) ) KINGDOM CONSTRUCTION LIMITED Plaintiff – v. –, 2018 ONSC 29

CITATION : KINGDOM CONSTRUCTION LIMITED v. REGIONAL MUNICIPALITY OF NIAGARA, 2018 ONSC 29 COURT FILE NO.: C-244-15 DATE: 2018/01/08 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) KINGDOM CONSTRUCTION LIMITED Plaintiff – and – REGIONAL MUNICIPALITY OF NIAGARA Defendant ) ) ) ) ) ) ) ) ) ) ) Geza Banfai and Stephen Brown-Okruhlik, for the Plaintiff Stephen Chisholm, for the Defendant ) ) HEARD: September 26, 27, 28 and 29, and November 14, 2017 D.A.

Broad reasons for judgment Introduction [ 1 ] This action arises out of the termination of a construction contract. [ 2 ] The plaintiff (“Kingdom”) as contractor, entered into a fixed price contract dated December 23, 2013 (the “Contract”) with the defendant (the “Region”), as owner, for the construction of a waste water facility called the “South Side Low Lift Sewage Pumping Station Upgrade and CSO Tank” in the City of Niagara Falls, Ontario (the “Project”). [ 3 ] Kingdom commenced work on the Project on January 20, 2014.

By Notice of Termination dated January 21, 2015 (“Notice of Termination”), the Region terminated the Contract effective immediately.

By Statement of Claim issued March 10, 2015 Kingdom sued the Region for payment of $3,100,000, being the alleged unpaid balance of the price of labour, services and materials supplied by it to the Project and for damages for breach of contract and misrepresentation in the sum of $1,600,000. [ 4 ] At the commencement of the trial the parties filed a comprehensive Agreed Statement of Facts, comprising 86 pages and 257 paragraphs, including an agreement that the quantum of Kingdom’s damages, subject to the determination of liability, shall be the amount of $2,100,000 plus HST thereon. [ 5 ] The parties also filed a Joint Book of Documents comprising three binders containing 225 tabbed documents. [ 6 ] The Agreed Statement of Facts was augmented by four days of viva voce evidence called by the parties. [ 7 ] The issue for determination is whether the Region was entitled to terminate the contract as it purported to do by the Notice of Termination.

Background [ 8 ] The following relevant evidence was disclosed by the Agreed Statement of Facts. (

a) Tender and Subsurface Conditions Report [ 9 ] Kingdom was the low bidder for the Contract following a public tender process initiated by the Region. The scope of the Project comprised two components – firstly the excavation and construction of an underground reinforced concrete storage tank to capture combined sewer overflows (the “CSO tank”) and secondly, the construction of upgrades to an existing pumping station located adjacent to the CSO tank. [ 10 ] The call for tenders for the Project was issued by the Region on September 24, 2013, with a closing date specified to be two

weeks later, on October 8, 2013. Included in the tender package was a report prepared by the Region’s geotechnical and environmental engineering consultant Terraprobe Inc. (“Terraprobe”) entitled “Geotechnical Investigation South Side Low Lift SPS CSO Tank, 4414 Chippewa Parkway, Niagara Falls, Ontario” (the “Terraprobe Report”) as well as a letter prepared by Terraprobe dated May 2, 2013 and submitted by it to the Ministry of the Environment (“MOE”) in support of its application, on behalf of the Region, for a Permit to Take Water (the “First PTTW”).

The First PTTW was required for the contractor on the Project to proceed with the dewatering of the excavation called for by the tender documents. [ 11 ] The Terraprobe Report comprised one of the Contract Documents, as did the First PTTW and the supporting documents to the First PTTW. The First PTTW was issued by the MOE to the Region on August 15, 2013.

It allowed a total of 500,000 l/day of water to be drawn on the site as part of the dewatering of the excavation for the CSO tank and expired on December 31, 2014. [ 12 ] The Region did not retain or instruct Terraprobe to investigate the bedrock underlying the soil on the Project site or the groundwater at the bedrock level, and Terraprobe did not carry out any such investigations.

Notwithstanding this, the Terraprobe Report listed, as one of the possible methods of shoring to be carried out by the contractor, a system calling for the use of sheet piles with tiebacks and toe pins penetrating into the underlying bedrock below the base of the proposed excavation.

Kingdom’s shoring subcontractor proposed this system of shoring, as contemplated by the Terraprobe Report, and Kingdom submitted shop drawings for this system to the Region’s engineering consultant and Contract Administrator on the Project, Hatch, Mott MacDonald (HMM”), which HMM reviewed without comment. [ 13 ] The dewatering plan proposed by Kingdom, involving the use of an Atlas Eductor Dewatering System, was one of the dewatering methods identified in the Terraprobe Report.

Kingdom’s dewatering plan provided for a maximum water extraction allowance of 500,000 l/day consistent with the Terraprobe Report and the First PTTW. (

b) Problems with Subsurface Conditions [ 14 ] Shortly after Kingdom commenced its dewatering operations in mid-April, 2014 it discovered the presence of an excessive amount of hydrogen sulfide (H2S) emanating from the excavation. The presence of H2S gas in sufficient quantities poses a threat to worker safety, engages the Occupational Health and Safety Act and can damage equipment. The possibility of H2S gas emanating from the excavation was not disclosed in the Terraprobe Report or in any other tender or contract document.

On April 22, 2014 Kingdom sent a Request for Information (RFI) to HMM reporting the H2S issue and that it had necessitated a halt to dewatering because of occupational health and safety concerns. The RFI stated that Kingdom was being impacted with construction delays and that, until the matter was addressed and resolved, it would continue to be impacted both financially and as it related to the construction schedule. [ 15 ] Kingdom and HMM then engaged in the exchange of emails and further RFI’s were issued by Kingdom.

HMM, in its communications, initially placed the responsibility for dealing with the presence of excessive and dangerous H2S on Kingdom. Kingdom submitted various proposals developed by its dewatering subcontractor Atlas to deal with the presence of H2S gas. [ 16 ] Finally on May 2, 2014 HMM confirmed to Kingdom that the Region had agreed that the revised Atlas proposal constituted a reasonable approach, that it would issue a lump sum Change Order for $72,784 to address the H2S issue, and would extend the

schedule for completion of the Contract by an appropriate number of calendar days. Kingdom accepted the approach in the Region’s proposed lump sum Change Order and pointed out to the Region that it had, to that point, lost a total of 22 days as a result of the H2S problem. [ 17 ] On May 16, 2014 Atlas informed Kingdom that the eductors used for dewatering were encountering a black organic substance that had not been identified in the Terraprobe Report.

Kingdom passed on Atlas’ email to HMM, noting that Atlas was pumping water at a much reduced capacity due to the presence of a black sludge condition in the water. [ 18 ] On May 29, 2004 Atlas sent an email to Kingdom advising that the dewatering would be shut down the next morning, citing an order from the MOE to do so immediately.

On the same day Kingdom advised HMM that its shoring subcontractor had shut down its drilling operations during the installation of tiebacks to the shoring due to a significant concern with high levels of H2S and an additional concern that groundwater was escaping and was being projected on the workers from the augured hole. [ 19 ] On June 2, 2014 Kingdom sent an RFI to HMM requesting direction with respect to unforeseen subsurface conditions impacting the dewatering operation. [ 20 ] During the same period, being in early June 2014, Kingdom retained Harry Oussoren of Insitu Contractors Inc. (“Oussoren” and “Insitu”) as its own geotechnical consultant to investigate the subsurface conditions which were being encountered on the Project. [ 21 ] On June 4, 2014 Kingdom submitted a further RFI to HMM advising that it had retained its own consultant and that its preliminary opinion was that the underlying bedrock contained considerable fractures which were impacting the dewatering system by surcharging the confined area inside the sheet piles with water.

