Ross-Clair v Canada (Attorney General): Contractors Beware of Charging for Extras

Ross-Clair, a division of R.O.M. Contractors Inc. v Canada (Attorney General),2016 ONCA 205 [Ross-Clair] is the Ontario Court of Appeal’s (“ONCA”) latest decision affecting the commercial construction industry.

Commercial construction contracts typically include not only arbitration clauses, but also detailed provisions on how to deal with disputes over additional costs incurred during the project “extras.” The contract in Ross-Clair contained a provision appointing the Project Engineer (“PJ”) to adjudicate all claims for extras made by Ross-Clair, a division of R.O.M. Contractors (the “Contractor”) and to make a binding decision on whether to approve such extra costs. While the PJ’s decision could be challenged in arbitration, the Contractor was required under the provision to provide sufficient detail to support its claim.

After providing notice of a claim for $1,437,976.00 to its client, in this case Public Works Canada (“PWC”), a division of the Federal Government of Canada, the Contractor thought it was complying with the meaning of the provision. PWC however, took the position that the information was insufficient and that the PJ could not render a decision as a result. The Contractor brought an application to the Superior Court seeking an Order that the PJ make a determination on the Contractor’s entitlement to the extras.

After the applications judge granted the Order, PWC appealed the decision on the basis that the Contractor failed to provide sufficient details of the extras in accordance with the contract and thus should be precluded from claiming anything at all. In seeking only to interpret and apply the provisions of the agreement, the ONCA agreed with PWC. In doing so, it rendered a decision that reached too far into the contractual relations between the parties and interfered with the Contractor’s fundamental rights under the agreement. Determining the standard of review to be ‘correctness,’ the ONCA proceeded in its analysis to re-weigh some of the facts, without indicating whether the applications judge made a palpable and overriding error. Overall, the decision appears to be impractical and creates uncertainty as to how much information will satisfy the terms of such provisions in commercial construction contracts.

Issues and Reasoning

The applications judge carefully considered the provision requiring the Contractor to provide sufficient detail on the facts and circumstances of a claim for extras. The applications judge found that the agreement required the Contractor to provide more than mere notice of its claim to PWC, but the requirement did not extend so far as to require the Contractor to prove its claim for extras. The judge found on the facts that the Contractor provided information that was sufficient for the PJ to make a determination of the Contractor’s entitlement and ordered the PJ to make such a determination. This was a reasonable decision that respects the agreement between the parties and further enables them to proceed with the process they agreed to in the contract. If the PJ still had concerns at this point over the insufficiency of the information provided by the Contractor, this could have been dealt with by weight, meaning any missing information could be held to detract from the Contractor’s claim.

Yet the ONCA treated the informational requirement as a threshold issue, meaning that if the information was deemed insufficient by PWC, the Contractor’s right to the claim would be extinguished altogether. Interestingly, the ONCA disagreed with the lower court over the standard for assessing the sufficiency of the information provided. In fact, it held that the Contractor, in the context of such a provision, was basically required to prove its claim to the other side. After a significant amount of correspondence was exchanged between PWC and the Contractor over the sufficiency of the information in support of its claim, the latter did in fact produce a detailed report titled “Analysis of Delays and Additional Costs” on May 28th, 2013, which is one year and three months after the project was certified to be complete. Implying that the sufficiency of the information in this report may have met the standard required for the Contractor to prove its claim, the ONCA then found that this report was too late.

Uncertainty for Future Parties

A related provision to the sufficiency requirement was that a claim for extras had to be submitted no later than 30 days after the project was certified to be complete. Thus, the ONCA’s position on the report being late is understandable. However, the above notice provision is separate from the sufficiency requirement. Logically, the two are not dependent on each other. Moreover, nowhere does the agreement state that a failure to meet the sufficiency requirement constitutes a failure to meet the requirement to submit one’s claim. However, the ONCA held that these provisions must be read in the entire context of the agreement as a whole, purportedly justifying the conclusion that failure to provide sufficient information within 30 days after completion is a failure to provide notice of the claim at all. It is unclear in the ONCA’s decision how that conclusion was specifically reached.

