Vancouver, Harbourside Park: Court orders developer to pay contractor in dispute over deficiencies and delays

DATE OF RELEASE:  May 8, l996                        No.  C961764
Vancouver Registry


IN THE SUPREME COURT OF BRITISH COLUMBIA


BETWEEN: )
)
METRO-CAN CONSTRUCTION )
(HS) LTD. )REASONS FOR JUDGMENT
)
PLAINTIFF)
)OF THE HONOURABLE
AND: )
)
NOEL DEVELOPMENTS LTD. and ) MADAM JUSTICE BOYD
SPF PROPERTIES INC. carrying )
on business as "S.P.F. )
PROPERTIES INC." and the ) (IN CHAMBERS)
said S.P.F. PROPERTIES INC. )
)
DEFENDANTS)


Counsel for the Plaintiff: Mr. Howard Shapray
Mr. Brad Cramer

Counsel for the Defendants: Mr. Robert Jenkins


Date and Place of Hearing: April 9, 1996 at
Vancouver, B.C.


_______________________________________________________


1 The plaintiff applies, pursuant to Rule 18, for three
orders: (1) the payment of the Phase 2 holdback in the sum of
$1,348,779.77 to the plaintiff, in accordance with the terms of the
construction contract dated March 2, 1994; (2) the payment of
$150,000 plus G.S.T. to the plaintiff in accordance with a letter
of agreement between the parties dated January 13, 1994; and (3) an
order that the certified deficiency retention fund, in the sum of
$497,496.50, be paid by the owner into the owner's solicitors'
trust account, pending payment out in accordance with SC 14.4 as
the plaintiff completes uncorrected or incomplete items and applies
for payment of the work completed.

2 Very briefly, Noel Developments Ltd. and SPF Properties
("the owner") as owner/developer entered into a contract with
Metro-Can Construction (HS) Ltd. ("the contractor"), whereby in
consideration of the payment of $30,000,000, the contractor agreed
to construct two 28 storey high-rise towers in downtown Vancouver,
known as the Harbourside Park Condominium Park Project. Phase 1
was completed some time ago. Phase 2 is still underway although
occupancy permits have been issued for some portions of this part
of the project.

3 I am advised that the contractor's overall claims against
the owner exceed some $4,000,000, against which the owner
counterclaims for damages arising from the alleged deficiencies and
delays in the contractor's work. This application for judgment
does not relate in any way to those claims and cross-claims but is
limited to a payment out of the holdback for both Phase 1 and
Phase 2 of the project.

4 The key contractual provisions are as follows:

ARTICLE A-4 PAYMENT

(a) Subject to applicable legislation and the provisions
of the Contract Documents, and in accordance with
legislation and statutory regulations respecting holdback
percentages and, where such legislation or regulations do
not exist or apply, subject to a holdback of ten percent
(10%) the Owner shall:

...

(2) upon Substantial Performance of the Work as
certified by the Consultant pay to the
Contractor the unpaid balance of holdback
monies then due. . . .


General Condition 3.5:


Based on the Consultant's observations and his evaluation
of the Contractor's applications for payment, the
Consultant will determine the amounts owing to the
Contractor under the Contract and will issue certificates
for payment in such amounts, as provided in Article
A-4. . .


Supplementary Condition G.C. 14.4


Immediately following the issuance of the certificate of
Substantial Performance of the Work the Consultant will
issue a certificate for payment of holdback monies less
such sums as the Consultant shall determine for all
incomplete or deficient Work and amounts due to the Owner
by the Contractor. The holdback monies authorized by
this certificate shall become due and payable on the day
following the expiration of the statutory limitation
period stipulated in the lien legislation applicable to
the Place of the Work. . . providing that the Owner may
retain out of such holdback monies any sums required by
law to satisfy any liens against the Work or other
monetary claims against the Contractor and enforceable
against the Owner and that the Contractor has submitted
to the Owner a sworn statement that all accounts for
labour, subcontracts, products, construction machinery
and equipment and other indebtedness which may have been
incurred by the Contractor in the Substantial Performance
of the Work and for which the Owner might in any way be
held responsible have been paid in full except holdback
monies, properly retained. Monies will continue to be
retained by the Owner following issue of such certificate
on account of uncorrected or incomplete items an amount
equalling twice the agreed value of each such item as
established by the Consultant in accordance with GC 14.3.
As the Contractor completes uncorrected or incomplete
items he shall be entitled to make application for
payment for the work completed.