Kingdom advised that its consultant had suggested that it immediately drill three 6 inch wells outside the excavation and into the bedrock and perform additional testing of the bedrock, as the Terraprobe Report contained no information in that regard.

Kingdom requested direction as to whether HMM wished to have Terraprobe complete the additional wells, or whether it preferred to have Kingdom do so, in which case a Change Order would be requested, as there would be additional costs associated with this extra testing. [ 22 ] HMM responded to Kingdom’s RFI, questioning what unusual and significant subsurface conditions were hampering dewatering, and informing Kingdom that it may do further geotechnical and/or hydrogeologic technical investigations if it wished, however, unless it were shown that the pumping rate to dewater the excavation needed to be greater than 500,000 l/day there would be no benefit to the Region from this investigation and the Region would not contribute to the cost. [ 23 ] On June 5, 2014 Oussoren provided Kingdom with a written report on his site visit conducted the previous day, commenting, inter alia , that the evidence suggested that the bedrock below the excavation is an aquifer which has solution cavities, is highly conductive and is likely hydraulically connected to the adjacent river.

Since the hydrogeological characteristics of the bedrock had not previously been quantified, he recommended that several wells be drilled to the bedrock so that a pumping test that could be conducted

to permit the hydrogeological regime to be better understood and decisions made on how to proceed with the Project. [ 24 ] On July 11, 2014 Kingdom submitted a further RFI to HMM, explaining its ongoing concern with the subsurface water conditions and requesting approval from HMM, as the engineer on record, to proceed with excavation. HMM responded that it was not in a position to give permission on when to commence excavation, as that was an issue that should be addressed by Kingdom and its subcontractors.

Kingdom and HMM engaged in an email debate on July 11, 2014 which concluded with HMM advising that it was not its responsibility to tell Kingdom whether it could excavate or not, as it was the contractor’s decision and risk, and that HMM would not give or withhold approval or permission. [ 25 ] On July 14, 2014 Kingdom reported to HMM, relaying Oussoren’s view that the fluctuating piezometer readings in the excavation indicated a pressurized aquifer, but that excavating a 3.00 meter cut could be safely undertaken. Kingdom advised that it had directed its subcontractor Peters Excavating to proceed with this cut.

Kingdom advised that Oussoren suggested that the next logical approach to determine whether or not the aquifer had been depressurized was to dig a test pit in the centre of the excavation down to bedrock. [ 26 ] Upon advice from Terraprobe, HMM declined to undertake the suggested test pit. [ 27 ] Four days after commencing excavation of the 3.00 meter cut (on July 18, 2014), Peters Excavating advised Kingdom of the extreme conditions on the site and that it could not and would not proceed with further excavation until the ground had been sufficiently dewatered, as it was not prepared to place its equipment at further risk and danger. [ 28 ] On July 22, 2014 the parties held a site visit.

The next day Kingdom issued a further RFI summarizing the information reviewed on a site visit, namely that groundwater appeared to be coming from the bedrock into the base of the excavation, that Terraprobe requested additional monitoring data through means of bedrock exploration to better understand the best method of proceeding with the work, that significant voids were found in the bedrock during the tieback installation, and that Kingdom considered the exploratory work in the bedrock to be extra to the Contract and was therefore requesting HMM’s direction to proceed. [ 29 ] On July 24, 2014 HMM responded to Kingdom, agreeing to pay the well drillers’ invoice, plus the standard contractor markup, but advising that Kingdom would be responsible for its own supervision, project management and safety. [ 30 ] The Region acknowledged on discovery that by this point (July 24, 2014) it had become obvious that investigation of the underlying bedrock was a necessary and responsible thing to do, that the Region had brought in Terraprobe to assist, that Terraprobe had also acknowledged that an investigation of the bedrock groundwater was a sensible thing to do, and that investigation was then underway. [ 31 ] On August 5, 2014 Kingdom issued a further RFI, reporting that it was at a standstill because the present dewatering system would not have the capabilities to dewater the excavation, indicating that a revised PTTW might be necessary and requesting direction from HMM. [ 32 ] On August 9, 2014 Oussoren submitted a written report to Kingdom on the results of the further tests that Insitu had been conducted during the previous week, stating that it had been conclusively shown that the original pumping rate of 500,000 l/day in the First PTTW was insufficient to achieve the required drawdown of water and that the source of the problem was the bedrock. [ 33 ] On August 13, 2014 Kingdom issued a further RFI to HMM, forwarding the report from Oussoren and recommending that a new PTTW be obtained for the greater amount of water.

It also made recommendations for changing the dewatering system in a cost- efficient manner using high extraction pumps. Kingdom sought the direction of HMM in respect of these matters. [ 34 ] HMM and the Region conducted an email exchange on August 13, 2014 on how best to respond to Kingdom’s RFI.

HMM proposed to the Region that Kingdom be advised that, to assist it in its dewatering task, Terraprobe would submit an application to amend the current PTTW to increase the permitted taking to 2.5 million l/day as recommended by Insitu, and that Terraprobe would also apply to amend the date of last taking pursuant to the PTTW to December 31, 2015. HMM concluded by suggesting that a meeting be held to develop a joint response from HMM, Terraprobe and the Region to a claim that it anticipated would come from Kingdom.

This email exchange between HMM and the Region on August 13, 2014 was not disclosed to Kingdom prior to the commencement of the action. [ 35 ] By this point (mid-August, 2014) it was obvious to the Region that a changed condition existed, in that there was much more subsurface water that needed to be dealt with than anyone had expected. On discovery the Region agreed that it took no issue with the fact that there was a changed condition as result of the excess water, but its issue concerned the cause of the changed condition, which the Region attributed to Kingdom.

It acknowledged that this was the nub of the issue concerning the changed condition relating to the unanticipated quantity of water. [ 36 ] The Region thought that the changed condition was the result of Kingdom’s construction methods or practices, namely that, when the bedrock was penetrated by the shoring installed by Kingdom’s subcontractor, it introduced the volume of water which was then experienced.

The Region’s specific concern was with the toe pins to the sheet piles designed to prevent the bottom of the sheet piles from being pushed into the excavation had penetrated the bedrock. [ 37 ] However, the Region ultimately agreed on discovery that its consultant Terraprobe anticipated the very shoring system which Kingdom actually installed, and also that Terraprobe anticipated that the shoring would have to be anchored into the bedrock.

The Region also agreed that there was nothing in the Terraprobe Report which warned the contractor to be careful about the installation of toe pins. [ 38 ] The Region further agreed on discovery that the sheet piling system which Kingdom employed was covered by shop drawings which it submitted to HMM prior to the work being undertaken and which were reviewed by HMM without raising any concern about their adequacy. The Region also agreed that Kingdom and its subcontractor installed the sheet piling system in substantial conformity

with the shop drawings. [ 39 ] The Region has no evidence that the toe pinning which Kingdom or its subcontractor performed was done incompetently and has no other knowledge, information or belief to support an allegation that the changed site conditions were the result of errors or omissions in the work performed by Kingdom. [ 40 ] Terraprobe wrote to HMM on August 26, 2014, offering the opinion that if Kingdom was to proceed by depressurizing the bedrock aquifer, it should be responsible for obtaining the necessary PTTW to maintain a line of responsibility as to the timing and conditions for obtaining it.