The ONCA could have reasonably reached an alternative conclusion without conflicting with the agreement as a whole. While one specific purpose of the agreement was to create certainty by imposing time limits—hence the 30 day deadline to bring a claim for extras—the general purpose was to provide a multi-stage dispute resolution mechanism upon which the parties could rely. In this case, the immediate dispute was not over the extras but over the quantity and quality of information provided in the claim for extras. Extensive correspondence between the parties shows that they disagreed over this point. This is much different than failing to start a claim at all within the 30 days. Why then does disagreeing over the information provided result in one party being stripped of its rights under the contract because they couldn’t see eye-to-eye with the other party on how much information to provide? Such an interpretation of the contract is not only inconsistent with the Contractors’ right to a fair process, it puts the other party, PWC, into a supra-advantageous position where it can continue to deny the adequacy of the information provided in the context of a dispute if a contractor is unable to prove its claim. In other words, it puts PWC into a position of power and its enables it to act self-servingly. It is unclear whether the contract as a whole intended such an unbalanced result.

Conclusion

In deciding as it did, the ONCA rendered a decision that reached too far into the contractual relations between the parties and interfered with the Contractor’s fundamental rights under the agreement. The applications judge made a reasonable decision in ordering that a disputed claim be adjudicated according to the process agreed to by the parties themselves. Overall, the decision appears to be impractical and creates uncertainty as to how much information will satisfy the terms of such provisions in commercial construction contracts.

BY DEZSO FARKAS · MARCH 20, 2016

PUBLISHED AT thecourt.ca

Some Suggestions on Regulating Technological Innovation: City of Toronto v Uber Canada Inc.

In November of last year, I wrote an article for The Court on the recent decision in Uber Canada Inc. v City of Toronto, 2015 ONSC 3572 [“Uber”] by the Ontario Superior Court of Justice (“ONSC”). In Uber, Justice Sean F. Dunphy ruled that Uber is neither a “taxicab broker” nor a “limousine service” within the meaning of the City of Toronto Municipal Code, and thus cannot be prohibited from operating without a license.  In other words, the Court said that Uber cannot be regulated under the existing municipal framework that has regulated the taxi industry in Toronto for several decades.  However,  as Justice Dunphy alluded to, it is open to municipalities to develop new approaches to regulating this form of Disruptive Innovative Technology (“DIT”), however, it is abundantly clear that ‘outside the box’  thinking is necessary.

In this regard, I suggested in the above referenced piece that Uber, from a policy standpoint, should not be viewed entirely as an elusive regulatory subject. Instead, it is better understood as mimicking the role that law plays in enabling a market framework to exist, as market regulator, constraining the behavior of market actors in the public interest. I further suggested that Uber’s framework of rules and their implementation might surpass the public interest function played by the municipality in the areas of driver safety, passenger safety, and cost regulation. The purpose of this article is to further explore that claim, highlight the strengths and weaknesses of the Uber framework in light of recent information, and propose how municipalities might approach the issue.

The Market for Plates

The rapid proliferation of Uber as a cheaper alternative to licensed taxi services is partly fueled by the inability of licensed taxis to compete on price. Notwithstanding that rates are directly regulated, licensed taxi drivers incur very high costs to obtain a taxi license, or the use of one, in order to make a living.  In the City of Toronto, a plate could cost $300,000to purchase and $2000 a month to lease or more. As I previously argued, municipalities, by allowing this market to continue, are allowing the industry to price themselves out of the market. Shortly after my November article, the Competition Bureau of Canada (“Competition Bureau”) echoed these very sentiments.  Amongst other things, the Competition Bureau states “regulators need to make sure that their rules get the overhaul they desperately need, before the whole taxi system seizes up.”

In November, I also highlighted that an interesting consequence of the municipal taxi licensing regime is a market for plates that has grown since the 1950s. In issuing a taxi license to a qualified driver, municipalities will grant the license indefinitely, as opposed to recalling the license once a driver retires or passes away. In other words, once a license is granted, subject to its renewal every year and ongoing use in the industry, the plate is transferrable property. In fact, it is common practice for license holders to bequeath them in their wills.

Of course, since a fundamental part of having such a regime is to control the supply of taxi services (and price) by strictly limiting the number of new licenses issued, the plates become relatively scarce. A driver seeking entry into the market could wait years to get a plate issued from the municipality. Alternatively, that driver could purchase or lease a plate from a retired driver or a taxi broker that has accumulated several plates from former drivers.