Supplementary Condition GC 14.15


The Owner shall pay an amount equal to the builders' lien
holdback applicable to Phase 1 of the Work following the
issuance by the City of Vancouver of the first occupancy
permit of Phase 1 of the Work or the Consultant's
certification of the Substantial Performance of the Work
of Phase 1 of the Work, whichever is earlier, and shall
pay an amount equal to the remainder of the builders'
lien holdback for the Work following the issuance of the
first occupancy permit by the City of Vancouver for
Phase 2 of the Work or the Consultant's certificate of
Substantial Performance of the Work, whichever is
earlier, in both cases to the Owner's solicitors, to be
deposited in trust on the following conditions:

(a) the holdback amount due to the Contractor on
account of Phase 1 shall be paid by the Owner to
the Contractor within five (5) working days
following the expiry of a forty-one (41) day
holdback period following the Consultant's
certification of the Substantial Performance of
Phase 1 of the Work, subject to:

(i) the Owner's confirmation that:

(1) the property title to the Place of Work
is not subject to any claim of
builders' lien and

(2) no action for payment or garnishment
proceedings have been issued against
the Owner, or

(3)the Contractor has provided security
acceptable to the Owner, acting
reasonably, either in the Contractor's
solicitor's trust account or in court,
to the extent of the Owner's potential
liability under any such builder's lien
action for payment, or garnishment
proceeding, and the Owner and the
Contractor agree that such security may
be provided from the funds payable
hereunder by the Owner to the
Contractor provided however that any
security not acceptable to the
financial institutions providing the
construction financing for the Project
shall be deemed not acceptable to the
Owner,

by the Contractor, any Subcontractor,
material supplier, employee of the
Contractor or any other person claiming
under the Contractor.

(ii) the Contractor's provision to the Owner of a
release of Holdback Bond issued by a
qualified surety company, and in a form
satisfactory to the Owner, and

(iii) the Contractor's provision to the Owner of
waiver of lien signed by the Contractor with
respect to Phase 1 of the Work.

(b) the holdback amount due to the Contractor on
account of the balance of the Work shall be paid to
Contractor within five (5) working days following
the expiry of a forty-one (41) day holdback period
following the Consultant's certification of the
Substantial Performance of the Work, subject to:

(i) The Owner's confirmation that:

(1) the property title to the Place of Work
is not subject to any claim of
builders' lien and

(2) no action for payment or garnishment
proceedings have been issued against
the Owner

by the Contractor, any Subcontractor,
material supplier, employee of the
Contractor or any other person claiming
under the Contractor.

(ii) the Owner's continued retention of holdback
on account of uncorrected deficiencies in
the Work.



(1) Payment of $1,348,779.77:


5 Pursuant to SC 14.4 of the contract, the Project
Architect, who acts as the owner's "consultant" under the contract,
issued a Certificate of Payment on January 18, 1996, stating that
the contractor was entitled to the sum of $1,348,779.77 from the
Owner as the Phase 2 holdback. On that same date the Certificate
of Substantial Performance was also issued. Both the Certificate
of Payment and SC 14.15(b) provide that the Phase 2 holdback is due
five (5) working days after the 41 day holdback period has expired
Ä that is, March 6, 1996.

6 Mr. Shapray submits that SC 14.15 requires that the owner
deposit into the owner's solicitors' trust account, as an escrow,
sufficient funds to pay the contractor the Phase 2 holdback monies
as certified by the consultant, without deduction, except as
explicitly provided in the contract. He submits that the
Construction Contract contemplates that the plaintiff can rely upon
the owner's solicitor to pay out the Phase 2 holdback monies, which
are trust funds in the hands of the owner's solicitors, subject
only to the express qualifications which are stated in SC 14.15(b).
Here, all builders' liens have been discharged by the contractor;
there is no action for payment or garnishment proceedings which
have been issued against the owner; and a deficiency retention fund
in the sum of $464,950.00 (representing twice the agreed value of
the incomplete or deficient Work as determined by the consultant)
continues to be held by the owner.