This was the first time that the notion of Kingdom applying for the new PTTW instead of the Region applying for an amendment to the First PTTW was introduced. [ 41 ] On August 27, 2014 HMM wrote to Kingdom advising that, based on Terraprobes’ conclusions, it believed that any change to the dewatering system was Kingdom’s responsibility and stated that, if dewatering system modifications required an increase to the existing PTTW, it was Kingdom’s responsibility to obtain a new PTTW, and the cost of applying for and obtaining it would also be Kingdom’s responsibility. [ 42 ] On September 8, 2014 Kingdom issued a further RFI to HMM, forwarding a detailed report from Insitu summarizing its observations and recommendations, which included a shop drawing for a deep well system proposed to dewater the site, and recommending that a revised PTTW in the amount of 24 million l/day be obtained.

In the RFI, Kingdom stated that, due to the magnitude of the work required to move forward with dewatering for the new CSO tank, it was not prepared to complete the extra work without a formal Change Order. (

c) Steps Leading to Notice of Default [ 43 ] After internal consultations among HMM, the Region, the City of Niagara Falls, and legal counsel for the Region, HMM responded to Kingdom on September 17, 2014 with Site Instruction 02, stating, inter alia , (

a) Kingdom is instructed to continue expeditiously with all Work related to the sewage pumping station; (

b) in addition, Kingdom is instructed to continue expeditiously with all Work related to the CSO tank including dewatering/depressurizing the site. If Kingdom believes a new PTTW is required, it shall obtain the permit at its cost; and (

c) Kingdom is instructed to provide an updated

schedule showing how the contractor proposes to perform the balance of the Work, so as to complete the Work wihin the time specified in the Contract Documents. (emphasis in the original). [ 44 ] Kingdom responded to HMM on September 22, 2014 with a further RFI stating that whether or not HMM agrees with the costs associated with the work, it must be recognized that Kingdom will need to be given instruction to proceed “in dispute”. [ 45 ] On October 1, 2014 HMM sent Kingdom an email stating that, as the Contract Administrator, is was advising the Region that sufficient cause existed for the Owner to notify Kingdom that it was in default of its contractual obligations and instructing Kingdom to correct the default within five working days immediately following receipt of the notice. [ 46 ] Kingdom responded by an email of October 3, 2014 confirming that it was more than willing to undertake all of its contractual work and was preparing to complete the mechanical and electrical upgrades to the pumping station.

With respect to the dewatering, Kingdom stated, inter alia , that it could not proceed as per the contract, as directed by HMM, due to the changed conditions.

Reference was made to item 14 [GC 7.01.14] in the General Specifications of the Contract, stating “where the Contractor finds any error, inconsistency, or omission relating to the Contract, the Contractor shall promptly report it to the Contract Administrator and shall not proceed with the activity affected until receiving direction from the Contract Administrator.” Kingdom went on to state that it believed that the best course would be to follow the claims resolution requirements in the Contract. (

d) Notice of Default [ 47 ] The Region sent a letter to Kingdom dated October 3, 2014 (the “Notice of Default”) giving notice, in accordance with OPS General Conditions of Contract 4.05, that Kingdom was in default of its contractual obligations. The letter noted that Kingdom had explicitly indicated that it was not prepared to continue with the work which, in the Region’s view, would constitute an event of default under the Contract irrespective of other items identified by the Contract Administrator.

The letter stated that Kingdom had five (5) working days from the date of the letter to correct all the items of default. [ 48 ] On October 10, 2014, the Region delivered a letter to Aviva, Kingdom’s surety, forwarding the October 1 notice of non- conformance and October 3 Notice of Default, advising that the Region may shortly be in a position to terminate the Contract on account of default, and providing notice of a possible claim on the Performance Bond, should the default not be remedied by Kingdom in a timely manner. [ 49 ] On October 15, 2014 Kingdom issued a further RFI containing its detailed response to the Region’s Notice of Default.

The letter concluded by stating that Kingdom was ready to proceed with the alternate dewatering plan as soon as it received the required direction. [ 50 ] HMM responded by email on October 15, 2014 stating that it would not provide direction regarding the dewatering and that it believed that it was a “contractor’s means and methods issue.” HMM stated that it did not agree that there was a changed condition or alternatively, if the condition had changed, it was due to Kingdom’s actions. (

e) Forbearance Letter [ 51 ] On October 19, 2014 the Region sent a letter to Kingdom (the “forbearance letter”) acknowledging that it had received a

proposed

schedule for completion of the works and that there had been ongoing communications between Kingdom, the Region and HMM regarding the sufficiency of that

schedule and the satisfaction of the events of default. The Region advised that it was not taking steps “at that time” to terminate the contract in accordance with its prior notice.

However, the Region advised that its forbearance of the right of termination was “temporary and without prejudice to the Region’s exercise of any rights, including future termination, that it may have under the Contract or at law.” In particular, it strictly reserved the right to exercise any rights under the contract or at law should discussions between the Region, Kingdom and HMM cease or did not, in the Region’s sole discretion, appear fruitful or productive in resolving the issues between the parties. [ 52 ] Kingdom wrote to the Region on October 20, 2014 to clarify its position, concluding that the forbearance communicated in the forbearance letter was wise, and that Kingdom was doing everything in its power to assist the resolution of the issue posed by the unanticipated dewatering, however, Kingdom was still seeking appropriate instruction and direction from HMM, as Contract Administrator. (

f) Application for New PTTW [ 53 ] On October 30, 2014 Kingdom send a further RFI to HMM repeating that it was prepared to commence the work and have the new dewatering system installed as well as to make application for the new PTTW immediately provided that it received direction.

HMM responded on the same day, directing Kingdom to continue with the contract work, to forward a submission detailing the proposed revised the dewatering system for review by the Project Manager, and stating that, if the proposed dewatering system will require a new PTTW, Kingdom was directed to make application to the MOE as soon as possible. [ 54 ] On October 31, 2014 Kingdom sent a further RFI to HMM enclosing the shop drawing submission for the revised dewatering program.

The drawing was returned by HMM on November 3, 2014with the annotation “reviewed as noted”. [ 55 ] On November 6, 2014 Kingdom issued a further RFI to HMM stating that the work in question resulted from a changed or unforeseen site condition, that the RFI should be considered as a request for Change Order or Change Directive, that Kingdom would consider HMM’s approval as a direction to proceed “under claim” and that Kingdom would be forwarding a detailed claim. [ 56 ] On November 20, 2014 Ousseron reported to Kingdom, based upon advice that he had received from the MOE, that if the Region were to request an amendment to the First PTTW it could be processed in 30 days, but if Kingdom were to apply for a PTTW it would become a new permit and the processing of the application would take 90 days.

Kingdom passed this information on to HMM immediately, asking if the PTTW could be taken out by the Region as an amendment to the existing PTTW to expedite the process. [ 57 ] On November 25, 2014 the parties attended a construction meeting during which the Region directed that Kingdom take out a new PTTW. [ 58 ] On December 10, 2014 Kingdom sent an email to HMM providing an update on the status of the Project. Kingdom reported that Insitu was working on the new PTTW application and it should have the final information prepared for submission to the MOE in the following week.