Given that scarcity commands a high price, and that there is a seemingly endless supply of drivers seeking entry into the market, the high price of plates is understandable but, in my opinion, not justifiable. The problem with the costs associated in either purchase or lease of such plates is that it fails to represent ‘real value’ or anything tangible that was created. The cost of a taxi license payable to the municipality is nominal, usually $100. However, a plate’s value is inflated by scarcity, which in turn is a by-product of the regulator limiting supply in the market and failing to set limits on the lifespan of each plate. In other words, to the extent that owning a plate gives the holder a license to participate in a monopoly, that monopoly is then further leveraged by market players to extract a staggeringly high rent from new market entrants. In sum, it is very possible that large amounts of money are being extracted from the ‘taxi economy’ without additional value being provided to drivers or passengers.

On the issue of the market for plates, I argue that the desired policy approach is quite clear: eradicate the market for plates. Municipalities could better regulate the issuance of plates by making them non-transferrable and by requiring drivers exiting the market, or their estates, to return the license to the issuer.  The license could then be re-issued to a new driver or a new one issued altogether.

What about Taxi Brokers and Market Supply?

In theory, overall supply would not be effected, only distribution. There are currently a fixed amount of plates in existence all of which must be renewed with the City on a regular basis. Drivers entering the market can obtain a plate from the City, if they choose to wait, or can obtain one privately, albeit at a significant cost. The only difference would be that private citizens or corporations could not sell or lease plates. Thus, the end result would be: one driver, one plate.

However, a seemingly simple restriction on plate transfers has the potential to disrupt and re-arrange an entire industry, making any regulatory approach inherently political and interest-group driven. While this is no surprise, the impact on the industry could outweigh the benefits of eradicating the market for plates, which entails eliminating a value-extracting middleman.

To argue that some type of value  is created for the industry as a whole by enabling drivers to get into the industry sooner rather than later by privately procuring a plate is simply wrong.  . Given that, presumably, the plate would have gone to someone else anyway had it been returned; on net, there is no new value created through this process, only value extracted.  Paying for a plate is merely akin to budding into a line-up by bribing the person near the front to let you in.

The real havoc would fall on taxi companies who currently play a dual role in the market. Many cab companies provide dispatching services to drivers, which is an activity caught by municipal regulation. Just to recap, Justice Dunphy held that Uber does not fall into the category of being a “taxi broker”, despite offering a replacement in the market for that very service.  This is primarily because the Uber’s are not provided by a person or entity, but merely a machine offering an interface for willing contractual parties to do this ‘brokering’ activity themselves. In fact, there is no dispatching that occurs in the ordinary sense. While I would agree that dispatching creates value, it is abundantly clear that machines can do it better.

The second role played by taxi companies is that they own several cars, own or lease several plates, and hire or subcontract drivers to operate said vehicles. Implementing a one driver, one plate scheme by restricting plate transferability would, in effect, render these companies obsolete, or at least limit them to fielding calls from incoming riders and dispatching taxi cabs.  However, do such taxi companies create value or, on the contrary, do they extract wealth from the ‘taxi economy’?

Not all taxi drivers have the resources to purchase or lease their own vehicles, which precludes them from entering the market. Paying a fee or percentage of earnings to a taxi company for using their vehicle, in order to earn a living, is arguably a value creating endeavour. However, this value-creating aspect of what taxi companies do must be separated from what taxi companies charge drivers for using their plates. Alternatively, if a taxi company is leasing a plate from a ‘retired’ driver for use on one of its vehicles, it is likely passing this fee onto the driver . In any event, taxi companies, by owning or leasing multiple plates, are either capturing non-value creating rents from the ‘taxi economy’ or paying such rents to plate owners and passing on the cost.

Uber and Regulating the Public Interest

Having become personally fascinated with the Uber phenomenon, I have made it a point to regularly use the service to gather ‘field evidence’ on how it works (and to save money). From my own user experience and through conversations with many drivers, I have observed a small handful of weaknesses, raising some doubt on Uber’s ability to effectively address public interest concerns.

A common complaint of Uber drivers is that too many drivers are on the Uber network at any given time. While prices have not dropped as a result, drivers experience this competition through reduced fare rates.  As a result, the drivers I have encountered feel they cannot make a full-time living being an Uber driver. This creates the opposite situation of what the municipal legal framework intended.  The municipal scheme aims to control the amount of drivers in the market in relation to the City’s population, ensuring that every market participant can at least make a living. This lessens the amount of ‘undercutting’ in the market and lowers incentives for non-compliance.

