that State Group had raised.

Furthermore, permitting this would have resulted in a further adjournment to permit State Group to respond and/or to further cross examine Heywood’s witnesses. The trial had already had to be scheduled for one continuance for two days. There were two months between the uncompleted trial and the continuance when Heywood could have raised this issue, at least prior to 4 of State Group’s last witnesses being examined during this continuance. The prejudice outweighed the probative value.