Ousseron reported experiencing some difficulty with the MOE in receiving answers on recent water quality results which had slowed the process. [ 59 ] Under a lengthy cover letter to the MOE dated January 3, 2015, and couriered on January 6, 2015, Insitu submitted the application for a revised PTTW along with substantial supporting materials. A hard copy of the application for the PTTW was provided to HMM on January 6, 2014. (

g) Termination of the Contract [ 60 ] On discovery the Region acknowledged that it began considering termination of the Contract as one of its options prior to Christmas, 2014. [ 61 ] On January 19, 2015 the Region and HMM had an email exchange concerning whether HMM was of the opinion that Kingdom had failed to cure the default identified in the October 3, 2014 Notice of Default and was not in conformance with the General Conditions of the Contract. [ 62 ] On January 20, 2015 the Region instructed HMM to issue an instruction to Kingdom not to attend the site on the next day, January 21, 2015. [ 63 ] HMM sent a site instruction to Kingdom stating that, at the request of the Region, Kingdom was not to attend the site on January 21, 2015. [ 64 ] On January 21, 2015 the Region sent a letter entitled “Notice of Termination of Contract” to Kingdom and to its surety Aviva, stating that, further to correspondence from the Region to Kingdom dated October 3, 2014 and October 16, 2014 and in accordance with provisions of the Contract, the Region was providing notice of termination of the Contract effective immediately.

The letter stated that the Region relied upon the correspondence from the Contract Administrator HMM dated October 1, 2014 advising all parties of Kingdom’s default under the Contract, and stated that all items of default identified in that correspondence had not been corrected or remedied to the satisfaction of the Region and the Region was exercising the right of termination reserved to it under the Contract. The letter further advised that the Notice of Termination was provided in accordance with

Section GC 4.0 - Owner’s Responsibilities and Rights. [ 65 ] By letter dated January 21, 2015 Kingdom responded to the Notice of Termination of Contract, stating, inter alia, that it strongly disagreed with the decision to terminate the Contract and requested the Region’s immediate reconsideration on the grounds that insufficient notice was provided of any further concerns after October, and also that Kingdom was still prepared and always had been to fully execute its contractual obligations without delay.

The letter stated that, should the Region’s decision remain final, Kingdom needed to advise that it would experience significant damages from the decision, that the damages would be forwarded to the Region for

reimbursement and would include recovery of all original Contract costs to date, for which there was a significant current shortfall, any and all delay impact costs incurred to date, as well as loss of profit. [ 66 ] On January 23, 2015 the Region responded by stating that its position remained as set forth in the Notice of Termination, specifically as it related to Kingdom’s failure or refusal to rectify all items of default noted by the Region’s Contract Administrator in its correspondence of October 1, 2014. (

h) Claim on Performance Bond [ 67 ] In the course of making its decision to terminate the contract, the Region considered enforcement of the Performance Bond issued by Aviva (the “Bond”), expecting that Aviva would either bring in another party to finish the Contract or would cover the Region’s costs. [ 68 ] On January 29, 2015 the Region made a formal written demand on the Bond. [ 69 ] In response, Aviva retained counsel to conduct an investigation and respond to the call on the Bond.

On August 31, 2015 Aviva issued a lengthy detailed letter to the Region in which it denied the Region’s claim under the Bond outright. [ 70 ] The Region did not reply to Aviva’s letter, nor did it commence any action against Aviva for recovery under the Bond. [ 71 ] The Region did not counterclaim against Kingdom in this proceeding, nor did it initiate any separate action against Kingdom respecting the Project. Issue [ 72 ] The ultimate issue for determination is whether the Region was entitled to terminate the Contract by the Notice of Termination dated January 21, 2015.

The Notice of Termination was stated to have been given in accordance with

Section GC 4.0 - Owner’s Responsibilities and Rights, and that the Region, in terminating the Contract, relied upon the correspondence from the Contract Administrator HMM dated October 1, 2014. [ 73 ] The October 1, 2014 correspondence constituted notice that “sufficient cause exists” for default on Kingdom’s part, alleging that Kingdom was in non-conformance with four specified Contract General Conditions, namely: GC 3.07.03 GC 3.13.01 GC 4.05.01, and GC7.01.13 [ 74 ] The Notice of Termination made reference only to the defaults alleged in the October 1, 2014 email.

The termination must therefore be considered to have been based only on alleged defaults of Kingdom under the four General Conditions listed in that correspondence, and not on the allegation in the Notice of Default dated October 3, 2014 that “Kingdom had explicitly indicated that it was not prepared to continue with the work.” Relevant Contract Provisions [ 75 ] The following provisions of the General Conditions of the Contract are pertinent in considering the Notice of Termination: 3.07.03 The Contractor shall not be entitled to payment for the cost of delays incurred as a result of a dispute between the Contractor and Owner.

The Contractor shall execute the Work and may pursue resolution of the dispute in accordance with subsection GC 3.13, Claims, Negotiations, Mediations. 3.13.01 Unless the Contract has been terminated or completed, the Contractor shall in every case, after serving or receiving any notification of a claim or dispute, verbal or written, continue to proceed with the Work with due diligence and expedition.

It is understood by the parties that such action shall not jeopardize any claim it may have. 4.05.01 If the Contractor… should neglect to prosecute the Work properly or otherwise fails to comply with the requirements of the Contract and if the Contract Administrator has given a written statement to the Owner and Contractor that sufficient cause exists to justify such action, the Owner may, without prejudice to any other right or remedy the Owner may have, notify the Contractor in writing that the Contractor is in default of the Contractor’s contractual obligations and instruct the Contractor to correct the default in the 5 Working Days immediately following the receipt of such notice. 4.05.01 The Contractor shall have the right within the 5 full Working Days following the receipt of a notice of default to correct the default and provide the Owner with satisfactory proof that appropriate corrective measures have been taken. 4.10 Where the Contractor is in default of the Contract the Owner may, without prejudice to any other right or remedy the Owner may have, terminate the Contract by giving written notice of termination to the Contractor, the Surety, and any trustee or receiver acting on behalf of the contractor’s estate or creditors of the Contractor. 7.01.13 The Contractor shall prepare and update, as required, a construction

schedule of operations, indicating the proposed methods of construction and sequence of work and the time the Contractor proposes to complete the various items of Work within the time specified in the Contract Documents. The

schedule shall be submitted to the Contract Administrator within 14 days from the Contract award. If the contractor’s

schedule is materially affected by changes, the Contractor shall submit an updated construction schedule, if requested by the

Contract Administrator, within 7 days of the request. This updated

schedule shall show how the Contractor proposes to perform the balance of the Work, so as to complete the Work within the time specified in the Contract Documents. [ 76 ] The following additional contractual provisions are also relevant to the issues to be determined. [ 77 ] In

Section GC 1.04, “Work” is defined to mean “the total construction and related services required by the Contract Documents” and “Change in the Work” is defined to mean “the deletion, extension, increase, decrease, or alteration of lines; grades; dimensions; quantities; methods; drawings; substantial changes in geotechnical, subsurface , surface, or other conditions ; changes in the character of the Work to be done; or materials of the Work or any part thereof, within the intended scope of the Contract” (emphasis added). [ 78 ] GC 1.04 defines “Contract Documents” to mean “the executed agreement between the Owner and Contractor, tender, General Conditions of Contract, Supplemental General Conditions of Contract, Standard Specifications, Special Provisions, Contract Drawings…”. [ 79 ] “Contract Drawings” or “Contract Plans” are defined to include “any Geotechnical Report, any Subsurface Report, and any other reports and information provided by the Owner for the Work…”. [ 80 ] “Change Order” is defined to mean a written amendment to the Contract signed by the Contractor and the Owner, or the Contract Administrator where so authorized, covering… a Change in the Work… and changed subsurface conditions; and establishing the basis for payment and the time allowed for the adjustment of the Contract Time. [ 81 ] “Change Directive” means any written instruction signed by the Owner, or by the Contract Administrator where so authorized, directing that a Change in the Work or Extra Work be performed. [ 82 ] “Geotechnical Report” is defined to mean a report or other information identifying soil, rock and ground water conditions in the area of any proposed Work. [ 83 ] Pursuant to GC 2.01.01 the Region, as Owner, warranted that the information furnished in the Contract Documents could be relied upon, with certain specified limitations and exceptions respecting the location of underground utilities, none of which were applicable. [ 84 ] GC 7.01.14 provides that “where the Contractor finds any error, inconsistency, or omission relating to the Contract, the Contractor shall promptly report it to the Contract Administrator and shall not proceed with the activity affected until receiving direction from the Contract Administrator.” [ 85 ] GC 7.01.15 provides that “the Contractor shall promptly notify the Contract Administrator in writing if the subsurface conditions observed in the Working Area differ materially from those indicated in the Contract Documents.” [ 86 ] Pursuant to GC 1.04 “Working Area” means all the lands and easements owned or acquired by the Owner for the construction of the Work. [ 87 ] Pursuant to GC 3.10.01.01 the Owner, or the Contract Administrator where so authorized, may, by order in writing, make a Change in the Work without invalidating the Contract.

