Contractual Notice Requirements: Not Just A "Technical Defence"

The following conversation is not uncommon at the outset of a construction dispute:

However, as the Ontario Court of Appeal recently ruled in Technicore Underground Inc. v. Toronto (City)¹, a failure to comply with clear notice provisions is a real defence.  And in its reasons for judgment, the Court of Appeal essentially reminded us of what the Supreme Court of Canada had articulated thirty years prior.

Brief Summary of the Facts

The City retained Clearway Construction Inc. to build a water main.  Clearway hired Technicore as a subcontractor to do the tunneling work, which required the use of a tunnel boring machine.  On August 2, 2006, a flood occurred in the tunnel.  The tunnel boring machine required repair work and after the resultant delay, the tunneling work was ultimately completed on December 22, 2006.

After completion, the claims commenced.  In a letter dated February 9, 2007, Technicore sought to advance a claim against Clearway for C$800,000.  On March 6, 2007, Clearway delivered a claim to the City for its own alleged flood costs of approximately C$400,000, together with indemnity for the Technicore claim.  The City denied the Clearway claim by letter dated April 4, 2007.

On July 30, 2008, Technicore commenced an action against the City, seeking recovery of its alleged flood damages.  The City added Clearway as a third party.  In March of 2010, or approximately three years after submitting its original claim, Clearway counterclaimed against the City for C$1 million in damages plus indemnity for Technicore's separate claim against Clearway.  Several months later, Clearway sent the City an additional claim for damages of over C$3 million.  Clearway ultimately incorporated its increased damages figure into an amended statement of defence and counterclaim, claiming a total of approximately C$3.4 million.

The provisions in the contract between Clearway and the City included the following:

The City brought a partial summary judgment motion in reliance upon this notice provision.  The court agreed with the City and the bulk of Clearway's counterclaim was dismissed.  Clearway appealed.

The arguments raised by Clearway were similar to those that are commonly raised in response to a notice defence.  On the facts of this case, the Court of Appeal rejected them all. Although there were five primary grounds raised by Clearway, I have chosen to focus on the three that may have the greatest impact on other cases:

i. The Language of the Notice Provisions

Clearway argued that the contract contained a procedure for identifying claims, but that it did not contain language that was sufficiently clear to deprive Clearway of the right to advance its counterclaim.  In particular, Clearway argued that the contract did not contain a "failing which" clause (i.e. a clause stating that compliance with the notice provision was required failing which the claim could be rejected). 

In reliance upon the Supreme Court of Canada's 1982 decision in Corpex (1977) Inc. v. Canada², the Court of Appeal rejected this argument outright.  It was noted that the clause at issue in the Corpex case also didn't contain a "failing which" provision and that the Supreme Court of Canada had even commented that both the contractor and owner benefit from a clear notice provision – the contractor has certainty that its legitimate claim will be honoured if it complies with the notice requirements, while the owner has the certainty of knowing whether a claim will be proceeding and can respond appropriately (by mitigating its damages, deciding how to manage any additional work that is actually required, etc.).

Accordingly, the language of the notice provision was sufficient to bar Clearway's claim.

ii. Absence of Prejudice

Another argument put forward by Clearway was that the intention of a notice provision is to prevent prejudice arising from non-compliance.  Clearway argued that with no evidence of prejudice, its claim should not be rejected.

The Court of Appeal again relied upon Corpex.  Although it was recognized that, "one purpose of a notice provision is to enable the owner to consider its position and the financial consequences of the contractor providing additional work" (paragraph 47), it was also held that, "...as owner, the City is assumed to have been prejudiced by a multimillion dollar claim being made years after the Contract permitted and long after the City could consider its position and take steps to protect its financial interests" (paragraph 51).

Clearway's absence of actual prejudice argument was rejected.

iii. Waiver

It is also quite common for a claimant who encounters a notice defence to argue that if the defendant failed to enforce the relevant provisions of the contract throughout the course of the project, then it has waived its right to rely upon them.  In this instance, Clearway argued that since the City failed to object to the timing of the March 2007 claim, it waived compliance with the notice provision at issue.

Once again, the Court of Appeal rejected Clearway's argument outright.  In so doing, it confirmed that a party will only be found to have waived its reliance on its rights where it communicated a clear intention to the other party to do so – "an unequivocal and conscious intention to abandon" (paragraph 64).  The Court of Appeal noted that Clearway did not adduce evidence of any such communications.

Clearway's related argument that the parties varied the terms of their contract by virtue of their conduct failed as well.  To the contrary, the Court of Appeal found that both parties went to great lengths to try to abide by the terms of their agreement.

Conclusion

In reviewing the Technicore decision, one should be careful to take into account the unique facts of the case.  In particular, it was found that the claim at issue had been submitted to the City three years after the applicable deadline had lapsed.  One can only speculate if the outcome would have been the same if the claim had been submitted only one or two weeks late.  In addition, different facts may well have supported a waiver or other argument that could override clear notice provisions.

However, the ruling does send a message that carries a great deal of significance for the construction industry.  In simple terms, parties should always operate under the assumption that they will be held to their bargain.  With respect to defences based upon notice, it is incorrect to dismiss such arguments as "technical" or "last resort" defences that are introduced only where no other position is available. And there is good reason for this – both parties to a contract benefit from certainty and a full understanding of the options available to them when the other party is alleged to be in breach.

In considering how to apply Technicore to their day-to-day businesses, contractors (and all payees) would be well-advised to know their contract terms and abide by them.  If they choose to ignore the prescribed notice provisions, it may potentially be at their own peril, even for otherwise valid claims.  Owners (and all payors), on the other hand, will perhaps have more confidence that when the relevant notice period expires without a claim having been submitted, they can make budgeting and related decisions accordingly.

The most important lesson to be drawn from this decision is one that cannot be stressed enough:  The safest and least controversial course of conduct for parties to a construction contract – be it for a large energy plant or a home renovation – is to review, understand and comply with the terms of their contract.

Footnotes

^{1 2012 ONCA 597}

^{2 [1982] 2 S.C.R. 643}

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