On a positive note, Uber’s online rating system, which requires passengers to rate drivers at the end of a trip, could eliminate some of the drivers from the market with low ratings. These ratings are immediately visible to would-be passengers upon initiating the ‘request a driver’ feature on the online app. I don’t view the high level of competition caused by the rating system to be a major concern, at least from a regulatory standpoint.  While in a traditional regulatory setting, too much competition might induce higher levels of non-compliance, I am not convinced that Uber customers are so easily fooled. In any event, the trend I have observed through my fieldwork is that most drivers are ‘Ubering’ on a part-time basis around their other jobs.  The main advantage Uber offers, is flexibility, wherein drivers can work whenever they feel like it.

Perhaps Uber is poised to change the work habits and income earning patterns of urban populations or at least a segment of them. By no coincidence, municipal regulation does the same, sometimes quite pervasively. While the undemocratic nature of how DITs shape our behavior is concerning to some, municipalities cannot put up proverbial legal barricades to prevent Uber drivers from ‘entering’ city limits.

Conclusion

While Uber has the potential to address many of the public interest concerns targeted by the municipal legal framework, it is far from perfect. However, instead of finding creative ways to push-back against Uber’s growth, municipalities should look at the ways in which DITs, like Uber, actually work to protect the public interest and should endeavour to enhance and integrate those features.  While municipalities, as a result of Uber, will be inevitably bound up in contentious politics, the possible demise of the taxi industry should be carefully weighed against the back-lash that would arise from restricting the transferability of plates. This could allow licensed taxis to compete on price with Uber and ultimately facilitate some type of convergence or integration between these industries.

BY DEZSO FARKAS · MARCH 14, 2016

PUBLISHED AT thecourt.ca

Mapleview v Papa Kerollus: Erring on the side of fairness when adjudicating commercial leases

Mapleview-Veterans Drive Investments Inc. v Papa Kerollus VI Inc. (Mr. Sub), 2016 ONCA 93 [Mapleview], a case released yesterday by the Ontario Court of Appeal (“ONCA”), is the latest pronouncement on interpreting commercial lease provisions. While the outcome of the appeal is understandable given the facts relied upon by the parties, it causes concerns not only for how future cases will be interpreted, but also for the bargaining power it bestows onto commercial landlords at the expense of fairness for commercial tenants.

The case centres on the contractual right of Papa Kerollus VI Inc. (the “Tenant”) to elect to renew the lease for an additional term by a certain deadline. In this case, the contract stipulated that the tenant must comply with several pre-conditions to be eligible to exercise this right. A key pre-condition was that any “additional rent” due under the agreement could not be in arrears. Feeling like Mapleview-Veterans Drive Investments Inc. (the “Landlord”) was improperly accounting for additional rent due and unfairly demanding higher payments in an attempt to squeeze it out, the Tenant disputed the amount due. In turn, the Landlord held the Tenant to be in default and denied its right to renew on that basis. While the applications judge was sensitive to the circumstances of the alleged default, the ONCA found the dispute to be irrelevant for determining whether the pre-conditions to exercising the renewal option had been met. In doing so, it further opened the door for future landlords to demand unreasonable amounts from their tenants, knowing that even a legitimate dispute by the tenant could not preserve its ability to hang on to its lease and continue operating its business. This in turn could lead to increased predatory conduct towards less sophisticated commercial tenants.

Issues and Reasoning

Although the Landlord in this case denies having an agenda to, in effect, get rid of the Tenant at the end of the lease, the facts of the case more than point in that direction. In any event, the facts depict a long-standing dispute implicating distrust of the Landlord by the Tenant and suspicion of bad faith conduct.

Of key importance is the wording of Clause 2 in the lease, which states: “provided that the Tenant had paid the rent and all other sums payable under this Lease when due and, provided the Tenant has performed all other covenants under the Lease as and when the same are required to the performed, the tenant shall have the option to renew for one further term of five years.”

The issue at the lower court and at the ONCA was whether the Tenant complied with the above clause with respect to paying the “additional rent” due under the agreement, which consisted of the Tenant’s percentage share of taxes, maintenance, and insurance (“TMI”). As mentioned, these amounts were disputed by the Tenant on the basis that its percentage of TMI was not being accurately allocated and that the Landlord was attempting to collect an unreasonable amount for these costs in advance.