The Contractor shall not be required to proceed with a Change in the Work until in receipt of a Change Order or Change Directive. Upon receipt of such Change Order or Change Directive the Contractor shall proceed with the Change in the Work. Analysis (

a) Was the Notice of Default Issued by the Region Sufficiently Clear and Precise? [ 88 ] It is not disputed that the right of the Region to terminate the contract pursuant to GC 4.10 could not come into existence unless the preconditions in GC 4.05.01 were first satisfied. Those preconditions are fourfold, namely: (

i) HMM, as Contract Administrator, must have given a written statement to the Region, as Owner, and to Kingdom, as Contractor, that sufficient cause existed to justify giving written notice to Kingdom that it was in default of its contractual obligations; (ii) The Region must have given written notice to Kingdom that it was in default of the its contractual obligations, with instruction to Kingdom to correct the default in the 5 working days immediately following the receipt of the notice; (iii) The default or defaults specified in the written notice must not have been corrected by Kingdom within five working days; and (iv) The Region must have given written notice of termination to Kingdom, and to its surety Aviva. [ 89 ] As indicated above, the written statement of sufficient cause justifying the giving of the Notice of Default, was contained in an email from Tom Agnew of HMM dated October 1, 2014 to Jason Gagnon of Kingdom.

The email stated, in part: “In review of the sequence of events and correspondence over the last few months and Kingdom’s failure or refusal to continue expeditiously with the Work, the Contract Administrator is advising the Owner that the General Contractor (Kingdom) is in non- conformance to the following Contract General Conditions: • GC 3.07.03 • GC 3.13.01

• GC 4.05.01 • GC 7.01.13” [90] The Notice of Default dated October 3, 2014 from Tony Cimino, Project Manager for the Region, stated, as its purpose, theprovision of notice in accordance with GC 4.05 that Kingdom was in default of its contractual obligations. It referenced the email datedOctober 1, 2014 “advising of several items of non-compliance with the Contract” and stated that the Region was relying upon theinformation set out in that correspondence in delivering the Notice of Default.

The letter stated that, pursuant to GC 4.06, Kingdom had 5working days from the date of the letter to correct all of the items of default set out in the correspondence dated October 1, 2014. Nofurther particulars were given in the Notice of Default with respect to the nature of the defaults the Region relied upon. [91] In the case of Urbacon Building Groups Corp. v.

Guelph (City) 2014 ONSC 3641 (S.C.J.) MacKenzie, J. held at para. 157that an owner delivering a notice of default must accurately and clearly stipulate in the notice the deficiencies in the contractor’sperformance upon which it relies and which the contractor is given notice to rectify or cure. [92] In Pioneer Hi-Bred International Inc. v. Richardson International Ltd. 2010 MBQB 161 (Man.

Q.B.) Joyal A.C.J.Q.B., afterobserving at para. 58 that the purpose of a contract provision requiring written notice of an apprehended breach is to give the party inbreach an opportunity to remedy its breach, stated: For such a remedy to be forthcoming, specifics of the particular breach complained of must be given in sufficient detail so as to enablethe party to understand the behaviour being impugned by the other party. Notice need be clear and concise as its time period fortermination has started as of a given letter.

Such clarity should leave no doubt in the mind of the other party of the possible and expectedconsequences of non-compliance. [93] On the issue of the manner in which a notice of default must be given, Joyal A.C.J.Q.B. quoted the case of M.L. BaxterEquipment Ltd. v. GEAC Canada Ltd. (1982), (ON SC), 36 O.R. (2d) 150 (Ont. H.C.) at paras. 16-17, as follows: 16 The purpose of the 90-day period, as I have said, is to allow the defendant to remedy his breach. If he can do so, then according tothe terms of the 1976 Agreement, the plaintiff has no cause to complain.

It follows, therefore, that the notice which commences this timeperiod must be very clear and precise in order that the defendant realize its import. The defendant must be made aware that the periodhas begun to run. The letter of April 13 is lacking in many respects. The plaintiff does not say in the letter that the defendant is in breachor in default of its obligations. Nowhere in the letter is reference made to the termination clause nor is any statement made that after 90days of default Baxter intended to terminate the contract.

Taken in the perspective of the relationship between these parties, it is quiteeasy to see that the defendant may not have construed the letter as having the same import which the plaintiff now relies on it for. Theparties had numerous communications regarding completion dates for the project, all of which passed with little comment. Now for theplaintiff to rely on this relatively mild letter as notice in respect of the termination of the contract is a distinctly different attitude. 17 The termination of an agreement is a very serious matter.

It is the cessation of a legal relationship between two parties which mostoften leads to costly legal actions, such as this one, in order to settle the differences between them. A notice, therefore, which is thecommencement of the termination procedure must be one which brings home to the party to be charged the purpose thereof so that itmay be said that there was no doubt that the defendant realized the serious consequences of his inaction. The letter of April 13 is notsuch a notice.

No proper notice having been given to the defendant, it follows that the 90-day period never began to run and, therefore,the plaintiff's termination was a wrongful one. (underlining added) [94] Thus, a notice of default which does not clearly and precisely communicate the nature of the default or defaults upon whichthe owner relies and which must be remedied within the time period specified in the contract, is not effective and cannot support a noticeof termination delivered after expiry of the specified period, because the period for rectification never began to run. [95] Joyal A.C.J.Q.B., in Pioneer Hi-Bred at para. 61, endorsed a four-step analytical framework for the purpose of determiningwhether the plaintiff in that case was entitled to terminate the contract, consisting of the following steps: 1.

What, if any, breaches were clearly identified in the notice? 2. If any breaches were clearly identified, did any of those breaches constitute a breach of the contract? 3. Did the contractor remedy all actual breaches of the contract within the specified period? 4. If not, was clear notice given to the contractor that the contract would or could be terminated if it failed to remedy any suchbreaches? [96] In the present case the Notice of Default did not set forth any particulars of alleged defaults on the part of Kingdom, butsimply referred to the “statement of sufficient cause” email dated October 1, 2014.

That email similarly did not set forth particulars ofalleged defaults, but rather simply listed four provisions in the General Conditions of the Contract with which it stated Kingdom was innon-conformance. [97] The first two General Condition provisions relied upon, GC 3.07.03 and GC 3.13.01, address the contractor’s obligation toproceed with, or execute, the “Work” while a claim or dispute is outstanding.