7 In these circumstances, Mr. Shapray submits that the
contractor has an absolute right to payment out of the holdback
fund in accordance with the Certificate of Payment, with no right
of set-off or deduction, regardless of any counterclaim advanced or
to be advanced by the owner: (Gauvin Construction Ltd. v. Soco
Investment Inc. (1991) 47 C.L.R. 174 (B.C.S.C.) In Chambers).

8 The owner says it has already incurred costs in excess of
$1,500,000 both correcting defects in the work and completing the
work and it expects to incur further costs which could exceed
$1,000,000. It says that the amount currently allowed by the
consultant as the deficiency retention fund is insufficient to
cover the cost of the allegedly defective and incomplete work. Mr.
Jenkins submits that in any event, the consultant's evaluation of
the value of the deficiencies is not conclusive and is not binding
on either the parties or the Court. Rather, he says that pursuant
to GC 3.4, the consultant is merely the judge of the performance of
the work in the first instance only.

9 Relying upon the decision in Gilbert-Ash v. Modern
Engineering (1974) A.C. 689 (H.L.), later approved by our Court of
Appeal in United Metal Fabricators v. Voth Brothers Construction
(1987) 42 D.L.R. (4th) 193 (B.C.C.A.), Mr. Jenkins submits that in
light of the contractual provisions in the case at bar, judgment
cannot be granted to the plaintiff under Rule 18 or Rule 18A, since
the owner has a bona fide delay claim against the contractor which
exceeds the contractor's claims and was advanced long before the
litigation commenced.

10 I am not satisfied that the decisions in either Gilbert-
Ash (supra) or United Metal Fabricators (supra) are of any
assistance to the owner in this case. First, I note that the
results in both cases turned upon the specific language of the
contract being considered by the Court. In First City Development
Corp. Ltd. v. Stevenson Construction Co. Ltd. (1983) 48 B.C.L.R.
242 (B.C.C.A.), our Court of Appeal noted that the decision in
Gilbert-Ash specifically turned on the wording of the building
contract. In the case at bar, those portions of the contract
relating to the Phase 2 holdback monies provide specifically for
payment out of such funds, subject only to the express
qualifications which are stated in SC 14.15(b). All of those
qualifications have been met. At least under the terms of the
contract, the monies must be paid out.

11 In my view, the only issue is whether, despite the
language of the contract, the owner retains some equitable right of
set-off. In order for there to be a set-off in equity, the owner
must bring itself within certain restrictive rules and principles,
ones eloquently summarized by MacFarlane J.A. in Coba Industries
Ltd. v. Millie's Holdings (Canada) Ltd. [1985] 6 W.W.R. 14 at
p. 22, that is:

1. The party relying on a set-off must show
some equitable ground for being protected
against his adversary's demands.

2. The equitable ground must go to the very
root of the plaintiff's claim before a set-off
will be allowed.

3. A cross-claim must be so closely connected
with the demand of the plaintiff that it would
be manifestly unjust to allow the plaintiff to
enforce payment without taking into
consideration the cross-claim.

12 As the Court noted in First City (supra), any right of
set-off which the owner may have is subject to the contract between
the owner and the contractor. Here, I am satisfied that read
together, Clauses A-4, GC 3.5 and SC 14.15(b) constitute an
agreement to the contrary. I agree with Mr. Shapray that had the
owner wished to reserve a right to set-off as against the Phase 2
holdback monies in addition to the deficiency retention set out in
14.4 and SC 14.15(b)(ii), the owner could and should have expressly
articulated that right in SC 14.15. The entire scheme of the
contract militates against such a right.

13 I find that these funds are due and payable. The only
question is whether they ought to be paid out to the plaintiff or
whether execution ought to be stayed. I will deal with that issue
later in these reasons.

2. Payment of $150,000 plus G.S.T.:

14 I am satisfied that this amount became due and payable to
the plaintiff, pursuant to the terms of a letter agreement between
the parties dated January 13, 1994, by no later than the date of
substantial performance, namely, January 18, 1996. Since the
owner's position vis-a-vis these funds is identical to that
reviewed earlier, the result is the same. These monies are also
due and payable to the plaintiff. Again, I will deal with the
issue of a stay of execution later in these reasons.