The applications judge in the lower court acknowledged the relevance of the dispute to whether the Tenant was able to comply with the pre-conditions set out in Clause 2 of the lease. He ultimately held that once a judicial determination of any arrears owing was made, the Tenant would have 60 days to pay—at which point the pre-conditions in the clause would be satisfied, allowing the Tenant to validly elect to renew the lease. The applications judge concluded at para. 40 of his decision that “a tenant is entitled to know with some degree of accuracy what arrears exist, so that it can put itself in a position where it is not in default when exercising its renewal right.” In effect, he found that compliance with the clause was in some cases contingent on the Landlord and Tenant agreeing on the quantum of what those preconditions are, in this case the existence of any arrears.

The Court of Appeal took a completely different approach. It held that the applications judge erred by giving any relevance to this dispute and that the only issue was whether the arrears demanded at the time was paid by the Tenant or not. It based this holding on other clauses in the agreement, namely clauses 3.C. and 10 through 13, which required the Tenant to make percentage payments towards TMI on a monthly basis and “upon demand” after receiving the Landlord’s estimate. Thus, as long as the Landlord made a demand for the funds pursuant to this provision, the Tenant must pay in order to avoid defaulting on the lease and losing its renewal right despite disputing the amount demanded. The ONCA likened this contractual provision to a promissory note that gives the holder an undisputed and unassailable right to the value of the note plus any interest

A Difficult Predicament

Some important context here is that commercial landlords have the ability to evict a commercial tenant at the end of a lease and gain possession of the leased premises. This is the case regardless of whether the tenant is conducting a viable business and wishes to continue. In some cases, predatory landlords have refused to renew a lease to a successful business, forcing it to leave. They have then occupied the space to operate the business under a new name or have re-leased the space at a premium, exploiting the former tenant’s leasehold improvements and customer base. While this occurs more frequently in the retail context, tenants typically negotiate a renewal clause to protect themselves against such a scenario.

Being in a position to make findings of fact and to assess credibility, the applications judge understood the dynamics of the scenario that had unfolded. He understood the near impossible predicament the Tenant was placed in and the ability of the Landlord to make continuous and escalating demands for more money under the agreement.

While the Court of Appeal took a strict and literal approach to interpreting the provisions in the agreement, it reached the right decision given the fact scenario at hand.. The decisive factor was that the Tenant admitted to owing a small undisputed sum of principle rent, less than $300.00. The Court commented that the provision in Clause 2 of the lease cannot be interpreted as permitting the Tenant to pay almost all of “the rent and all other sums payable under this Lease when due.” It was required to pay every penny. Fair enough.

However, in principle, the court went much further than this. The broader principle evolving from this decision is concerning, especially since the case could have been decided alone on this small undisputed rent sum. The Court went as far as holding that the existence of any dispute is irrelevant and that a tenant is required to pay any amounts demanded by the Landlord to avail itself of the renewal clause. Not only is this is rather harsh, but it is problematic because the real issue is the proper interpretation of the clause that permits the Landlord to make demands for increased payments and in turn obligates the Tenant to pay them. The ONCA’s Promissory Note analogy in this case fails because, unlike the note, the quantum of what is due and payable is not established as it is on the face of the note. For the purpose of reaching a fair decision, the ONCA should have interpreted the limits of such a clause; after all, it had relied upon it in principle. It is unclear whether such clauses in the context of commercial lease agreements truly entitle the Landlord to demand whatever it wishes, especially when its goal is to get rid of the tenant and re-lease the space or continue the Tenant’s business. Surely, such ‘on demand’ clauses are attached to other provisions in the lease and are subject to considerations of fairness, reasonableness, and good faith. For example, if the Landlord anticipates that the cost of TMI is going to rise in the upcoming year, it would be properly entitled to demand higher payments towards TMI and credit any overpayments back at the end of the period in question. However, what if the Landlord demands three times its anticipated cost increase, leading to a dispute between itself and the Tenant? Taking a strict and literal interpretation of the right to make demands under the lease fails to articulate any constraints on the exercise of such a right.

Conclusion

By ruling that issues around the satisfaction of preconditions to exercising rights in commercial leases are essentially not disputable, the ONCA further opened the door for future landlords to behave unreasonably towards their tenants, precluding them from exercising key contractual rights such as the right to renew. This in turn could lead to increased predatory conduct towards less sophisticated commercial tenants. The ONCA could have endeavoured to interpret the “on demand” clause in the lease and articulated some parameters of reasonableness and fairness. This approach could better balance the contractual rights of landlords and tenants in the commercial leasing context.

BY DEZSO FARKAS · MARCH 13, 2016

PUBLISHED AT thecourt.ca