The statement of sufficient cause dated October 1, 2014did not delineate the nature of the claim or dispute which may have been outstanding, nor the “Work” which Kingdom was alleged to benot executing “with due diligence and expedition.”

[ 98 ] “Work” is defined in GC 1.04 as “the total construction and related services required by the Contract Documents” and is distinguished from “Extra Work” which is defined as: “work not provided for in the Contract as awarded but considered by the Contract Administrator to be essential to the satisfactory completion of the Contract within its intended scope, including unanticipated work required to comply with legislation and regulations that affect the Work.” [ 99 ] It was not made clear and explicit in the October 1 email whether HMM considered the enhanced dewatering system, requiring the issuance of a new PTTW, to be “Work” as opposed to “Extra Work.” Neither GC 3.07.03 nor GC 3.13.01 has any application to “Extra Work”. [ 100 ] The terms” claim” and “dispute” are not defined in the General Conditions.

However, it is apparent from a reading of GC 3.13 “Claims, Negotiations, Mediation” that a “dispute” relates to a disagreement regarding a “claim” by a Contractor for additional payment. [ 101 ] GC 3.13.03.02 requires the Contractor to give immediate verbal notice of a situation that may lead to a “claim for additional payment” and GC 3.13.03.03 requires it to provide written notice in the standard form “Notice of Intent to Claim” within 7 days of the commencement of any part of the Work that may be affected by the situation. [ 102 ] The Claims Procedure detailed in GC 3.13.03, involving the exchange of information between the Contractor and the Contract Administrator, is followed by GC 3.13.04 which requires the parties to make all reasonable efforts to resolve “their dispute” by amicable negotiations.

GC 3.13.05 provides that if “a claim” is not resolved satisfactorily through negotiation, and if the Contractor wishes to pursue “the issue” further, the parties may, by mutual agreement, utilize the services of a mediator. GC 3.14.01 provides that if a “claim” is not resolved satisfactorily through negotiation or mediation, either party may invoke the provisions of GC 3.14, “Arbitration” by giving written notice.

GC 3.14.03 deals with the appointment of an arbitrator and GC 3.14.03.01 provides that the arbitrator shall be mutually agreed upon to adjudicate “the dispute”. [ 103 ] It is evident from the foregoing that a “dispute” for the purposes of both 3.07.03 (which refers to GC 3.13) and GC 3.13.01 relates to a “claim” by the Contractor for additional payment.

There is no process in GC 3.13 for the resolution of a “dispute” by negotiation, mediation and arbitration that does not pertain to a “claim” by the Contractor for additional payment. [ 104 ] The October 1 email did not clearly and precisely identify the “claim” made by Kingdom, nor the “dispute” concerning any such “claim” which HMM, on behalf of the Region, was relying upon in referencing GC 3.07.03 and GC 3.13.01. The evidence did not disclose the existence of any outstanding “claim” advanced by Kingdom.

Kingdom had reported what it considered to be an error, inconsistency or omission relating to the Contract in reference to the changed subsurface conditions that it had encountered and had repeatedly sought direction from HMM, as the Contract Administrator, pursuant to GC 7.01.14, but had not advanced a “claim” so as to engage GC 3.13. [ 105 ] GC 4.05.01 is the provision that permits the Owner to notify the Contractor in writing that it is in default of its contractual obligations, after the Contract Administrator had delivered to the Contractor and the Owner a written statement that sufficient cause exists to justify such action.

However, these steps may only be taken, after commencement of the Work, if the Contractor had neglected to prosecute the Work properly, or had otherwise not complied with the requirements of the Contract. [ 106 ] As indicated above, the statement of sufficient cause email did not clearly and precisely specify the “Work” which HMM, on behalf of the Region, may have been alleging that Kingdom was not prosecuting properly, nor any other contractual obligations with which it was alleging that Kingdom was not in compliance. [ 107 ] GC 7.01.13 pertains to the requirement that the Contractor prepare and update, as required, a “construction

schedule of operations”. The provision provides that “if the Contractor’s

schedule is materially affected by changes” the Contractor shall submit an updated construction schedule, if requested by the Contract Administrator, within 7 days. The updated

schedule shall show how the Contractor proposes to perform the balance of the Work, so as to complete the Work within the time specified in the Contract Document. [ 108 ] The October 1 email did not clearly and precisely identify the “changes” which materially affected Kingdom’s initially submitted

schedule which could be said to have triggered an obligation on Kingdom to submit an updated construction schedule. [ 109 ] It was not sufficient for HMM, on behalf of the Region, to simply list a series of General Condition provisions in its “statement of sufficient cause” (which was later incorporated, without further particularization, into the Region’s Notice of Default), but rather the Region was required, in the Notice of Default, to clearly and precisely communicate the nature of the default or defaults upon which it relied and which it required Kingdom to remedy within the specified time. [ 110 ] Moreover, it was not necessary for Kingdom to establish by evidence that it was confused or did not fully understand the basis for the Region’s Notice of Default, nor for the court to embark upon an enquiry into that issue.

The onus is on the Owner to clearly identify the breaches upon which it relies. It is not a required step in the analysis outlined in Pioneer Hi-Bred that the Contractor satisfy the court that it was not confused or did not understand the nature of the defaults relied upon by the Owner, in spite of the deficient nature of the disclosure in the Notice of Default. There is good reason for this.

Given the seriousness of termination of a contract, it is important that the steps which must be taken by an Owner as a precondition to the exercise of a right to terminate be performed clearly and precisely, so as to minimize the potential for uncertainty and resulting costly litigation. [ 111 ] In my view, neither HMM’s “statement of sufficient cause” email dated October 1, 2014, nor the Region’s Notice of Default dated October 3, 2014 clearly and precisely communicated the nature of the default or defaults by Kingdom upon which the Region relied.

The consequence of this, as indicated above, was that the 5 day period for correction of the alleged defaults never began to run. The Notice of Termination dated January 21, 2015 was therefore without foundation and the termination was wrongful. (

b) Was the Region Entitled to Rely Upon the Notice of Default in Issuing its Notice of Termination January 21, 2015?

[ 112 ] In the event that I am wrong regarding the lack of clarity and precision in the Region’s Notice of Default, it is necessary to consider whether the Region continued to be entitled to rely upon the Notice of Default delivered on October 3, 2014 to terminate the contract on January 21, 2015. [ 113 ] As indicated above, in the forbearance letter dated October 16, 2014, the Region acknowledged that it had received a proposed

schedule for the completion of the Work and that there had been ongoing communications among Kingdom, the Region and the Contract Administrator “regarding the sufficiency of the

schedule and the satisfaction of the events of default.” The Region stated that it would not be taking steps to terminate the Contract “at that time,” reserving to itself the right to do so in the future in its sole discretion, if discussions among the parties did not appear satisfactory to it. [ 114 ] There is no express provision in the General Conditions, or elsewhere in the Contract, entitling the Region to reserve or defer a right of termination.

GC 4.10 simply provides that where the Contractor is in default of the Contract the Owner may, without prejudice to any other right or remedy the Owner may have, terminate the contract by giving written notice to the parties specified. As indicated above, the right to terminate for default under GC 4.10 only comes into existence if the notice requirements in GC 4.05.01 are satisfied. [ 115 ] In the case of Conway v. Coty Construction Co. 1989 CarswellNfld 33 (Nfld.

S.C.) it was held at paras. 46 and 47 that, if an owner seeks to rely upon a notice of default containing a cure provision to terminate a contract, action must be taken to terminate the contract within a reasonable time following passage of the specified rectification period.

