An 849-paragraph testament to the grinding weight of our civil justice system, the decision in Walsh Construction v. Toronto Transit Commission et al., 2024 ONSC 2782, was arrived at after a trial stretching over 19 months, and which included a combined total of 6,540 pages of affidavit evidence (not including exhibits) and 3,360 pages of closing submissions (plus an additional 10,341 attachments).
It is not just a wonder that the decision of Justice Hood was rendered less than nine months after the final day of trial; it is something of a minor miracle that any of the participants are still alive.
In spite of the achievement that the decision represents, its findings on flow-through claims of subcontractors represent a potentially troubling precedent for the industry, and are puzzling as a matter of law. They bear further scrutiny on the appeal that is currently underway.
Background
Walsh Construction Company Canada (“Walsh”) was the contractor for the Pioneer Village Station on the Toronto Transit Commission’s (“TTC”) Toronto-York Spadina Subway Extension. The contract, along with the broader subway extension project, experienced delays. Walsh claimed against the TTC for $193 million; the TTC counterclaimed for $22 million.
A thorough dissection of the decision will have to wait for another time. (Interested authors, or those with too much time on their hands, should submit their proposals to the editor of this newsletter at jnathwani@margiestrub.com.) This article focuses on only one aspect of the decision: liability for claims of subcontractors which a contractor seeks to flow through to an owner.
Flow-Through Claims
Overview and position of the parties
At paragraphs 317-355 of the decision, Justice Hood discusses the claims advanced by Walsh on behalf of its subcontractors for delay and acceleration. These claims totalled over $61 million.
Walsh argued that it was entitled to recover from the TTC any damages that Walsh’s subcontractors were entitled to recover from Walsh as a result of the TTC’s breaches of contract, notwithstanding that the subcontractors have no contractual relationship with the TTC. This is the case, argued Walsh, whether Walsh chose to litigate those subcontractor claims or settle them.
The TTC argued that for subcontractor claims to be recoverable, Walsh needed to have potential liability to its subcontractors. However, Walsh had entered into settlement agreements with most of its subcontractors, so it had no potential liability to those subcontractors. The TTC argued that the claims should therefore be denied.
There were two types of agreements entered into between Walsh and its subcontractors: assignment liquidating agreements and non-assignment liquidating agreements.
Types of liquidating agreements
Justice Hood summarized the assignment liquidating agreements at paragraph 333:
Under the assignment liquidating agreements, Walsh paid to the subcontractor an amount that represents all of the contract payments due and payable to the subcontractor. In exchange for this payment, the subcontractor assigned its claim to Walsh and released Walsh from liability. In some instances, the amount paid by Walsh was less than the subcontractor claim.
He summarized the non-assignment liquidating agreements at the following paragraph:
Under the non-assignment liquidating agreements, Walsh paid to the subcontractor an amount representing the contract payments due and payable to the subcontractor in exchange for a release of Walsh. If Walsh were able to recover anything from TTC with respect to the subcontractor claims, it was to pay it to the subcontractor less a percentage for overhead, markup and costs incurred. If there is a global recovery, the subcontractors would receive a pro-rated recovery as solely determined by Walsh.
Holding and rationale
Justice Hood categorizing these types of claims as flow-through claims, and reviewed the limited authorities dealing with such claims. At paragraph 343, Justice Hood cited authorities which stand for the proposition that a contractor must have potential liability for flow-through claims in order to recover damages from an owner.
Justice Hood disallowed both categories of claims. The ratio of his decision on this point is found at paragraphs 344-345:
A flow-through claim is a procedural device only. It does not create a new cause of action as between a subcontractor and TTC as there still is no privity of contract between them. Accordingly, for Walsh to pass any liability to TTC on a flow-through claim, the liability (or at a minimum, the potential liability) must remain as between Walsh and its subcontractors.
… In neither situation does Walsh have any liability. Even with the non-assignment liquidating agreements, any payment is completely dependent upon recovery from TTC.
Justice Hood noted that three subcontractors had made separate claims against Walsh, and Walsh had made third-party claims against the TTC in those proceedings. In his view, those separate proceedings could determine the TTC’s liability for those subcontractor claim.
Analysis
With the greatest of respect for Justice Hood, it is difficult to understand the reasoning on this point. The reason that Walsh did not have any more potential liability to its subcontractors is that it had incurred real liability in the form of payments to those subcontractors on account of their claims. Walsh was seeking to recover actual damages from the TTC. While it surely would make sense to scrutinize whether the amounts paid by Walsh were on account of impacts in fact caused by a breach of contract by the TTC, and whether the payments were excessive or improvident, it seems entirely backwards to suggest that damages can be recovered if potential liability exists, but not if actual damages have been incurred.
Among other problems with this approach is that is more or less guarantees vastly more litigation than would otherwise be necessary. Walsh, in this case, was effectively rewarded for continuing to litigate with three subcontractors, and punished for reaching settlements with the rest. Surely that is the opposite of the behaviour that the law ought to encourage.
Lesson for contractors
Justice Hood criticized Walsh for a number of aspects of its conduct in respect of the subcontractor claims, including that Walsh failed to scrutinize the claims, and that Walsh took inconsistent positions in respect of the claims – denying entitlement in correspondence with subcontractors, but, years later, asserting entitlement at trial.
There are lessons to be learned here for contractors. Establish in your contract how claims arising from events or issues for which the owner is responsible will be dealt with. Create an Equivalent Project Relief (or similar) mechanism by which subcontractors may obtain relief only in the event of payment by the owner. Rather than seeking to settle and obtain releases from those subcontractors, advance their claims under the contractor’s claims process, involving the subcontractors at each stage of the dispute. Make the subcontractor prove their claims, but avoid positional correspondence which simply denies entitlement – unless you are content with that correspondence being used against you.
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