3. Deposit of the Deficiency Retention Fund:

15 The contract contemplates that the certified deficiency
retention funds shall be paid by the owner into the trust account
of the owner's solicitor to be held and paid out in accordance with
SC 14.4. As Mr. Shapray submits, the purpose is to provide the
plaintiff, as the general contractor, with the assurance that the
deficiency retention is also held in trust by the owner's
solicitors, to be paid out without deduction, except as provided
explicitly in the contract.

16 Here, the owner has refused to pay these funds into
trust. Mr. Jenkins says that SC 14.15 allows the owner to holdback
funds for deficiencies. He emphasizes that here, the deficiency
work has not been performed and hence, need not be paid into trust.

17 I am unable to find any support for that interpretation
of the contract in the language of the contract itself. To the
contrary, I find that applying the plain language of the contract,
the entire deficiency retention fund must be held in trust by the
owner's solicitors. Accordingly, the deficiency retention of
$497,496.50 must be paid into the trust account of the owner's
solicitors, to be held there pending payment out in accordance with
SC 14.4 as the plaintiff completes uncorrected or incomplete items
and applies for payment of the work completed.

4. Ought there to be a Stay of Execution of the Contractor's
Judgment?


18 In the event the Court finds that the plaintiff's alleged
breaches of contract merely give rise to right of counterclaim and
judgment is granted, the owner submits that execution on that
judgment ought to be stayed.

19 While the owner has made some suggestions that the
plaintiff appears to be a "shell" company, incorporated solely for
the purpose of pursuing the present construction contract, I will
not spend any time addressing this allegation. The concluding
remarks contained in Mr. Hayman's affidavit are not based on
anything more than speculation on the owner's part and cannot form
the foundation for the relief sought.

20 Mr. Jenkins submits that the plaintiff will suffer no
prejudice in waiting for its money. He notes that the plaintiff's
holdback claim is secured by some $2.6 million cash, held in an
interest-bearing trust account. In any event, he notes that much
or all of the money paid out to the plaintiff would in turn be paid
to sub-trades who are entitled to payment under a labour and
material bond. In my view, the status of the holdback funds
account has no bearing on the issues in this application.

21 If I am inclined not to stay execution, then Mr. Jenkins
asks that I consider ordering the plaintiff to post a letter of
credit, securing the amount of the owner's claims as the Court did
in First City (supra). I am not persuaded that the situation in
First City is particularly similar to that in issue here. There,
the contractor had no remaining cross-claim against the owner.
Here, the contractor has a total claim against the owner which
exceeds $4,000,000. It is only the holdback and the amount due
under the letter of agreement which is in issue today.

22 I agree with Mr. Shapray that since the parties here have
expressly bargained for the creation of a deficiency retention in
their contract, to delay execution on the certificate of payment
pending additional security being provided to the owner amounts to
a re-writing of the contract between the parties. That, in my
view, would amount to a form of pre-judgment security which is not
in keeping with the principles expressed in Aetna v. Figelman
(1985) 15 D.L.R. (4th) 161 (S.C.C.). (See also Reynolds v.
Harmanis (1995), 39 C.P.C. (3d) 364 (B.C.S.C.) and El-car Holdings
Ltd. v. Nolitt Group Property Consultants (1995) 4 B.C.L.R. (3d) 71
(B.C.C.A.)).

23 For these reasons, the amounts earlier stated shall be
paid to the plaintiff, with no requirement for any posting of
security, whether by way of letter of credit or otherwise.

24 Finally, I must note that at the close of submissions,
Mr. Shapray made me aware of a certain "without prejudice"
agreement made by the parties prior to the commencement of these
proceedings. These reasons in no way detract from that agreement
which need not be set out here. The order reflecting these reasons
ought, however, to reflect the terms of that agreement.

25 The plaintiff is entitled to the costs of this
application.



"M. E. Boyd"
M. E. Boyd, J.
Vancouver, British Columbia
May 8, 1996