If the owner takes no such action within a reasonable time and allows the contractor to continue working, it will be considered to have acquiesced in the contractor continuing to perform and a subsequent termination will be found to be an unlawful repudiation of the contract. [ 116 ] What is to be considered a reasonable time within which an owner must deliver a notice to terminate following expiry of a cure period after the giving of a default notice will depend upon the circumstances of each case. [ 117 ] In my view, a communication of a unilateral open-ended forbearance by an owner would not have the effect of eliminating entirely the requirement for an owner seeking to terminate a contract to do so within a reasonable period following expiry of the contractual cure period.

Otherwise an owner could simply unilaterally relieve itself of a contractual obligation. [ 118 ] It is not necessary for me to determine whether such a forbearance can have the effect of restarting the clock for calculation of a reasonable period for an owner to take action, as I find that the Region did not deliver its Notice of Termination within a reasonable time, even if calculated from the date of the forbearance letter.

Ninety-seven days passed between the date of the forbearance letter and the Notice of Termination. [ 119 ] In the period between the forbearance letter and the Notice of Termination, HMM, on behalf of the Region, directed Kingdom, on October 30, 2014, to continue with the Contract work, to forward a submission detailing the proposed revised dewatering system for its review, and to make application to the MOE for issuance of a new PTTW if required. Kingdom accepted this direction and continued to perform under Contract.

This included preparation and submission of an application for a new PTTW, delivery of an updated

schedule on November 25, 2014 and addressing various design issues impacting the pumping station upgrade. [ 120 ] By allowing Kingdom to continue to perform under the Contract for ninety-seven days following delivery of the forbearance letter, or one hundred and five days following the expiry of the cure period in the Notice of Default, and directing Kingdom to proceed with work under the Contract during that period, the Region acquiesced in Kingdom’s continued performance of the Contract. It was not open to the Region to terminate the Contract on January 21, 2015 in reliance on alleged defaults referenced in HMM’s email of October 1, 2014. (

c) Was Kingdom in Default at the Time of the Notice of Default? [ 121 ] In the event that I am wrong in finding that the notice of default issued by the Region was not sufficiently clear and precise and that the Region did not have the continued right to rely upon the Notice of Default in issuing its Notice of Termination, it is necessary to consider whether Kingdom was in breach of any of its contractual obligations justifying delivery by the Region of the Notice of Default on October 3, 2014. [ 122 ] The question of whether Kingdom was in breach of the contract in early October, 2014 relates to the question of whether there was a “Change in the Work” as defined in the General Conditions, in reference to the subsurface conditions which Kingdom encountered in attempting to carry out the dewatering of the site. [ 123 ] Pursuant to GC 1.04 the definition of “Change in the Work” includes substantial changes in geotechnical, subsurface… or other conditions; changes in the character if the Work to be done…within the intended scope of the Contract. [ 124 ] Pursuant to GC 3.10.01 the Contractor “shall not be required to proceed with a Change in the Work until in receipt of a Change Order or Change Directive.” [ 125 ] Hence, if there were substantial changes in geotechnical, subsurface, or other conditions so as to constitute a “Change in the Work,” Kingdom was under no obligation to perform any extra work by reason of such changes until the Region, through HMM, issued a Change Order or Change Directive for such extra work.

Kingdom could not be in default for refusing or failing to perform such extra work in the absence of a Change Order or Change Directive. [ 126 ] Moreover, Kingdom was obliged by GC 7.01.14, upon finding any error, inconsistency, or omission relating to the Contract, in this case relating to the Terraprobe Report and the First PTTW obtained by the Region prior to tender, each forming part of the Contract Documents, to promptly report it to HMM, as Contract Administrator, and was prohibited from proceeding with the activity affected, in this case the dewatering of the excavation site, until receiving direction from HMM. [ 127 ] Thus, it is necessary to determine whether there were substantial changes in geotechnical, subsurface, or other conditions from the conditions contemplated by the Contract Documents, or whether there was any error, inconsistency, or omission relating to the

Contract in reference to the subsurface conditions. [ 128 ] As indicated above, in accordance with the instructions of the Region, Terraprobe did not carry out any investigations of the subsurface conditions in the bedrock below the excavation site or the groundwater conditions in the bedrock.

Notwithstanding this the Terraprobe Report contemplated the contractor employing a system of shoring involving the use of sheet piles with tiebacks and toe pins penetrating into the underlying bedrock below the base of the proposed excavation. [ 129 ] Para. 1.3.3 of the Contract directed the contractor to “refer to the Terraprobe Report for recommended excavation and dewatering methods for all excavations on the site.” On cross-examination Graeme Guthrie for the Region confirmed that Terraprobe did make recommendations respecting excavation and dewatering systems and that the bidders on the tender call, including Kingdom, were expected to pay attention to Terraprobe’s recommendations in that respect. [ 130 ] Kingdom was entitled to look to the Terraprobe Report, during the tendering process and after contract award, to provide accurate and reliable information respecting the subsurface conditions which could affect its work in performing the Contract.

GC 2.01 entitled “Reliance on Contract Documents” provides that the Region, as Owner, warranted that the information furnished in the Contract Documents could be relied upon, with certain limitations or exceptions, none of which are applicable. Paragraph GC 2.01.02 only excluded any warranty or representation with respect to

interpretations of data or opinions expressed in any Subsurface Report provided to the Contractor for perusal, whether or not included in the Contract Documents (underlining added). [ 131 ] The fact that Kingdom could rely on the Terraprobe Report also follows by virtue of GC 3.10.01.01 relating to Changes in the Work referred to above. This clause was designed to protect both the contractor and the owner. The policy rationale of this clause was explained in the case of Walsh-Canadian Construction Co. v. Churchill Falls (Labrador) Corp. 1979 CarswellNfld 47 (Nfld.

C.A.) [leave to appeal to the S.C.C. refused 31 N.R. 539 n]. at para. 19, quoting an earlier U.S. decision, as follows: 19 The rationale behind the use of this type of clause is found in the case of Foster Construction C.A. v. United States , 193 Ct.C1. 587, (1970), a decision of the U.S.

Court of Claims, at page 613: The starting point of the policy expressed in the changed conditions clause is the great risk, for bidders on construction projects, of adverse subsurface conditions: 'No one can ever know with certainty what will be found during subsurface operations.' Whenever dependable information on the subsurface is unavailable, bidders will make their own borings or, more likely, include in their bids a contingency element to cover the risk. Either alternative inflates the costs to the Government.

The Government therefore often makes such borings and provides them for the use of the bidders, as part of a contract containing the standard changed conditions clause. Bidders are thereby given information on which they may rely in making their bids, and are at the same time promised an equitable adjustment under the changed conditions clause, if subsurface conditions turn out to be materially different than those indicated in the logs.

The two elements work together; the presence of the changed conditions clause works to reassure bidders that they may confidently rely on the logs and need not include a contingency element in their bids. Reliance is affirmatively desired by the Government, for if bidders feel they cannot rely, they will revert to the practice of increasing their bids. The purpose of the changed conditions clause is thus to take at least some of the gamble on subsurface conditions out of bidding.

Bidders need not weigh the cost and ease of making their own borings against the risk of encountering an adverse subsurface, and they need not consider how large a contingency should be added to the bid to cover the risk. They will have no windfalls and no disasters. The Government benefits from more accurate bidding, without inflation for risks which may not eventuate.

It pays for difficult subsurface work only when it is encountered and was not indicated in the logs. [ 132 ] The evidence is clear that Kingdom, through its subcontractors, implemented shoring and dewatering methods that were in accordance with the recommendations contained in the Terraprobe Report, to which it was contractually bound to have reference. Shop drawings for this work were submitted to HMM for review, which HMM carried out without comment.

There was no evidence that the shoring and dewatering operations of Kingdom were not executed in substantial conformity with the shop drawings and with Terraprobe’s recommendations. [ 133 ] The evidence is also clear that Kingdom’s subcontractors encountered subsurface conditions which were substantially different than the conditions disclosed and contemplated by the Terraprobe Report and that these changed conditions substantially interfered with its dewatering operations. [ 134 ] The changed conditions included the presence of dangerous levels of H2S, the undisclosed presence of organic sludge material which clogged the educator system, increases in water pressure causing infiltration into the excavation, reports of voids being encountered during bedrock drilling for tiebacks, and bubbling in the adjacent river during drilling. [ 135 ] When the bedrock investigation was conducted by Insitu in late July 2014, the bedrock was found to be an acquifer containing solution cavities, was highly conducive, was hydraulically connected to the river and was effectively charging the soils confined by the shoring then in place with water.

These conditions required implementation of a significantly enhanced dewatering system from the system that had been recommended by Terraprobe, involving the taking of quantities of water many orders of magnitude greater than had been identified and anticipated in the Terraprobe Report. [ 136 ] I find that there was a “Change in the Work” as defined in the Contract in reference to the subsurface conditions.

As such, Kingdom was not obliged to perform any Extra Work by reason of these changed conditions until it was issued a Change Order or Change Directive for such extra work. [ 137 ] I also find that there was an error, inconsistency, or omission relating to the Contract, in reference to the Terraprobe Report and the First PTTW, which required Kingdom to promptly report it to HMM, as Contract Administrator, and which required it to discontinue dewatering operations in the excavation site until it had received direction from HMM. [ 138 ] The Region acknowledged that it had no evidence that the changed subsurface conditions were caused or contributed to by Kingdom’s operations and I specifically decline to make any such finding.

[ 139 ] The Region argues that the choice of dewatering and shoring system for the Project was a “means and methods” decision which was the sole responsibility of Kingdom as the contractor and that, in seeking direction from HMM on how to proceed, Kingdom was improperly seeking to shift the responsibility and risk for a “means and methods” issue to the Region and/or HMM. The Region says that it was not prepared to take on the risk of giving direction on the dewatering and it was not obliged to. [ 140 ] I do not accept this submission.

The rights and obligations of the parties in circumstances involving a Change in the Work were clearly set out in the Contract. Kingdom had no obligation to perform Extra Work resulting from the Change in the Work without a Change Order or Change Directive.

Pursuant to GC 3.01.06 HMM, as Contract Administrator, was obliged to investigate all allegations of a Change in the Work made by Kingdom and to issue appropriate instructions. [ 141 ] It is common ground that the subsurface conditions, as ultimately determined by Insitu through its investigation and later confirmed by Terraprobe, were such that a new PTTW, involving a much greater quantity of water to be taken over a longer period, would have to be obtained from the MOE and a different system for dewatering implemented.

In my view, Kingdom had no obligation to apply for a new PTTW in the absence of a Change Order or Change Directive directing it to do so. The Region had obtained the First PTTW and it was therefore never intended to constitute an “approval or permit required for the project” which the contractor would have the responsibility to obtain under the Specifications.

The First PTTW was obtained by the Region by virtue of its responsibility under GC 4.02 to “obtain and pay for all permits, licences, and certificates solely required for the design of the Work.” [ 142 ] The work of obtaining a new PTTW was not provided for in the Contract Documents and only became necessary because of the Change in the Work. It therefore fell within the definition of Extra Work in the Contract.

The cost of obtaining the new PTTW was the responsibility of the Region. [ 143 ] In my view Kingdom acted appropriately when it encountered the Change in the Work related to the subsurface conditions by discontinuing dewatering operations, by seeking direction from HMM and later requesting issuance of a Change Order or Change Directive for the Extra Work associated with the Change in the Work. [ 144 ] I find that Kingdom was not in breach of any contractual obligation at the time of issuance by the Region of the Notice of Default on October 3, 2014.

Accordingly, the termination of the Contract by the Region on January 21, 2015 was unlawful. [ 145 ] Given this finding it is not necessary to proceed to the third and fourth steps in the analytical framework in Pioneer Hi-Bred. (

c) Did the Region Breach an Obligation of Good Faith? [ 146 ] Kingdom submits that a finding should be made that the Region breached an obligation of good faith, according to the principles enunciated by the Supreme Court of Canada in the case of Bhasin v, Hrynew, 2014 SCC 7 .

Cromwell, J held, at para. 73, that there is a general duty of honesty in contractual performance, meaning simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. [ 147 ] Kingdom argues that the Region and its Contract Administrator lied or knowingly misled Kingdom and then its surety Aviva about the essential underpinning to their obligations of performance under the Contract, the existence of the changed condition and the corresponding obligation to give direction, thereby effectively preventing Kingdom from continuing performance of its own obligation to construct the CSO tank.

It asserts that in furtherance of this objective, the Region and HMM issued Site Instruction 02 on September 17, 2014 knowing that it could not possibly be complied with and then sought to use it to invoke the termination provisions of the Contract. [ 148 ] Kingdom asserts that the foregoing was done knowingly and in bad faith by the Region during the period from August 2014 until the direction was given by HMM on October 31, 2014 and that the Region continued to mislead and undermine Kingdom’s interest as the contractor from that date until the termination on January 21, 2015. [ 149 ] Given my determination that the termination of the Contract by the Region was unlawful on the bases that 1) the Notice of Default issued by the Region did not clearly and precisely communicate the defaults relied upon; 2) the Region was not entitled to rely upon the Notice of Default in issuing the Notice of Termination; and 3) Kingdom was not in default of any contractual obligations at the time of issuance of the Notice of Default, it is not necessary to make a finding that the Region breached an obligation of good faith.

Counsel for Kingdom acknowledged that such a finding is not necessary to found liability on the part of the Region. [ 150 ] Moreover, a breach of an obligation of good faith on the part of the Region was not pleaded in the Statement of Claim. In making this observation, I make no finding that it is necessary in every case to specifically plead breach of an obligation of good faith for such a finding to be made. However it does constitute an additional reason to decline to make such a finding in this particular case.

Disposition [ 151 ] On the basis of the foregoing, judgment shall issue requiring the defendant Region to pay to the plaintiff Kingdom damages in the sum of $2,100,000 plus HST thereon, totalling in all the sum of $2,373,000, being the quantification of the plaintiff’s damages agreed to by the parties. Costs [ 152 ] The parties are encouraged to agree upon costs. If they are unable to do so, the plaintiff may make written submissions as to costs within twenty-one (21) days of the release of these Reasons for Judgment. The defendant has fourteen (14) days after receipt of the plaintiff’s submissions to respond.

All such written submissions shall not exceed five (5) double-spaced pages, exclusive of Costs Outlines or Bills of Costs, Offers to Settle and Authorities, and are to be forwarded to me at my chambers at 85 Frederick Street, 7 th Floor, Kitchener, Ontario N2H 0A7. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as between themselves.

D.A. Broad Released: January 8, 2018 CITATION : KINGDOM CONSTRUCTION LIMITED v. REGIONAL MUNICIPALITY OF NIAGARA, 2018 ONSC 29 COURT FILE NO.: C-244-15 DATE: 2018/01/08 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: KINGDOM CONSTRUCTION LIMITED - AND - REGIONAL MUNICIPALITY OF NIAGARA REASONS FOR JUDGMENT D.A. Broad Released: January 8, 2018